A 2004 Financial Sector Assessment Program (FSAP) conducted by the International Monetary Fund (IMF) for Ecuador, included an assessment of the country's banking supervisory framework. As of June 2008, the results of the FSAP have not been published. However, a 2005 IMF Article IV report notes that the FSAP found a relatively resilient financial system, albeit with some vulnerabilities pertaining to the regulatory framework and supervision. To address some of the FSAP recommendations, the Ecuadorian authorities developed a detailed work plan that included enacting a bankruptcy and creditor rights bill in the beginning of 2006; tightening the definition of liquidity and capital; and developing better risk management practices. Ecuadorian authorities claimed that other recommendations could not be met due to legal obstacles and political difficulties. The 2005 IMF report, therefore, asked Ecuador to strengthen efforts to implement all the FSAP recommendations. A 2004 World Bank report provides details on a Financial Sector Technical Assistance Loan (FSTAL) to Ecuador to strengthen (among other things) the country's supervisory and regulatory framework for the banking sector. However, the report notes that the loan program was not successful in achieving all its objectives, especially in terms of modernizing the legal framework for the financial sector. In 2006, the United States Agency for International Development (USAID) disbursed a technical assistance loan to the Superintendency of Banks and Insurance to improve financial intermediation in Ecuador, establish effective prudential norms and streamline supervision. The USAID website notes that the technical assistance mission is helping the Ecuadorian authorities implement a strategic plan to modernize banking standards in compliance with the Basel Core Principle (BCPs) for Effective Banking Supervision. Despite this information, none of the publicly available sources explicitly address Ecuador's compliance with the BCPs.

General Overview

Banking system soundness indicators in Ecuador are "generally positive" and "largely well secured," finds a 2008 International Monetary Fund (IMF) report on Ecuador. The report notes that although deposits and credits to the private sector continue growing, cost and accessibility of credit remains an issue. The IMF report commends Ecuador for its plans to establish an augmented liquidity fund and a stronger deposit insurance scheme, as well as to reform its bank resolution regime. The report calls for strengthening the financial system supervision, with more autonomy and legal protection to the financial sector supervisor, the Superintendency of Banks and Insurance (SBS) and a strengthened supervisory framework for small financial cooperatives that are not regulated by the SBS.

In an article by Quispe-Agnoli and Whisler, published in the 2006 Federal Reserve Bank of Atlanta Economic Review, the authors describe the benefits of the official or full dollarization of the Ecuadorian banking system as a response to the 1999-2000 banking crisis. Per this report, under full dollarization, banking regulations were tightened and restructured, regulators were given enhanced powers to take preventive action against unstable or weak banks, capital adequacy requirements were made more stringent and brought closer to Basel standards, and prudential supervision was improved. The General Law on the Institutions of the Financial System was revamped to include provisions eliminating connected lending, requiring strict loan loss reserves, clarifying capital definitions and requirements, and making consolidated financial reporting mandatory. The report attests that these reforms made the Ecuadorian banking system more transparent and brought it closer to international standards. Nevertheless, strict regulations did not translate into better implementation or enforcement. Accounting standards are still not in line with international standards and some regulations continue to be lenient, such as the rule on loan write-offs.

The IMF conducted a Financial Sector Assessment Program (FSAP) for Ecuador in 2004 which included an assessment of Ecuador's banking supervision framework. The report is not publicly available, although it is mentioned in the IMF's 2005 Article IV report wherein the IMF asks Ecuador to "strengthen efforts to implement the 2004 FSAP recommendations" (p. 4). The 2005 Article IV report sees evidences of progress on this front, with the SBS tightening up regulations pertaining to capital and liquidity in accordance with the 2004 FSAP recommendations. However, what raised the IMF concern was the tabling of a draft banking-sector law in Congress, with the ostensible purpose of channeling more credit into productive activities and reducing the cost of financial intermediation. The IMF felt that the draft bill had the potential of sharply reducing financial intermediation, undermining prudent credit management, and consequently threatening the soundness and stability of the banking system. The report elaborates that, given strong protests and warnings from the Central Bank, the SBS and the financial community at large, the Congress began reconsidering the proposals. Another potential cause for concern, is the fact that depositor confidence in the health of the banking sector is not deep rooted, and therefore any hint of economic weakening could lead to spillovers in the banking system, with the potential of turning into systemic banking problems. The absence of deposit insurance or a lender of last resort in the banking sector could compound the crisis.

