In its 2007 Doing Business Guide, the U.S. Department of Commerce states that the implementation of financial sector regulatory reforms, such as the enactment of the Banking and Financial Groups Law, the Financial Supervision Law, and the Central Bank Law, has brought the Guatemalan banking supervisory framework more into line with international standards. However, the International Monetary Fund (IMF), in its 2006 Article IV Consultation with Guatemala, points out that further improvement needs to be made. Particularly, bank supervision and regulation as well as the legal authority of supervisors must be strengthened. Effective consolidated supervision and enhanced risk assessment should be applied to financial conglomerates. On-shore bank operations should be protected from problems arising in off-shore affiliates. Moreover, credit classification and provisioning rules should be tightened, and connected lending and exposure of unhedged borrowers to exchange risks should be limited. Overall, however, there is insufficient information publicly available as to Guatemala's compliance with the Bank for International Settlements' (BIS) Core Principles for Effective Banking Supervision.

General Overview

In 2005, the International Bank for Reconstruction and Development (IBRD) reported that Guatemala "has made significant progress in its financial sector reform program following a banking crisis in 2001" (p. 23). A major part of the reform program included the enactment of five financial sector laws: the Monetary Law, the Banking and Financial Groups Law, the Bank Supervision Law, the Central Bank Law, and the Money Laundering Law. According to the 2005 IBRD report, these laws addressed several shortcomings found in the legal framework during the World Bank's 2000 Financial Sector Assessment Program. As the IBRD states, the "reform of the financial sector legal framework aimed at strengthening the regulation of financial groups and creating an orderly market exit mechanism, enhancing credit risk management, and increasing access to financing" (p. 23). The IBRD goes on to explain that the "reform of [the] bank supervision legal framework aimed at strengthening the autonomy of the Superintendent of Banks and its legal and institutional capacity to supervise financial groups, and raise banking sector regulation towards international standards" (p. 23).

The International Monetary Fund (IMF), in its 2005 Article IV Consultation with Guatemala, commended the authorities for the modernization of and improvements made to the financial sector legislation. Particularly, prudential norms were tightened and off-shore banks were included in the regulatory framework. Also, solvency, asset quality, and liquidity are covered by the new legislation.

In its 2007 Doing Business Guide, the U.S. Department of Commerce (U.S. DoC) states that the implementation of financial sector regulatory reforms, such as the enactment of the Banking and Financial Groups Law, the Financial Supervision Law, and the Central Bank Law, has aligned the Guatemalan banking supervisory framework more closely with international standards. However, the IMF's 2006 Article IV Consultation with Guatemala points out that further improvements need to be made. Particularly, bank supervision and regulation, as well as the legal authority of supervisors, must be strengthened. Effective consolidated supervision and enhanced risk assessment should be applied to financial conglomerates. On-shore bank operations should be protected from problems arising in off-shore affiliates. Moreover, credit classification and provisioning rules must be tightened, and connected lending and exposure of unhedged borrowers to exchange risks should be limited. The IBRD, in its 2005 report, concludes that "it is necessary to continue to strengthen the capacity of the Superintendent towards implementation of Basle II-like supervision - analysis of bank risks and implementation of risk-based consolidated supervision - though not necessarily involving an explicit change towards that framework in the immediate future" (p. 24).

The 2007 U.S. DoC report considers the Guatemalan capital markets weak and inefficient, despite the progress made in the context of the financial reforms. As of 2007, Guatemala has 23 commercial financial institutions with an estimated USD 13.7 billion in assets, 17 non-bank financial institutions, primarily performing investment banking and medium and long- term lending, and three exchange houses.

The Principles

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

II

According to the 2004 World Bank report, the Law of Financial Supervision strengthens the Superintendence of Banks' (SdB) supervisory and sanctioning powers. The law sets forth the responsibilities of the SdB, such as the enforcement of laws and regulations, the supervision of financial entities (particularly with respect to adequate liquidity and solvency), the issuance of instructions to overcome deficiencies, the imposition of sanctions, the authority to access all relevant information, the supervision and inspection on a consolidated basis, and the evaluation of the policies, procedures, norms and systems of the entities. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

1.(2) Operational independence and adequate resources.

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

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

II

According to the 2006 IMF Article IV Consultation with Guatemala, further improvements have to be made with regard to bank supervision and regulation, as well as the legal authority of supervisors. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

II

According to the 2006 IMF Article IV Consultation with Guatemala, there has been some progress in implementing the World Bank's 2000 Financial Sector Assessment Program recommendations, but more has to be done. Stronger bank supervision and regulation, and enhanced supervisory authority must be set in place. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

1.(5) Legal protection for supervisors.

II

According to the 2004 World Bank report, the Law of Financial Supervision requires the SdB to provide its staff with financial means in order to cover the legal expenses that occurred in the context of legal actions against them. The law also grants personal immunity to the SdB and its authorities. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

II

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

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

II

According to the 2004 World Bank report, the Law of Banks and Financial Groups sets forth the minimum entry requirements for new banks. Under the law, the SdB is granted the authority to reject promoters, shareholders or administrators who have any impediment under the law. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

II

According to the 2004 World Bank report, the Law of Banks and Financial Groups governs the powers and duties of the bank and bank group management council. It also covers internal control matters. Under the law, the SdB may determine minimum requirements and the scope of the external audit. However, there is insufficient information publicly available as to Guatemala'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 Guatemala'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 Guatemala's compliance with this principle.

