General Overview
The quality of bank supervision and regulation in Colombia has improved since the 1999 IMF's Financial Sector Assessment Program (FSAP) as indicated by progress in Basel Core Principles implementation. The banking system has been recapitalized, and the supervisory framework has been revamped. The revision of the banking law has improved solvency requirements, while also creating a framework conducive to more effective supervision. Nevertheless, the banking system still faces considerable challenges. The Superintendency of Banks lacks sufficient autonomy and independence, while the current legal framework fails to effectively protect either bank supervisors or the Superintendent. Risk-based regulation and consolidated supervision remain key issues going forward. Although solvency and profitability of commercial banks have improved, provisioning for nonperforming loans remains low relative to international standards. The substitution of government bonds for private sector loans in bank balance sheets has shifted the balance from credit risk exposure into market and sovereign risk exposure. Notwithstanding a general revision and improvement of the legal and regulatory framework, weaknesses remain. (FSSA Update 2005)
Congress approved banking reform to strengthen financial supervision. (2005 Article IV)
In 2003, the banking sector was comprised of 27 commercial banks, most of them privately owned. Three state-owned banks account for 25% of total bank assets, two of which are in the process of privatization. Mergers and acquisitions in the sector have reduced the number of banks considerably in the past five years. Banking is regulated by the Banking Superintendence, which introduced Basle and International Accounting Standards to the Colombian banking sector in 2000. Financial reforms adopted at the end of 2002 strengthened the supervisory authority of the Banking Superintendence, and in 2003 stronger credit risk evaluation systems were implemented. The Banking Superintendence also oversees Colombia's other credit institutions: mortgage banks, financial corporations (corporaciones financieras) and commercial financing companies (compañías de financiamiento commercial). (First Initiative)
The banking system comprises banks (including those specialized in housing finance, BECHs), finance corporations, commercial finance and leasing companies, and cooperatives of superior grade. (FSSA Update 2005)
According to the IMF in 2005, the banking system still faces considerable challenges. The Superintendency of Banks lacks sufficient autonomy and independence, while the current legal framework fails to effectively protect either bank supervisors or the Superintendent. Risk-based regulation and consolidated supervision remain key issues going forward. In addition, solvency and profitability of commercial banks have improved, but provisioning for nonperforming loans remains low relative to international standards. The substitution of government bonds for private sector loans in bank balance sheets has shifted the balance from credit risk exposure into market and sovereign risk exposure. Notwithstanding a general revision and improvement of the legal and regulatory framework, weaknesses remain. (FSSA Update 2005)
Significant revisions of the legal framework were undertaken in the period 1999-2003 with a number of modifications of the Banking Law (Law 510 in 1999, Decree 1720, in 2001 and Law 795 in 2003) which raised minimum bank capital requirements for credit and market risk, in addition to providing the legal background for the early warning system, prompt corrective actions, and consolidated supervision. The Banking Law also sought to protect consumers and to diversify the supply of bank products (Article 7). In addition, the SBC
issued regulations to define a new system of risk-based loan classification and provisions, encompassing specific and general provisioning requirements. (FSSA Update 2005)
The revision of the banking law has improved solvency requirements, while also creating a framework conducive to more effective supervision. At the same time, regulatory forbearance has not been completely eliminated as indicated by the low level of provisioned nonperforming loans and by the sensitivity of solvency ratios to conservative criteria of asset evaluation. Some of the funds lent for bank recapitalization have been prepaid and the prospects for repayment of remaining Deposit Insurance Fund (FOGAFIN) credits appear favorable as most recapitalized banks have regained market access or are backed by prominent financial holding companies. However, the two largest institutions
are still under FOGAFIN control. (FSSA Update 2005)
The technical and organizational challenges for the full implementation of the new risk-based approach to bank provisioning requirements remain substantial. The pioneering work of the Superintendency of Banks in the risk-based definition of loan-loss reserve requirements has required substantial investment in human resources and a redefinition of traditional supervisory approaches. Following up this work, the Superintendency of Banks needs to prepare a road map or strategy, in consultation with the banking system, for the full
