Abstract

Legal frameworks shape the context in which economic transactions take place, both within a given economy and between economies. Laws and regulations allow private economic agents to establish and (re)organize themselves, to seek finance, to enter markets by selling products and services, to enforce payment claims when customers are entering into default on obligations, and to exit a market in an orderly way when so desired or required. It is widely accepted that well-designed legal frameworks for market entry, operation, and exit can promote economic growth and, from a cross-border perspective, integration of economies and financial systems.

Legal frameworks shape the context in which economic transactions take place, both within a given economy and between economies. Laws and regulations allow private economic agents to establish and (re)organize themselves, to seek finance, to enter markets by selling products and services, to enforce payment claims when customers are entering into default on obligations, and to exit a market in an orderly way when so desired or required. It is widely accepted that well-designed legal frameworks for market entry, operation, and exit can promote economic growth and, from a cross-border perspective, integration of economies and financial systems.

This chapter analyzes legal frameworks in the context of the cross-border integration of financial systems in Latin America. Specifically, the authors try to determine which legal barriers hinder the cross-border establishment of financial firms, the provision of financial services, and the flow of financial investments. The authors explore how carefully designed law reform could remove some of those barriers with a view to improving market access.

The specific perspective of this chapter is that, in designing legal frameworks for market entry and operation, the objective of openness must be balanced with the objective of financial stability. The goal is not to advocate the removal of all barriers. Many legal provisions that hinder financial activity (by imposing a cost on it) have been established for good reasons and should be retained. For example, this is the case for the minimum capital, governance, and “fit and proper” requirements placed on financial firms. However, in many jurisdictions, including in Latin America, potential market entrants face legal barriers that are not intended to ensure financial stability but rather to pursue other public policy objectives (for example, protecting the local market) or private economic interests (rents). Removal of such barriers can contribute to enhanced financial integration, which means more competition, more choice, and lower prices for consumers. In addition, some LA-7 countries1 maintain certain legal instruments aimed at pursuing financial stability that are actually not effective in that pursuit. In this regard, the authors recommend strengthening the legal framework so countries are better equipped to deal with the financial stability risk stemming from foreign entrants; in other words, to create a better equilibrium between openness and financial stability. Using a parallel with the economic concept of the “production-possibility frontier,” we believe it is better, through the general improvement of the financial regulatory toolkit, to push the range of possible equilibria between financial stability and openness outward, as illustrated in Figure 7.1, instead of moving on the existing curve. This implies that, for most if not all countries, it is possible to seek both more financial stability and more openness.

Figure 7.1
Figure 7.1

Financial Stability–Openness Frontier

The chapter provides a brief overview of the methodology designed by the authors to assess the existence of legal barriers, identifies such barriers in the LA-7 countries, and suggests mechanisms to remove the barriers and strengthen the legal underpinnings of financial stability.

Methodology

Analyzing all legal rules that have or may have an impact on all types of cross-border flows is potentially a huge endeavor. To make the exercise workable, it is therefore imperative to clearly define parameters for the analysis. The methodology developed for this purpose is limited and therefore imperfect, but it may serve as a template for similar analysis in other regions, or in the same region at a later time.

What Is Meant by “Regional Financial Integration” in a Legal Sense?

First, it is necessary to define the types of financial activities and transactions that are considered in this chapter and hence from a legal perspective as manifestations of regional financial integration. In line with the general practice of trade law analysis, the authors distinguish between (1) the right of cross-border establishment and (2) the right to provide cross-border services. They also analyze certain cross-border financial flows of financial firms.

