A new rule for the Banks that will impact the value of the dollar

The Argentine Central Bank issued yesterday a new rule (Communication A 5536) that is expected to impact the value of the dollar.

Given its technical complexity its effects were initially not duly considered by the non financial sector.

In essence the new rule imposes a double limit on the foreign currency that could be held by financial entities.

The first limit is related with the net foreign exchange position (i.e. the amount of foreign currency either in currency or securities). Onwards the foreign exchange position of any bank could not exceed 30% of its net worth.

The difference in excess of that percentage –huge in the case of many banks, mostly foreign owned ones- should be sold within the next three months, which is expected to directly affect the four most relevant types of prevailing exchange rates (i.e. official, “stock market”, “blue chip” and “blue”) due to the prompt sale by banks of currency and foreign currency denominated securities.

The second limit impacts future contracts (foreign currency ones).

The Communication establishes that the net position in future contracts could not exceed 10% of banks net worth which will most probably impact the value of these type of agreements.

The technical aspects of the new rule are debatable but not the main concern. What worry the most are the manner and the opportunity: it is a short term measure with unforeseen consequences due to the rush of the changes. So far, it is the consequences and not the real causes of the crisis the ones being dealt with.