implementation of the new system of credit management, as well as making explicit the alternatives for those banks that may not opt for internal models. Also, a clear definition of the scope of consolidation needs to be established as a precondition for risk-based supervision. (FSSA Update 2005)
The modest level of profitability of the corporate sector remains a source of concern for the stability of the banking system, leaving the sector highly exposed to volatility in economic activity. The strong dependence of banks' NPLs on cyclical downturns confirms the high sensitivity of corporate
performance to adverse cyclical conditions in spite of a very modest degree of leverage. Similarly, progress in accounting and auditing practices has become a policy priority aimed at a more stable flow of credit toward more profitable areas of business. (FSSA Update 2005)
The financial reform law, enacted in 1990 (Act 45), was aimed at the creation of a financial system which would operate under conditions of greater freedom, solidity and efficiency, thus supporting the goals of internationalization and modernization of the economy as a whole. Measures were taken to encourage the recuperation and consolidation of the sector by adjusting towards international standards in prudential regulation. (Cardenas & Partow 1998)
The promotion of transparency, an increased participation of foreign investment in the financial sector, and the dismantling of a variety of quasi-fiscal burdens which had hampered the operation of agents in the system, were also included in the law. In addition, the proportion of public interests in the financial sector began to decline from their levels in the early nineties. Nevertheless, while the goals of regulation and supervision have undergone great changes, from repressive measures to preventive controls, the institutional structure of the Banking Supervisor has remained relatively unaltered, and continues to be characterized by a low level of formal independence. (Cardenas & Partow 1998)
The Banking Supervisor (SB) was created in 1923 by Act of Parliament No. 45. The SB is a branch of the central government and it has been given the ability to implement all laws related to commercial banks, mortgage banks, the Central Bank and other financial intermediaries. It is required to visit financial intermediaries annually and the criteria in the event of an intervention by Act of Parliament 57 of 1941 and official public institutions by Presidential Decree 975 of 1950. (Cardenas & Partow 1998)
The Banking Supervisor (SB) is not a formally independent entity, but rather one that reports directly to the Ministry of Finance. In 1985 the Act of Parliament 117 created Colombia's support authority, the Financial Institution Guarantee Fund (Fondo de Garantias de Instituciones Financieras FOGAFIN), which has been named responsible for carrying out all the decisions issued by the SB concerning the intervention of financial institutions. (Cardenas & Partow 1998)
Of the legal changes that took place in terms of regulation of the financial sector, the Act of parliament 35 of 1993 modified the institutional structure of intervention. A new body, the Technical ViceMinistry, was created within the Ministry of Finance and was made responsible for the drafting of rules and regulation in the sector. Some regulatory faculties that had been under the scope of the Banking Supervisor (SB) were transferred to the Technical Viceminister of Finance. Regulations concerning accounting within banks, the creation of new banks, and mergers or acquisitions of existing ones are still in the hands of the SB. (Cardenas & Partow 1998)
The Principles
1. (1) Clear responsibilities and objectives for each supervisory agency. |
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The SBC lacks sufficient autonomy and independence and is subject to current government-wide fiscal restraints, although its resources are provided by direct levies on banks and exceed SBC expenditures. The fact that norms related to the banking sector are issued by the Ministry of Hacienda and not by the SBC represents a de facto subordination of the SBC and a potential source of conflicts of interest. The definition of nonzero risk weights on banks' holdings of government debt for capital requirement purposes--in line with Basel II--is an area where conflicting views may emerge. Previous efforts to increase the autonomy of the SBC through legal changes have met with congressional opposition. (FSSA Update 2005)
Colombia's financial sector's regulatory and supervisory structure consists of a Banking Supervisor (SB) within the executive branch whose objectives are to supervise and control the intermediaries, a support authority known as FOGAFIN, the Technical Vice Ministry in charge of enacting all the regulation with the sector, supported by a set of prudential rules and regulations. There is little coordination between the agencies that issue regulations for the sector in spite of the framework of responsibilities set by legislation for each of the three supervisors, and there is no operational independence from political pressure. (Cardenas & Partow 1998).