The 2005 IMF report notes that the 2004 FSAP found Ecuador to have a relatively resilient financial system, albeit with some vulnerabilities. The FSAP called for improved supervision and regulation, increased minimum capital requirements, deposit insurance and lender of last resort protection, strengthened creditor rights, and improved bankruptcy procedures. These measures would enhance investor confidence and help bring financial intermediation in Ecuador closer to international standards. The 2005 IMF report mentions that the Ecuadorian authorities "have developed a detailed work plan to address some of the FSAP recommendations" (p. 24). The work plan involves enacting a bankruptcy and creditor rights bill in the beginning of 2006; strengthening the payments system; tightening the definition of liquidity and capital; and developing better risk-management practices. The Ecuadorian authorities stated that other recommendations could not be met due to legal obstacles and political difficulties. The IMF, however, avers that long-term financial system reforms would require the "maintenance of macroeconomic stability, the reduction of economic vulnerabilities, and progress on the reform priorities recommended in the FSAP" (p.25).

In response to the financial crisis of 1999-2000, the World Bank joined three other international financial institutions - the IMF, the Inter-American Development Bank (IDB), and the Andean Development Corporation (CAF) - to disburse a Financial Sector Technical Assistance Loan (FSTAL) effective 2001 to Ecuador. The loan, according to a 2004 FSTAL implementation completion report by the World Bank (hereafter referred to as the 2004 World Bank report), was "aimed at assisting the Ecuadorian government to manage and confront the deep financial sector crisis faced by the country, and strengthening the regulatory framework and supervisory capacity of the Authorities in order to foster the long term soundness and efficiency of the banking system" (pp. 2-3). One of the objectives of the FSTAL was to strengthen banking regulation, supervision, and enforcement to bring them up to par with international standards. Although the overall outcome of the FSTAL did not satisfy the World Bank, the program did achieve substantial improvement in the banking regulation and supervisory practices in Ecuador. The SBS developed on-site and risk-based supervision and also greater staff capacity. A new operational manual for on-site examination and training for the staff was developed, the examination procedures were upgraded, off-site monitoring was tightened, and the CAMELS (Capital adequacy, Asset quality, Management factors, Earnings, Liquidity, and Sensitivity) approach to risk based supervision was introduced. The SBS also introduced provisions eliminating connected lending, stricter requirements for financial statements, and capital requirements in line with Basel Core Principles (in a phased manner by December 2003). The 2004 World Bank report noted that the FSTAL did not achieve its objective of modernizing the legal framework for the financial sector and its aim of unifying the General Law on the Institutions of the Financial System (which had been amended piecemeal to cope with the financial crisis) was not achieved. The World Bank report notes that the "SBS is still a relatively fragile institution with an inadequate personnel skill mix, significant technological upgrading requirements and insufficient legal support for its mandate" (p. 13). In spite of its shortcomings the report acknowledges that the SBS has come a long way since 1999.

The Financial Sector Reform and Strengthening (FIRST) Initiative website provides information on a 2006 United States Agency for International Development (USAID) technical assistance to the financial sector supervisor, the SBS, to the tune of US$0.3 million for improving financial intermediation in Ecuador, establishing effective prudential norms and streamlining supervision. The USAID website notes that a technical assistance mission is helping the Ecuadorian authorities implement a strategic plan to modernize banking standards in compliance with the Basel Accords. The 2008 U.S. Department of State (DoS) report mentions that the Ecuadorian financial system includes, inter alia, 29 banks and 28 cooperatives. Seven banks have offshore offices, and both off-shore and on-shore financial institutions are supervised by the SBS. However, off-shore deposits are not guaranteed by the government's deposit insurance.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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In 2004, the English edition of a report jointly prepared by the Center for Latin American Monetary Studies (CEMLA) and the World Bank (hereafter referred to as the CEMLA/WB report) observes that the 1994 General Law on the Institutions of the Financial System establishes the duties of the SBS, which is "a technical organ with administrative, economic and financial autonomy" (p. 22). The 2004 World Bank report noted that the FSTAL did not achieve its objective of modernizing the legal framework for the financial sector and its aim of unifying the General Law on the Institutions of the Financial System (which had been amended piecemeal to cope with the financial crisis) was not achieved. The World Bank report notes that the "SBS is still a relatively fragile institution with an inadequate personnel skill mix, significant technological upgrading requirements and insufficient legal support for its mandate" (p. 13). In spite of its shortcomings the report acknowledges that the SBS has come a long way since 1999. Nevertheless, there is little information publicly available on Ecuador's compliance with this principle.