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

II

According to the 2004 World Bank report, the Law of Banks and Financial Groups "establishes the minimum capital of banks and financial groups as 10 percent of the risk-weighted assets, with the weights to be applied established by regulation, and requires the adoption of regularization plans in cases of capital deficiencies" (p. 4). The 2005 IMF Article IV Consultation with Guatemala reports that the risk-weighted capital adequacy ratios of on- and off-shore banks are well above the statutory minimum of 10 percent. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

II

There is insufficient information publicly available as to Guatemala'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.

II

According to the 2007 U.S. DoC Doing Business Guide, the previous legal framework gave banks and other financial institutions some leeway in valuing assets and evaluating the performance and quality of those assets. With the implementation of financial sector regulatory reforms, such as the enactment of the Banking and Financial Groups Law, the Financial Supervision Law, and the Central Bank Law, the legal framework has been brought more closely into line with international standards. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

II

According to the 2005 IMF Article IV Consultation with Guatemala, there has been progress in strengthening the banking system, and there are ongoing reforms. "Prudential norms have been tightened and offshore banks have been brought into the regulatory framework" (p. 5). However, there is insufficient information publicly available as to Guatemala's compliance with this principle

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

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According to the 2006 IMF Article IV Consultation with Guatemala, connected lending must be further limited. However, there is insufficient information publicly available as to Guatemala'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 Guatemala'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 Guatemala's compliance with this principle.

13. Comprehensive risk management processes.

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

14. Adequate internal controls.

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According to the 2004 World Bank report, the Law of Banks and Financial Groups governs the powers and duties of the bank and bank group management council. It also covers internal control matters. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

ID

The 2007 U.S. DoS report notes that the Regulation to Prevent and Detect the Laundering of Assets (RPDLA) "requires all financial institutions under the oversight and inspection of the SdB to establish anti-money laundering measures, and introduces requirements for transaction reporting and record keeping." The report adds that the financial sector in Guatemala has 'largely complied' with the RPDLA requirements, and that "covered institutions are prohibited from maintaining anonymous accounts or accounts that appear under fictitious or inexact names." However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

According to the 2007 U.S. DoC Doing Business Guide, Guatemala introduced strong anti-money laundering legislation in 2001 and established a Financial Intelligence Unit. Guatemala aggressively fights the use of its financial system by money launderers and controls off-shore activities. The DoC guide notes that improvements in Guatemala's anti-money laundering regime and other reforms have resulted in its removal from the FATF's list of non cooperating countries in 2004.

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

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

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

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

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

II

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

20. Ability to supervise on a consolidated basis.

II

According to the 2006 IMF Article IV Consultation with Guatemala, more improvements are required to strengthen bank supervision and regulation and enhance legal supervisory authority. Specifically, the IMF suggested that greater risk assessment and consolidated supervision must be set in place for financial conglomerates. However, there is insufficient information publicly available as to Guatemala'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.

II

According to the Deloitte & Touche Tohmatsu IAS Plus website, Guatemala replaced its national Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRSs) as of 2002. In a 2007 overview of the use of IFRSs in Guatemala, Deloitte & Touche reports that IFRSs are required for all domestic listed and unlisted companies. However, since 2002, the International Accounting Standards Board (IASB) has been continuously revising IFRSs, and there is no publicly available information as to Guatemala's compliance with the most recent set of IFRSs.

The ICGPA, in 2006, reports that the SdB proposes accounting standards for banks and insurance companies and publishes the proposals in an "Accounting Instructional Handbook for Entities under the Vigilance and Inspection of the SdB" ("Manual de Instrucciones Contables para Entidades Sujetas a la Vigilancia e Inspeccion de la SdB").

22. Adequate supervisory measures to ensure timely corrective action.

II

According to a 2004 World Bank report, the Law of Financial Supervision strengthens the SdB's supervisory and sanctioning powers. The law sets forth the responsibilities of the SdB, such as the enforcement of laws and regulations, the supervision of the financial entities (particularly with respect to adequate liquidity and solvency), the issuance of instructions to overcome deficiencies, the imposition of sanctions, the authority to access all relevant information, the supervision and inspection on a consolidated basis, and the evaluation of the policies, procedures, norms and systems of the entities. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

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

II

According to the 2006 IMF Article IV Consultation with Guatemala, there is still a need to improve bank supervision and regulation, and the supervisory authority must be enhanced. The report specifically called for better risk assessment and more effective consolidated supervision must apply to financial conglomerates. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.

24. International exchange of information with other supervisors.

II

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

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

II

According to the 2004 World Bank report, the Law of Banks and Financial Groups treats off-shore entities and on-shore entities equally. Off-shore entities need to be authorized under the law. However, there is insufficient information publicly available as to Guatemala's compliance with this principle.