1.(2) Operational independence and adequate resources. |
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The SBC lacks sufficient autonomy and independence. The SBC is subject to current government-wide fiscal restraints, although its resources are provided by direct levies on banks and exceed the SBC expenditures. The fact that norms related to the banking sector are issued by the Ministry of Hacienda and not by the SBC represents a de facto subordination of the SBC and a potential source of conflicts of interest. The definition of nonzero risk weights on banks' holdings of government debt for capital requirement purposes--in line with Basel II--is an area where conflicting views may emerge. Previous efforts to increase the autonomy of the SBC through legal changes have met with congressional opposition. (FSSA Update 2005)
The lack of formal and real autonomy with respect to the Government has meant that the Superintendency of Banks' (SB) performance has been compromised when its responsibility, in terms of vigilance of the financial sector, is directly confronted with the Government's general economic and political interests. Since, by definition, formal autonomy addresses independence from the government, its absence has affected neither the independence of the SB from the private sector nor the fulfillment of its tasks with respect to the private sector. (Cardenas & Partow 1998).
The Ministry of Finance supervises the performance of the Banking Supervisor (SB) and participates in the decision-making process within the institution and management. The Minister of Finance is ultimately responsible for all spending decisions within the SB. Its budget has depended exclusively on obligatory contributions made by the institutions within the sector. The amount to be contributed is determined by the SB but must be approved by the Minister of Finance. These contributions are placed in a fund that is part of the general budget to be later transferred to the SB. The central government may keep some of the resources. (Cardenas & Partow 1998).
The Ministry of Finance must approve all of the Banking Supervisor's (SB) expenses. The SB has no independence of decision-making regarding long-term investment projects. The incentives created by this structure favour a SB that relies heavily on the opinions of the government when taking decisions. (Cardenas & Partow 1998).
An internal administrative reorganization of the SBC is needed. Conduct of
supervision at the SBC is based on units that follow individual supervised entities and are not necessarily well-trained in risk management. Qualified staff may also be insufficient should an important number of banks decide to migrate to internal models. Nevertheless, risk-based supervision requires innovations in the supervisory approach and organization. Validation and supervision of databases, systems, models, methodologies and consistency of the results are
major challenges for the SBC. (FSSA Update 2005)
1.(3) A suitable legal framework for authorization and ongoing supervision. |
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There is no information publicly available that directly addresses this principle.
1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns. |
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There is no information publicly available that directly addresses this principle
The Banking Supervisor (SB) has acted independently with respect to private economic groups of the financial sector. However, the absence of clear rules or thresholds for interventions and the requirement that the Minister of Finance approve all decisions jeopardizes the high degree of discretion that the SB posses in the type of intervention it chooses to undertake. (Cardenas & Partow 1998).
1.(5) Legal protection for supervisors. |
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The current legal framework fails to effectively protect either bank supervisors or the Superintendent. (FSSA Update 2005)
The Banking Supervisor (SB) does not have a special legal immunity and can be denounced (as occurred during the 1980s when one of the Supervisors was removed form his post by the Attorney General) on the grounds of errors in the supervision. (Cardenas & Partow 1998).
1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information. |
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There is a need for better coordination of efforts and information among the SBC, the Securities Superintendency (SVC), and the Superintendency of Companies (SSC). Colombia already enjoys a concentration of the supervisory responsibility over banks, insurance and pension funds in the SBC. Rules for cooperation should entail specific requirements for exchange of information, consultation and assistance on policy, monitoring of markets and entities, and conflict resolution processes. The SVC and the SBC should harmonize regulation and supervisory practices for independent brokers and bank-related
brokers to assure a level playing field. The agencies should define a "lead supervisor" with clear responsibility and accountability concerning market, credit and liquidity risks, and stress tests. (FSSA Update 2005)
2. Clearly defined permissible activities for banks and control of the use of the word 'bank'. |
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There is no information publicly available that directly addresses this principle.
3. Criteria for structure, directors, operating plan, controls, financial condition and capital base. |
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There is no information publicly available that directly addresses this principle.
4. Authority to review and reject transfer of ownership. |
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There is no information publicly available that directly addresses this principle.