Per the CEMLA/WB report, the SBS's supervisory powers include "approv[ing] the institutions' bylaws and any changes thereof; (2) look[ing] after the stability, soundness and correct functioning of the institutions and watch[ing] over their compliance with the relevant rules, regulations and laws; (3) establish[ing] preventive supervision programs and perform[ing] unrestricted inspections to verify the accurateness of the information the institutions send the BCE [Central Bank of Ecuador]" (p. 23).

1.(2) Operational independence and adequate resources.

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The CEMLA/WB report notes that the SBS is "a technical organ with administrative, economic, and financial autonomy" (p. 22). Its governing body is the Banking Board and it comprises the Superintendent of the SBS, the General Manager of the Central Bank of Ecuador (BCE), two members designated by the President and a fifth member who is designated by the above four members. The 2008 IMF report advises Ecuador to strengthen financial system supervision with more autonomy and legal protection to the SBS. Nevertheless, there is little information publicly available regarding Ecuador's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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The 2004 World Bank report noted that the FSTAL did not achieve its objective of modernizing the legal framework for the financial sector and its aim of unifying the General Law on the Institutions of the Financial System (which had been amended piecemeal to cope with the financial crisis) was not achieved. The CEMLA/WB report observes that the SBS's supervisory powers include ensuring the stability, soundness, and proper functioning of the supervised institutions and supervising their compliance with the relevant rules, regulations and laws. However, there is little further information publicly available on Ecuador's compliance with this principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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See Principle 1.(3).

1.(5) Legal protection for supervisors.

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The 2008 IMF report advises Ecuador to strengthen financial system supervision with more autonomy and legal protection to the SBS. There is little further information publicly available that directly addresses Ecuador's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

4. Authority to review and reject transfer of ownership.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

5. Authority to review major acquisitions and investments.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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In its 2004 report, the World Bank noted that one of the accomplishments of the FSTAL was the development - in a phased manner by December 2003 - of capital adequacy requirements by the SBS that were closer to the Basel Core Principles. The 2006 article by Quispe-Agnoli and Whisler also states that capital adequacy regulations are now much closer to Basel standards than was previously the case. The 2005 IMF Article IV report notes that the unpublished FSAP called for increased minimum capital requirements. The 2005 IMF report further mentions that in order to implement the FSAP recommendation, the Ecuadorian authorities have developed a work plan that includes tightening the definition of liquidity and capital. However, there is insufficient information publicly available as to Ecuador's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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The 2006 Quispe-Agnoli and Whisler article mentions that the General Law on the Institutions of the Financial System was revamped after the financial crisis of 1999-2000 to include provisions requiring strict loan loss reserves and clarifying capital definitions and requirements. However, there is insufficient information publicly available as to Ecuador's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

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There is insufficient information publicly available as to Ecuador's compliance with this principle. The FSTAL sponsored by a loan from the World bank, IMF, IDB, and the CAF achieved substantial improvement in the banking regulation and supervisory practices in Ecuador. One of the improvements was the introduction by the SBS of the legal provision to eliminate connected lending. A 2005 report by the Inter-American Development Bank mentions that Ecuador imposes the tightest limit on related party lending of all the Latin American and Caribbean countries. The limit, in terms of the percentage of bank capital, is set at zero. Nevertheless, there is little information publicly available on Ecuador's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

13. Comprehensive risk management processes.

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The 2005 IMF Article IV report observes that Ecuador has developed a detailed work plan to address some of the FSAP recommendations, and it includes developing better risk-management practices. The FSTAL sponsored by the World Bank, IMF, IDB, and the CAF, contributed toward the introduction of the CAMELS approach to risk-based supervision of banks by the SBS. However, there is insufficient information publicly available as to Ecuador's compliance with this principle.

14. Adequate internal controls.

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There is insufficient information publicly available as to Ecuador's compliance with this principle. The 2004 World Bank ROSC observes that, under Resolution JB-2003-586 of 2003, banks are required effective 2004 to establish audit committees, "which will act as an advisory body assisting the bank's management in facilitating the audit process and monitoring internal controls" (p. 5).