  • With regard to the right of cross-border establishment, the authors focus specifically on the legal framework for the cross-border opening of establishments by banks and insurance firms; investment firms (such as broker-dealers or asset managers) are not part of the exercise. They focus on the right of foreign firms to open establishments (in this chapter, subsidiaries and branches) in the host country and briefly address the right of firms under their home country rules to expand abroad. The difference between branches and subsidiaries is that subsidiaries have a separate legal personality under the law of the host country, whereas branches do not—they are legally one with the parent bank/insurance firm in the home country. Once licensed, both subsidiaries and branches are authorized to offer banking (taking deposits and making loans) and insurance services, albeit possibly under certain limitations, especially for branches. The third form of establishment, representative offices, is not allowed to offer banking or insurance services in the host country and is less relevant for this exercise.

  • With regard to the right to provide cross-border services, the chapter concentrates mainly on two specific but interesting questions, and views them more from the perspective of the acquisition of services than the provision of services: (1) the right to acquire insurance coverage abroad and (2) the right of local pension funds to outsource part of their asset management tasks to foreign asset managers.

  • With regard to cross-border financial flows, the chapter analyzes the extent to which pension funds and insurance firms are allowed to invest a part of their portfolios in foreign financial assets.

In many countries, the rules governing the cross-border right of establishment, provision of services, and financial flows do not distinguish between regional and other possible foreign entrants. In some countries, where the right of access is provided by treaty, such a distinction can be made. The authors consider that general openness constitutes regional openness and that, conversely, generally applicable barriers constitute barriers to regional integration.

Which Legal Rules Are Analyzed?

Many types of legal provisions and rules are capable of obstructing or hindering regional financial integration. To remain within the boundaries of the practically feasible, the chapter’s analysis focuses on legal issues that directly hinder cross-border financial integration as defined in the previous paragraphs; namely, the opening of cross-border establishments by banks and insurance firms, the cross-border acquisition of certain financial services, and the cross-border flows of pension funds and insurance firms.

The analysis focuses on rules enshrined in primary legislation but, where relevant, also includes secondary regulation. In most countries, including most of the LA-7 countries, primary legislation provides the basic and most stable framework for financial market entry and operation. Many countries also include important rules regarding market access in secondary regulation, such as decrees issued by the government or regulations adopted by financial regulators. These rules tend to be more detailed and less stable (that is, they are modified more easily and more often).

Thus, the analysis of this chapter focuses on domestic law as established in internal constitutions, laws, decrees, regulations, and other local legal instruments. The authors do not analyze in detail the obligations of the LA-7 countries under public international law stemming from treaties and similar international instruments. However, the authors recognize that several of the domestic rules analyzed have been adopted pursuant to or shaped by international legal obligations. In one instance (Mexico), domestic rules make an explicit and direct reference to access rights acquired under public international law. Box 7.1 gives a brief overview of the role of public international treaties in regional financial integration.

Which Legal Rules Are Not Analyzed?

This chapter does not analyze certain legal frameworks even though they have a direct impact on cross-border financial integration; one such framework is the exchange controls rulebook. Several LA-7 countries still maintain exchange controls, and in some instances these controls may have a significant impact on the extent to which the local financial system is capable of integrating with those of other countries in the region. For example, some countries do not allow residents to maintain foreign currency deposits in local banks. The tax laws are also not analyzed in this chapter, although they obviously have a significant impact on cross-border financial flows.2 For instance, the tax treatment of interest (coupon) payments of bonds determines the degree to which local bonds are attractive to investors from other countries.3

The authors recognize that the absence of a detailed analysis of exchange controls and tax frameworks makes the current exercise imperfect. However, it is widely accepted that strict exchange controls and convoluted taxation rules hinder cross-border financial integration. It is fair to say that the LA-7 countries would be well advised to regularly review their exchange controls and taxation rules to ensure that these frameworks do not excessively hinder cross-border financial transactions and operations.

The Role of International Treaties in Regional Financial Integration

Public international law can play a big role in opening countries’ legal frameworks for the cross-border establishment of financial firms and provision of services. Important legal instruments in this regard are multilateral, regional, and bilateral free trade agreements (FTAs), as well as bilateral investment treaties.