5. Authority to review major acquisitions and investments. |
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There is no information publicly available that directly addresses this principle.
6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks). |
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The risk-weighted capital adequacy ratio (CAR) for the system stood at 14 percent as of September 2004, versus less than 11 percent before the crisis, and all institutions had a CAR above the 9 percent minimum. (FSSA Update 2005)
Adjustments to estimate the impact of tightening prudential rules indicate that it
would be prudent for some institutions to increase provisioning and capital given current risk exposures. The institutions most sensitive to these adjustments are BECHs, followed by finance corporations and public banks. Private banks, notwithstanding their lower sensitivity to the adjustments, could also fall below the regulatory minimum owing to their lower initial capital base. Most of the adjustment is for potential underestimation of capital requirements for market risk and under-provisioning for expected credit losses. (FSSA Update 2005)
Stress tests indicated that credit risk and interest rate risk are the main vulnerabilities, given the magnitude of exposures, relative sensitivities, and volatility of risk factors. (FSSA Update 2005)
7. A method exists for the evaluation of procedures related to loans, investments and portfolio management. |
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There is no information publicly available that directly addresses this principle.
Loans are divided into consumer, mortgage, commercial and small business lending for regulatory purposes. Within each of these groups loans are rated into 5 categories in order to determine loan-loss provisioning requirements: A(Normal), B(Acceptable), C(Deficient), D(Doubtful recovery) and E(Unrecoverable). (SB 2003)
Mortgage and consumer loans are evaluated on a permanent basis considering payment compliance. Commercial loans are evaluated at least twice a year based on payment capacity and debt service. (SB 2003)
In General, loans to a same debtor must be classified in accordance to the lowest level assigned to any of its debts within the institution or financial group. (SB 2003)
When the Banking Superintendence classifies a debtor, the whole sector must adopt such classification or a lower one unless a satisfactory explanation is provided for not doing so. (SB 2003)
8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves. |
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Since 1999, the SBC has improved prudential regulations in two main areas, one of which is credit risk. Capital requirements for market risk were introduced in December 2001 concomitantly with a new loan classification and provisioning system (SARC). The SARC constitutes a pioneering effort to apply risk-based regulation to the definition of loan loss reserves. As such, it extends to loan loss reserves the principles behind risk-based capital regulation developed by the Basel Committee.(FSSA Update 2005)
Classified loans (substandard, doubtful or loss) stood at 7.9 percent as of September 2004, down from 16.3 percent at the end of 1998. Furthermore, the ratio of loan loss provisions to classified loans has grown from 25 to 54 percent since 1999. The reduction in high-risk loans and increased provision coverage indicate that banks are now less exposed to credit risk in the banking book. (FSSA Update 2005)
Despite the recent improvements in financial sector indicators, potential
underestimation of provisioning and capital requirements is still of concern and the authorities are working to further increase both elements. Although provisioning rates have improved dramatically since the 1999 crisis, specific provisioning of higher risk loans still appears low relative to better provisioned banking systems. Also, prudential rules on market risks may underestimate capital requirements for these risks. The authorities are working to
close these provisioning and capital gaps. In particular, starting in July 2005, financial institutions will be required to hold provisions in line with estimated expected credit losses of their commercial and industrial loans. Banks will be given the option of adopting a supervisory model for computing expected losses or asking for the validation of their own internal models for the measurement of expected credit losses. (FSSA Update 2005)
The Colombian authorities have put in place tightening of provisioning for loans and foreclosed assets by end-2005. These tightening of prudential requirements will maintain pressures on banks' provisioning and capital levels and most likely would limit any possible further compression on interest rate spreads. (FSSA Update 2005)
Banks appear vulnerable to rollover risk. Half of the banks have a
negative one-month maturity gap (liabilities liquidating within one month exceed assets liquidating within one month). Furthermore, there is a systemic and structural gap at three months. Thus, in the case of a systemic liquidity shock, banks could incur losses in liquidating part of their negotiable securities given the size of their potential exposures and the fact that most banks would be on the same side of the market. (FSSA Update 2005)
9. Prudential limits and management information system on concentration of exposure. |
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There is no information publicly available that directly addresses this principle.