15. Strict "know-your-customer" rules and high ethical and professional standards.

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According to a 2007 mutual evaluation report on Ecuador's compliance with the Financial Action Task Force's (FATF) recommendations on anti money laundering (AML) and combating the financing of terrorism (CFT) by the Financial Action Task Force of South America (GAFISUD), Ecuador is noncompliant with most of the preventive requirements for the financial sector. Ecuador is noncompliant with all FATF recommendations on customer due diligence (CDD) and is noncompliant with most recommendations on record keeping and suspicious transactions reporting by financial institutions. However, the above information is inadequate to assign a compliance level to Ecuador with respect to this principle and there is little further information publicly available regarding Ecuador's compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

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According to the CEMLA/WB report, the SBS's supervisory responsibilities include "establish[ing] preventive supervision programs and perform[ing] unrestricted inspections to verify the accurateness of the information" (p. 23) submitted by the banks to the BCE. The 2004 World Bank ROSC adds that, within the SBS, the National Risk Department, with the operational support of the National Intendancy of Banks, carries out the monitoring and supervision of banks. The Department has a large and experienced staff to conduct on-site inspections and off-site analyses. Since 2003, they have effectively applied the SBS's procedures manual for on-site inspections. The procedures include "reviewing the external and internal auditors report, performing risk analyses and ensuring compliance with applicable prudential regulation and adequate risk management practices" (p. 10). The 2004 FSTAL report by the World Bank also attests that the loan contributed to enhanced supervision by the SBS. It included the development of a new operational manual for on-site examination and training for the staff, upgrading examination procedures, tighter off-site monitoring, and the introduction of the CAMELS approach to risk-based supervision of banks by the SBS. However, the above information is inadequate to assign a compliance level to Ecuador with respect to this principle and there is little further information publicly available regarding Ecuador's compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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The 2004 World Bank ROSC notes that "both consolidated and 'stand alone' financial statements are mandatory and must be audited" (p. 4). There is little further information publicly available as to Ecuador's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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Per the CEMLA/WB report, the SBS's supervisory responsibilities include performing "unrestricted inspections to verify the accurateness of the information" (p. 23) submitted by the banks to the BCE. The 2008 U.S. DoS report notes that the onshore banks undergo standard audits by the SBS, whereas offshore banks contract external auditors pre-approved by the SBS. However, there is insufficient information publicly available as to Ecuador's compliance with this principle.

20. Ability to supervise on a consolidated basis.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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As indicated in the 2004 World Bank ROSC, although based on International Financial Reporting Standards (IFRSs) (formerly International Accounting Standards - IASs), the Ecuadorian Accounting Standards exhibit significant differences against IFRSs. The 2006 report by Quispe-Agnoli and Whisler confirm this finding. Also, there is no legally established accounting standard-setting body in Ecuador. Therefore in the banking sector, the SBS under the General Law on the Institutions of the Financial System of 2001, is empowered to set its own accounting rules. Under the Law, banks, investment funds, savings and loans institutions are required to prepare consolidated financial statements in accordance with the accounting regulations issued by the SBS. The entities submit monthly, quarterly, and year-end financial reports to the SBS per the specific format and accounting policies of SBS's Unified Chart of Accounts. The ROSC notes that, as of December 31, 2002, the general-purpose financial statements of banks included a specific explanatory note summarizing the main differences between the accounting principles applied under the SBS rules and IFRSs. Further, the balance sheet, income statement, and statement of cash flows of banks are publicly available on the SBS's website. However, the companies do not post their audited financial statements on their websites, leading to non-transparent financial reporting and auditing. Also, enforcement of accounting standards remains a concern. Additionally, the Ecuadorian Accounting Standards have not been updated or brought closer to the IFRSs since 2000. Despite the above descriptive information, the publicly available sources do not address Ecuador's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

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As the CEMLA/WB report notes, the SBS's supervisory powers include requiring banks to "propose and then implement the corrective measures that are necessary" (p. 23). The SBS can impose administrative sanctions on, and initiate legal action against, banks, their directors, managers or debtors for non-compliance with applicable rules and regulations. The 2006 article by Quispe-Agnoli and Whisler notes that, under full dollarization, banking regulations were tightened and restructured and regulators were given enhanced powers to take preventive action against unstable or weak banks. However, this information is inadequate in terms of assigning a level of compliance to Ecuador for this principle and there is little further information publicly available regarding Ecuador's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

24. International exchange of information with other supervisors.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is insufficient information publicly available as to Ecuador's compliance with this principle.