The countries that make up the LA-7 (Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay) have made use of international treaties to open up their financial sectors, mainly through the General Agreement on Trade in Services (GATS). All LA-7 countries are members of the World Trade Organization (WTO), and in that capacity they are automatically also signatories to GATS. All LA-7 countries have undertaken specific commitments under GATS with regard to their financial sectors, thus submitting them to GATS’ “market access” and “national treatment” principles, which have a liberalizing effect.

In this context, however, the LA-7 countries have also maintained many of the barriers discussed in this chapter as limitations to their specific commitments under GATS. Examples of this are the requirement under Mexican law that banks and insurance companies enter the market as subsidiaries or the requirement of a Presidential Decree imposed upon foreign financial institutions to access the market in Brazil. Both measures are excluded from the countries’ specific commitments on market access.

Intra–LA-7 (pluri-lateral or bilateral) FTAs have until now rarely been used to achieve a much higher degree of regional openness than was achieved globally through WTO membership. GATS includes the option to grant preferential treatment (as an exception to Most Favored Nation treatment) among trading partners within a customs union or a free trade area. This offers to LA-7 countries the possibility to achieve a higher degree of regional openness without automatically granting similar treatment to WTO members from outside the region, at least at this stage. The LA-7 countries have made little or no use of this possibility. Many of their intra–LA-7 FTAs do not apply to financial services. Of the FTAs that apply to financial services, many include the barriers discussed in this chapter among their nonconforming measures, and in some instances the FTAs’ provisions are too general to provide a robust legal basis for access.

Going forward, the scope of application of the intra–LA-7 FTAs could in some cases be expanded to include financial services, and nonconforming measures without direct bearing on financial stability (or other appropriate public policy objectives, such as social security) could be eliminated.

This chapter does not address legal problems that hinder financial sector development more broadly without operating as direct cross-border barriers, such as creditor rights and quality of the judiciary. Well-designed contractual and collateral enforcement frameworks and a high-quality judiciary generally support growth of the financial system, thus creating an incentive for foreign entrants. Problems in these areas may constitute indirect barriers in the sense that well-connected local incumbents are probably better placed than new foreign entrants to navigate the legal complexities that arise in this context.

Legal Barriers to Regional Financial Integration

This section provides a relatively detailed overview of the manner in which the legal frameworks of the LA-7 countries authorize the forms of regional financial integration described above. The authors discuss direct barriers to entry and expansion as well as rules and mechanisms that hinder or could hinder the opening of certain forms of establishments.

Cross-Border Establishments of Financial Institutions

Outward Openness

All LA-7 countries generally authorize the opening abroad of establishments of their local financial firms, albeit sometimes under idiosyncratic conditions. All countries require prior approval of the home supervisor or—occasionally, for some operations—the ministry of finance.4 Some countries impose the standard condition that the establishment abroad must allow for effective consolidated supervision of the bank.5 Other countries, however, impose more onerous conditions. For instance, Brazil requires that expanding Brazilian banks, in addition to standard requirements, have been in business for at least six years and hold a capital surcharge of 300 percent.6 In Chile, the capital of a branch established abroad must be no less than 3 percent of the bank’s total assets.7

Inward Openness

The LA-7 countries differ considerably in the extent to which they authorize the opening of establishments in their own jurisdictions by foreign financial firms. Several countries (for example Colombia, Panama, and Peru) have open regimes as a matter of law: their financial legislation explicitly allows foreign banks and insurance firms to open both subsidiaries and branches. In most instances, such openings are subject to appropriate legal conditions in line with international good practices. For instance, in Colombia, foreign financial firms can establish subsidiaries, but the supervisor may condition such establishment on the existence of consolidated supervision of the foreign parent and the consent of the home supervisor.8

Several LA-7 countries maintain in their legislation formal legal barriers to the opening of certain types of establishments of foreign financial firms in their territory. Some of these barriers are fundamental in that they reflect a strong policy preference of local authorities regarding whether or how foreign financial firms should enter their market, while others are more idiosyncratic.

