Santander Central Bank Mandatory Reserves Coverage
On June 30, 2022 MIGA issued guarantees of up to US$200 million to Banco Santander, S.A. of Spain (Santander) for a period of 1 year covering the risk of expropriation of Banco Santander Argentina S.A. (Santander Argentina) mandatory reserves held at the Central Bank of Argentina.
Spain-based Banco Santander is one of the largest global financial institutions in the world in terms of market capitalization with retail and commercial operations in countries across Europe, Latin America, and North America. Its subsidiary banks abroad are required to maintain reserves at the central banks in their respective jurisdictions, based on the volume of customer deposits that these subsidiaries have. Mandatory reserves contribute to Santander’s overall risk-weighted assets (RWA) at the consolidated level, resulting in less headroom for other assets at a given level of capital.
Santander Argentina provides retail and consumer loans, small and medium enterprise (SME) and corporate finance services to clients in Argentina. MIGA previously supported Santander Argentina from 2017 to 2021. For this project, the MIGA guarantee will support all of the Bank’s lending activities. MIGA analyzed the Bank’s portfolio for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s exclusion list. Santander Argentina’s portfolio has corporate finance exposure to certain sectors that could have potential significant adverse environmental and social (E&S) risks and impacts such as oil and gas, agriculture and fisheries, construction and chemicals. This project has thus been categorized as FI-1 under MIGA’s Policy on Environmental and Social Sustainability (2013).
As of December 2021, about 56% of the Bank’s lending is to retail, 33% to corporates, 11% to SMEs. The main sectors supported include agriculture and fisheries, food processing, construction, oil and gas. Santander Argentina has limited exposures to activities on the MIGA Exclusion List.
The main E&S considerations of this project relate to Santander Argentina’s ability to identify, assess, and manage the E&S risks and impacts associated with its lending activities and the management of labor matters. MIGA analyzed Santander Argentina’s portfolio for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. MIGA also analyzed Santander Argentina’s E&S risk management procedures in line with the requirements of Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts (PS1), and Santander Argentina’s labor practices in line with the requirements of Performance Standard 2: Labor and Working Conditions (PS2). The applicable E&S requirements for this project are: (i) MIGA Exclusion List; (ii) applicable E&S laws and regulations in Argentina; and (iii) MIGA E&S Performance Standards.
Santander Group is an Equator Principles financial institution and is also a signatory to other global sustainable/responsible finance initiatives. As a member of the Santander Group, Santander Argentina aligns its E&S risk management procedures with Santander Group’s Environmental, Social and Climate Risk Management Policy. Santander Argentina’s E&S risk management system is focused on transactions in four sensitive sectors – (i) mining and metallurgy, (ii) energy, (iii) oil and gas, and (iv) soft commodities. Transactions in these four sensitive sectors are assessed for E&S risks and impacts. The sector policies, reflect amongst other aspects, the E&S issues associated with the sectors, scope of application, best practice standards, as well as prohibited and restricted activities within the sectors. The Sector policies are adapted to consider the particular characteristics and development of the market in which the relevant Santander subsidiary operates. Santander Argentina appointed a dedicated E&S officer who oversees the E&S risk management system. During the time of the previous MIGA engagement (2017 -2021), Santander Argentina satisfactorily implemented MIGA’s E&S requirements. The ESMS was subsequently streamlined to focus on the Santander Group’s policies and procedures. As such, Santander Argentina is required to revise and update its ESMS to expand the scope and include all lending activities (excluding retail lending) and incorporate MIGA’s E&S requirements into the existing procedures. Santander Argentina has in place an external communication procedure for receiving and addressing E&S concerns and requests for information from third parties, in line with the requirements of PS1.
Santander Argentina’s emergency response procedures are in line with the requirements of PS1. In response to the COVID-19 pandemic, Santander Argentina implemented measures to protect employees and clients in line with local requirements. The measures include provision of safety equipment, increased sanitization, work-from-home opportunities for employees and mental health support to employees.
Human resources and labor practices are compliant with the requirements of PS2. Amongst other aspects, Santander Argentina has labor policies and procedures that address terms of employment, recruitment, renumeration, and benefits, grievance management, training and others.
Santander Argentina is required to report periodically to MIGA on the implementation of the ESMS and application of the Performance Standards.
The aim of MIGA’s guarantee is to help Santander Group reduce the risk-weighting of some of its assets, which would lead to a reduction in the Santander’s RWA on a consolidated basis. The RWA capacity that is freed up is expected to help Santander Argentina grow the supply of credit, thereby supporting employment and economic reactivation as the country embarks in a transition period battling against external headwinds. The MIGA’s coverage would create RWA headroom, freeing up capacity for loan growth. The project will also support increasing access to Women-Owned MSMEs and demonstrates the importance of adopting inclusive business models.
The Project is aligned with the World Bank Group country engagement strategy in supporting inclusive recovery by encouraging private invest and job creation. In a context of high economic fragility and a shallow financial sector, the Project supports Santander Argentina’s lending activities to the MSME, corporate and household segments, increasing access to finance and encouraging credit penetration. The Project is also aligned with MIGA’s FY21-23 Strategic Business Outlook under its strategic directions of responding to the COVID-19 crisis by supporting the economic recovery. The Project is also contributing to MIGA’s strategic priority of demonstrating leadership on gender.