The following Loan concentration limit has been established and is currently fully operational: Unsecured loans to one individual can not exceed 10% of regulatory capital and 25% when covered by admissible collateral. (SB 2003)
10. Arm's length rule and monitoring for connected lending. |
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There is no information publicly available that directly addresses this principle.
At the end of 1995, the Banking Supervisor (SB) supervised over ninety institutions. However the degree of concentration within the financial sector is relatively high, and points to the possibility of the existence of a number of powerful interest groups that might seek to pressure the SB. In 1995, for example, six economic consortia owned 71.2% of total assets of the sector. Nevertheless, the fact that the law grants the SB powers for supervision and intervention, and given the visibility of the SB's decisions as well as the presence of a number of independent agencies that evaluate risk, it is difficult to reach any clear conclusion regarding the true ability of the SB to withstand pressures of existing interest groups. (Cardenas & Partow 1998).
11. Policies and procedures for country risk and transfer risk. |
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No progress has been made in regulating country risk. (FSSA Update 2005)
Foreign exchange risk appears limited, while equity price risk mostly affects
finance corporations. There is very little direct loss impact of a depreciation, because most banks are long in U.S. dollars. Indirect risk, through corporate sector exposures, also appears to be limited given the estimated low elasticity of NPLs to the real exchange rate and the relatively low percentage of loans in foreign currency. A moderate shock to equity markets would not severely affect commercial banks but could impact finance corporations. (FSSA Update 2005)
12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure. |
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Since 1999, the SBC has improved prudential regulations in two main areas, one of which is market risk. Capital requirements for market risk were introduced in December 2001 concomitantly with a new loan classification and provisioning system (SARC). The SARC constitutes a pioneering effort to apply risk-based regulation to the definition of loan loss reserves. As such, it extends to loan loss reserves the principles behind risk-based capital regulation developed by the Basel Committee. (FSSA Update 2005)
The calculation of market risk capital requirements has improved; however, current rules still allow some netting of UVR (real value of mortgages), and peso-denominated positions, which may underestimate the value-at-risk. (FSSA Update 2005)
It should be noted that most countries do not require capital against interest rate risk on loans held in the banking books as Colombia does. (FSSA Update 2005)
As of January 2002, Market Risk is included in the Solvency Ratio initially at 60%, currently for 2003 at 80% and as of 2004 Market Risk will weight in at 100%. (SB 2003)
13. Comprehensive risk management processes. |
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Risk-based regulation remain key issues going forward. Areas where progress has been either modest or nonexistent include control of material risks including operational and procedural risk. (FSSA Update 2005)
14. Adequate internal controls. |
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Areas where progress has been either modest or nonexistent include control of banks' internal control procedures. (FSSA Update 2005)
15. Strict "know-your-customer" rules and high ethical and professional standards. |
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Colombia formally adopted legislation in 1999 to establish a unified, central financial intelligence unit, the Unidad de Informacion y Anlisis Financiero (UIAF", within the Ministry of Finance and Public Credit with broad authority to access and analyze financial information from public and private entities in Colombia. (BINLEA 2005)
The UIAF is one of the leading authorities in AML/CFT controls in Colombia with adequate powers and systems. (FSSA Update 2005)
Colombian law requires that financial institutions maintain records of account holders and financial transactions. Financial entities must issue Suspicious Activity Reports (SAR's) on any transaction that raises concern. Colombia's banks operate under strict compliance controls, and work closely with the government, other foreign governments, and private consultants to ensure system integrity. Secrecy laws have not been an impediment to bank cooperation with law enforcement officials. Authorities often initiate money laundering investigations on the basis of the details provided by SAR reporting. Citizens are afforded rights to privacy;, however, and authorities carry out money laundering investigations in accordance with legal requirements to protect those rights. Financial institutions are not protected by law nor are they exempt from compliance with law enforcement obligations. General negligence laws and criminal fraud provisions ensure that the financial sector complies with its responsibilities while protecting consumer rights. (BINLEA 2005)
In addition, the Superintendence of Banks has instituted "know your customer" regulations for the entities it regulates, including banks, insurance companies, trust companies, insurance agents and brokers, and leasing companies. (BINLEA 2005)
16. Effective supervisory system consisting of on-site and off-site supervision. |
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Areas where progress has been either modest or nonexistent include on- and off-site supervision. The SBC is still working on a draft project to introduce improvements. However the IMF notes that Colombia has strengthened on-site inspection procedures and the training of on-site inspectors.