  • In Brazil, the key provisions of the framework governing the access of nonresidents to the Brazilian financial market are included in the Constitution, which requires Congress to specifically enact legislation regarding the participation of foreign capital in the financial sector.9 Until such legislation is enacted (and none has been enacted to date), nonresidents are not allowed to hold shares in domestic financial institutions (mainly banks but not insurance firms).10 Shareholdings that existed when the Constitution entered into force on October 5, 1988, are grandfathered, but the constitutional prohibition extends to increases in equity stakes in domestic banks. The president of the republic can grant a waiver for this constitutional prohibition on the basis of (1) international agreements, (2) reciprocity, or (3) the interest of the government.11 To obtain a presidential waiver, the central bank reviews and submits for the president’s decision, the application for licensing of a bank in which a nonresident intends to hold a direct or indirect participation, or for acquisition of or increase in direct or indirect participation in an existing bank by a nonresident.12

  • Mexico explicitly prohibits branches of foreign banks and insurance firms, and authorizes subsidiaries only under specific conditions. Only a foreign financial institution established in a country with which Mexico has entered into a treaty or agreement allowing for the establishment of subsidiaries may establish a subsidiary in Mexican territory.13 Mexico also requires that a majority of the members of the board of directors and all members of the executive board of banks reside in Mexico.14

  • In Uruguay, foreign banks are allowed to set up subsidiaries and branches in the country provided their by-laws or policies do not bar Uruguayan citizens from serving as directors, managers, or employees in their operations in Uruguay.15

Overly Broad Provisions

Even where legislative frameworks allow for entry, legislation in some LA-7 countries contains very broad provisions whose implementation may inhibit access to the local market for some types of financial firms.

  • One example of such broad provisions is statutory conditions that make the licensing of the establishment of firms subject to a very broadly drafted “best interests of the economy” test. For instance, in Panama, the banking license can be refused if “the bank does not contribute to Panama’s economy.”16

  • Some countries’ supervisory legislation also features broad discretionary powers for supervisors in issuing normative instruments or individual decisions. For instance, in Panama, banking law authorizes the supervisor to make the license subject to “any criterion it deems pertinent.”17

None of these provisions are restrictive per se or have been found in practice to have led to discriminatory treatment of foreign firms. Nonetheless, their very broad wording could, in principle, be used to restrict market access. Potential foreign entrants will naturally read those provisions in light of the supervisory practices and attitudes displayed by the supervisor and possibly also the government. Where those practices and attitudes are entrant friendly, the provisions are unlikely to cause much concern; however, where doubt exists, overly broad provisions contribute to uncertainty about the climate within which the request for licensing will be received, and this may discourage entry.

Restrictive or Discriminatory Conditions

Among the LA-7 countries where the legal right to entry of foreign financial firms exists, some subject branches of foreign banks to rules that effectively diminish the advantages of that business model. Compared to subsidiaries, branches are a low-cost form of entry (for example, the management structure is lighter, as there is no need to have a separate board of directors) and therefore often preferred by banks as an initial method of greenfield entry. However, where branches of foreign banks are regulated in exactly the same manner as locally incorporated banks, notwithstanding differences in circumstances,18 this advantage vanishes, and foreign entrants basically have to carry a cost almost equal to the cost of establishing a subsidiary.

