Bet against the banks: reserve requirement hikes, more controls, and a key tender

In their bid to advance toward the midterm elections without any surprises on the exchange rate front, a new tightening of the monetary tightening that the economic team has deployed in recent weeks will take effect this Monday. With reserve requirement increases, tighter controls on banks, and an "off-schedule" auction that seeks to channel any excess pesos into Treasury securities , Caputo and his team are seeking to ensure a relative "exchange rate peace," even at the cost of a higher cost of money and a possible impact on activity .

Starting today, banks are required to deposit 50% of their demand and savings deposits with the Central Bank of Argentina (BCRA). Of that total, 40 points will be in cash and 10 points can be bonds. For the latter, the Ministry of Finance launched an " off-program bidding process" this Monday, which is expected to absorb part of the nearly $6 trillion that banks refused to renew in last week's bidding process.

Although the banks disliked the tone of the measures, those in the City believe that the tightening of the bonds jointly implemented by the Central Bank and the Treasury could serve to capture this surplus of pesos. While pesos held in the Central Bank pay a 0% interest rate, the alternative of integrating part of those holdings with a bill, such as the TAMAR, which as of Thursday was paying almost 50% monthly, could be an option for banks.

"Following the elimination of the LEFI (Financial Instruments for Financial Institutions) and in light of the volatility observed in the money market, the government is taking measures to absorb excess liquidity and prevent fluctuations in interest rates. The increase in the minimum cash reserve, which seeks to regulate the sterilization of monetary surpluses, and the method of integrating it—with Treasury Bills acquired in primary issuances—points in that direction," explained Quantum Finanzas.

However, the combination of measures, far from guaranteeing interest rate stability, increases volatility, with a consequent rise in credit costs. Last week, the cost of overnight guarantees, the most liquid instrument on the market, climbed to 80% , and this has already impacted the financing options available to SMEs: the rate on current account advances, for example, also reached 80% annually.

The government's eagerness to modify the monetary system in place until July met with strong resistance from banks . Last Thursday, when the second adjustment to reserve requirements in less than a month was announced, private banks expressed their displeasure in a rather hushed tone. "They're making a mistake," they asserted. Banks will also face stricter controls: they must comply with the new minimum cash requirement daily, and if they fail to do so, the Central Bank warned of heavy fines.

At the consulting firm Delphos, they analyzed the latest measures taken jointly by Luis Caputo and Santiago Bausili and emphasized that the official objective is for banks to be able to finance more long-term liquidity than immediate liquidity, a measure that ultimately seeks to promote credit.

"The set of measures—the end of LEFIs and special auctions, an increase in reserve requirements with a focus on demand deposits and FCIs, the TAMAR offer with spreads of 6% (November) and 7.5% (January), and the BCRA's window for active swaps at a volume-weighted repo rate of +2%—aims to induce banks to stretch duration and remain firm in their restriction on aggregate controls ," they detailed. However, they warned: "The lack of migration to term deposits and the non-renewal of $5.8 trillion in the last auction show that the transition is still incomplete, so aggregate controls and regulatory drain are maintaining high rates for longer ."

Invecq analysts agreed: "This scheme could consolidate high interest rates in the coming months —in a context where nearly $9 trillion in debt maturities remain in August. While the strategy seeks to contain exchange rate pressures and anchor inflation, it also increases the risk of a further slowdown in economic activity and of the government going into the elections in a context of heightened financial tension."

The new scheme represents a more challenging environment for banks. "Financial institutions face challenges not only in normalizing liquidity management after the dismantling of the LEFI scheme, but also in the business itself, due to rising deposit rates—a real TAMAR of 2% of TEM—tightening spreads, and also higher credit risk, in a context where non-performing loans have been rising since the end of last year," noted Quantum Finanzas.