(FSSA Update 2005)
17. Regular contact with bank management and understanding of bank's operations. |
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There is no information publicly available that directly addresses this principle.
18. Analytical reports and statistical returns on solo and consolidated basis. |
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There is no information publicly available that directly addresses this principle.
19. Independent validation of supervisory information through on-site examination or external auditors. |
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In its update of the Financial Sector Stability Assessment in 2005, the IMF pointed out that the SBC should issue norms concerning the role, duties, and responsibilities of external auditors (revisores fiscales). In particular, the lack of audit standards and the lack of alignment with International Accounting Standards represents a serious departure from international best practices for financial reporting and transparency. In addition, the requirements that the SBC validate bank financial statements generates a confusion of roles and responsibilities between the SBC and the auditors that needs to be addressed. (FSSA Update 2005)
20. Ability to supervise on a consolidated basis. |
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Since 1999, important progress has been made to facilitate consolidated
supervision of financial conglomerates, but a comprehensive vision of how the risks assumed by groups may affect banks' soundness needs to be defined. The establishment of capital adequacy rules, the definition of limited accounting regulations and disclosure requirements, and the empowering of SBC to access related company information are steps in the right direction. Consolidated supervision remain key issues going forward. (FSSA Update 2005)
21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank. |
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In its update of the Financial Sector Stability Assessment in 2005, the IMF pointed out that the SBC should issue norms concerning the role, duties, and responsibilities of external auditors (revisores fiscales). In particular, the lack of audit standards and the lack of alignment with International Accounting Standards represents a serious departure from international best practices for financial reporting and transparency. In addition, the requirements that the SBC validate bank financial statements generates a confusion of roles and responsibilities between the SBC and the auditors that needs to be addressed. (FSSA Update 2005)
Law 222 of 1995 empowered the Superintendent of Banking (regulator of banks, insurance companies, and pension funds) to issue accounting guidelines for the entities it supervises. (ROSC 2003)
Banks are required to follow the same accounting standards/rules for both prudential regulatory reporting and financial reporting for external users. For prudential regulation of banks, the Superintendent of Banking issues specific accounting rules, valuation methods, and disclosure requirements that are applicable not only to regulatory reporting purposes but also to those who prepare general-purpose financial statements. (ROSC 2003)
In the course of supervising and monitoring compliance with prudential regulations by banks, insurance companies, and pension funds, inspectors of the Superintendent of Banking will take action if they uncover violations of accounting and auditing requirements. (ROSC 2003)
The Superintendent of Banking is authorized under the Banking Law to impose administrative sanctions against violators, including monetary penalties and suspension or disbarment of advisors and auditors. In practice, when regulators uncover material errors or infractions, the standard procedure is to arrange a meeting with the revisor fiscal and request a correction of the financial statements, without investigating the nature, extent, and impact of the errors or infractions. Effective punitive actions are rarely taken; the strongest sanction to date has been the issuance of a letter of reprimand. (ROSC 2003)
22. Adequate supervisory measures to ensure timely corrective action. |
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The IMF states that regulations to implement a system of prompt corrective actions have been introduced. (FSSA Update 2005)
23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations. |
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The SBC lacks the capacity to adequately examine the relationship between local banks and their foreign branches. The degree and nature of local banks' exposure to risk assumed by their overseas branches are not currently known by the SBC, making it more difficult to protect local banks. (FSSA Update 2005)
24. International exchange of information with other supervisors. |
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There is no information publicly available that directly addresses this principle.
25. Supervision of local operation of foreign banks and information sharing with home country supervisors. |
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There is no information publicly available that directly addresses this principle.
Colombia