Specifically, several LA-7 countries impose identical capital adequacy requirements (CARs) on branches of foreign banks and locally incorporated banks. This ignores the fact that the branch’s head office remains legally liable for the obligations of the branch, and imposes a high cost on the branch. Panama is one country that does not follow this approach: the CAR is not applied separately to the branch, although the parent must annually certify compliance of the parent’s consolidated CAR with the home country’s requirements.19

Several LA-7 countries apply discriminatory ring-fencing rules against foreign-owned branches. These rules provide that if a branch of a foreign bank enters into liquidation, the assets of the local branch will be distributed by priority to creditors of the local branch. (In other words, the assets of the branch will not be handed over to the home country liquidator of the parent bank, with the understanding that the host country creditors will file their claim on the estate of the failed bank according to home country rules.) Well-designed ring-fencing rules are nondiscriminatory and treat all creditors of the branch in a similar manner. Panama is a good example of a country with nondiscriminatory rules.20 In contrast, under Chilean, Colombian, and Peruvian law, creditors who reside in the country are preferred over nonresident creditors of the local branch.21 Such treatment discourages nonresident parties from maintaining deposits in or providing loans to foreign-owned branches: because the claims of such creditors would be subordinated to the claims of local creditors if the branch were liquidated, they are more likely to establish business relationships with locally incorporated institutions where such discriminatory treatment will not apply upon insolvency.

Cross-Border Acquisition of Financial Services

Several countries prohibit residents from acquiring certain types of financial services abroad. This chapter is not concerned with typical restrictions under an exchange control framework designed to support a country’s exchange rate policy, such as rules that prohibit residents from holding foreign currency abroad or acquiring certain foreign financial instruments (such as bonds or shares). Rather, the chapter focuses on financial services provided by foreign providers that should have little impact on a country’s balance of payments. For instance,

  • In Panama and Mexico, local residents are precluded from acquiring certain types of insurance contracts abroad.22

  • Most LA-7 countries impose restrictions on the ability of local pension funds to outsource part of their asset management tasks to foreign asset managers (this is allowed only in Chile).

  • In Brazil, both retail and professional investors may invest abroad only through a locally registered investment fund.

Cross-Border Financial Flows

All the LA-7 countries allow insurance firms to invest in financial assets abroad; however, domestic legislations impose limits on these investments, typically in percentage of capital and technical reserves. Most legal frameworks establish a minimum percentage that must be invested in “safe” securities; namely, those issued or backed by the (domestic) state or the central bank.23 For the remaining percentage, laws or regulations set a general maximum limit on investments in foreign financial assets and, within that limit, some individual limits depending on the type of instrument.24 Moreover, most legal frameworks grant the supervisory authority significant discretion to set additional limits, for example, for each issuance25 or even more generally.26

A similar approach applies to investments by pension funds in the LA-7. Several of these countries have established different general limits for different classes of funds: the higher the yield of the fund, the higher the limit on foreign investments; the more conservative the fund, the lower the limit on foreign investments. In addition to such general limits and for purposes of risk mitigation, legal frameworks also set specific limits by issuer and for each issuance.

The imposition of such limits on foreign investments is not a barrier per se, as such limits are needed for the purpose of risk mitigation.27 There are, however, two instances in which such rules could inappropriately hinder cross-border financial flows. First, the general or specific limits could be very low compared with stated public policy objectives. From a policy perspective it is possible to argue about the appropriate limit, but limits under 20 percent are considered very low.28 Second, some supervisory authorities might be granted a very high degree of discretion to impose additional limits. In both instances, the concern arises that these limits could be used to artificially promote investment only in national instruments, thus creating a captive market to the detriment of sound risk diversification.

Removal of Legal Barriers

To the extent that barriers hinder regional financial integration without yielding significant financial stability benefits, countries should consider replacing them with legal provisions that yield a better equilibrium between the two public policy objectives. In some instances this will require enhancing the legal framework to effectively address the specific financial stability risks posed by increased foreign activity in a country’s jurisdiction. The removal of barriers can take place at several levels.

First and foremost, regional financial integration would be supported if all countries across the region were to have in place objective and comprehensive entry regimes for foreign financial firms in primary legislation. Ideally, these regimes provide for entry in the form of both subsidiaries and branches of foreign firms. The use of primary legislation offers a more transparent and stable legal regime than secondary rules and regulations.29 This approach also guides individual decision making by prudential supervisory authorities and shields them from excessive discretionary powers that can lead to the perception of arbitrary decision making. Overly broad best interest tests and discretionary licensing criteria are best avoided. If they cannot be avoided, safeguards can be provided in the form of transparent administrative guidance on how the tests and licensing criteria will be applied; for example, in the form of circulars from the supervisory authority.

Beyond the rules on access to the market, certain conditions imposed on establishments of foreign firms do not contribute to financial stability. Several Latin American countries maintain measures that, while increasing the cost of cross-border operations, are fully appropriate in light of the imperative to maintain financial stability; for example, limits on intragroup exposures for subsidiaries, local asset maintenance requirements for branches, and the power to ring-fence a local branch of a foreign bank in a nondiscriminatory manner. However, when those measures include excessive or discriminatory characteristics that hinder cross-border integration without yielding meaningful financial stability benefits, they could be modified to better balance financial stability with openness. Removing the discriminatory aspect of ring-fencing mechanisms for foreign branches (already done by Panama) would be particularly useful in this regard. Reconsidering residence requirements for directors and senior managers30 (already done by most LA-7 countries) is also appropriate.

Rules prohibiting local residents from acquiring certain foreign financial services should also be reviewed. Chile, Colombia, and Peru present good examples of how barriers can be removed by explicitly authorizing in primary legislation residents to acquire foreign insurance coverage abroad.31

The Need to Strengthen some Aspects of the Legal Framework

In search of a better equilibrium between openness and financial stability, some legal requirements for establishments of foreign firms are currently too weak or poorly designed to achieve the objective of financial stability. This is particularly the case for some LA-7 countries with local asset maintenance requirements (LAMR) for branches of foreign banks. Conceptually, LAMR should require such branches to maintain in the country a certain amount of assets to satisfy liabilities of the branch in case of its insolvency (including insolvency of the parent firm), through the application of ring-fencing mechanisms. In the absence of LAMR, the branch may hold assets abroad under control of the head office, including in the form of deposits with or loans to the head office. In case of insolvency, this will result in branch assets being controlled by the liquidator of the head office or branch assets consisting of circular worthless claims.

To effectively operate as a safeguard for creditors of the branch, LAMR should be applied on a significant percentage of local liabilities, especially deposits. Colombia and Peru apply their LAMR only to the endowment capital of the branch,32 which is just a small part of total liabilities and far too low to effectively protect depositors, thus inhibiting the effectiveness of the ring-fencing mechanisms the LAMR is supposed to buttress.

Combined with removing the discriminatory feature of the ring-fencing rule, these legal requirements should be significantly strengthened, specifically to require a higher amount of branch assets to be held locally. This should be achieved by requiring the local holding of assets equivalent to a high percentage of local (deposit) liabilities. Thus well-designed LAMR should give the assurance to host countries’ supervisory authorities that they can manage adequately the specific risk stemming from branches of foreign banks. This may in turn lead to a more supportive attitude among local policymakers and supervisory authorities toward this form of cross-border establishments.

Conclusion

All in all, the LA-7 countries have made great progress in removing most of the legal barriers to cross-border financial operations. Several countries have open access regimes for establishments of foreign banks and insurance firms in their countries; however, some countries maintain certain formal barriers that hinder integration. These barriers reflect a reluctance on the part of policymakers and supervisory authorities, especially toward branches. Even in LA-7 countries that allow branches, the combination of, on the one hand, absence of a differentiated regulatory treatment of branches in spite of their specific legal nature, and, on the other hand, discriminatory ring-fencing rules combined with inadequate LAMR, points to an approach that diminishes the advantages of branches as well as the available legal instruments that allow a country to manage the risks while enjoying the benefits of opening to branches of foreign financial firms. It is hoped that the information in this chapter is helpful to authorities who seek to create a better equilibrium between financial openness and financial stability.

References

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  • De Wolf, Joseph. 2005. “Tax Barriers on the Way towards an Integrated European Capital Market: The EU Savings Directive as a Challenge for Clearing and Settlement Systems.” In Legal Aspects of the European System of Central Banks, p. 339. Frankfurt: European Central Bank.

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  • Organisation for Economic Co-operation and Development (OECD). 2006. “Guidelines on Pension Fund Asset Management.Paris: OECD.

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1

LA-7 refers to Brazil, Chile, Colombia, Mexico, Panama, Peru, and Uruguay.

2

With regard to Latin America specifically, see Tanzi, Barreix, and Villela (2008).

3

For a European Union perspective on this issue, see De Wolf (2005).

4

See, e.g., Article 87 of the Mexican Banking Law.

5

In Brazil, see Article 2 of Resolution 2723/2000.

6

Article 2 of Resolution 2723/2000.

7

Article 81 No. 2, Chapter 11-7, III, 3(a) of the Instructions of SBIF “Recopilación Actualizada de Normas.”

8

Article 53.3.f. of Organic Statute of the Financial System.

9

Article 192 of the Constitution.

10

Article 52 of the Constitution, Transitional Provisions.

11

The acquisition of nonvoting shares in a publicly traded financial institution is presumed to be in the government’s interest, and the waiver is automatically granted (Presidential Decree of December 9, 1996).

12

Article 1 of BCB Circular 3317/2006.

13

Article 45-A of the Banking Law.

14

Article 45-K and L of the Banking Law.

15

Article 8 of Decree-Law 15322/1982.

16

Article 48.3 of the Banking Law.

17

Article 48.5 of the Banking Law.

18

See, for example, Article 45A of the Colombian Banking Law and Article 39, 4th paragraph of the Peruvian Banking Law.

19

Article 18 of Regulation No. 001-2015.

20

See Article 221 of the Banking Law.

21

See Article 34 of the Chilean Banking Law, Article 45B.2 of the Colombian Banking Law, and Article 39 in fine of the Peruvian Banking Law. Reservations to obligations under free trade agreements may include such ring-fencing; see for example Peru.

22

See Article 153 of the Panama Insurance Law and Article 21 of the Mexican Insurance Law.

23

For example, in Colombia at least 40 percent of the technical reserves must be backed by investments in securities issued or backed by the Colombian state or the central bank, or by other highly liquid, secure, and profitable securities.

24

In Chile, the legal framework establishes a general limit of 20 percent for foreign instruments. Within that limit, the law sets a 5 percent limit for debt securities, deposits, bonds, promissory notes, and other debt securities issued by foreign financial institutions with a rating under BBB or N-3, and a 10 percent limit for shares of foreign companies or corporations, shares in foreign mutual or investment funds, and shares in Chilean mutual or investment funds with investments abroad.

25

That is the case in Chile: see Decreto con fuerza de ley 251, “Compañías de Seguros, Sociedades Anónimas y Bolsas de Comercio,” Article 24.

26

See Article 200, paragraph 8, of the Peruvian Banking and Insurance Law.

27

The Organisation for Economic Co-operation and Development (OECD) “Guidelines on Pension Fund Asset Management” allow the inclusion of maximum levels of investment by category (ceilings) to the extent that they are consistent with and promote the prudential principles of security, profitability, and liquidity pursuant to which assets should be invested (OECD 2006). However, the OECD does not provide guidelines on appropriate quantitative limits.

28

See, for instance, Chile’s 20 percent limit on insurance firms and Uruguay’s 15 percent limit for pension funds.

29

On this issue, see Bossu and Chew (2015).

30

As provided for in NAFTA Article 1408.

31

See Article 4 Decree-Law 251 in Chile, Article 38.2 of the Colombian Banking Law, and Article 10 of the Peruvian Banking Law.

32

See Article 2.36.12.2.2 of Colombian Decree 2555/2010 and Article 42 of the Peruvian Banking Law.

A New Strategy for a New Normal