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© 2007 International Monetary Fund

February 2007

IMF Country Report No. 07/66

Panama: Assessment of Financial Sector Supervision and Regulation, including Reports on the Observance of Standards and Codes on the following topics: Banking Supervision, Insurance Supervision, and Securities Regulation

This Assessment of Financial Sector Supervision and Regulation for Panama was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed on September 12, 2006. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Panama or the Executive Board of the IMF.

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Front Matter Page

INTERNATIONAL MONETARY FUND

PANAMA

Assessment of Financial Sector Supervision and Regulation

Prepared by the Monetary and Capital Markets Department

Approved by Jaime Caruana

September 12, 2006

This report is based primarily on work undertaken during two visits—a main mission from May 16 to June 1, 2005 and a second mission from November 15 to 22, 2005.

The assessment team comprised Michael Moore (Head), Francisco Figueroa, Ernesto Lopez, and Magally Bernal (assistant) (all MFD), Hellen Chirino-Roosberg (LEG), Alvir Hoffmann (banking supervision expert, the Central Bank of Brazil), Jose Antonio Monreal (banking supervision expert, consultant), Paloma Portela (Spanish Securities Commission—CNMV), Cristina Rohde (insurance supervision expert, consultant), and Nancy Worthington (legal expert, consultant). The main findings in the report are:

• The assessment of bank supervision showed a high degree of compliance with the Basel Core Principles (BCP) reflecting generally satisfactory implementation combined with an adequate legal and regulatory foundation. Areas of weakness were (i) legal protection for supervisors; and (ii) the need for harmonization of the regulation for nonbank deposit–taking institutions with that of banks.

• The supervisory and regulatory frameworks for capital markets and insurance sectors are underdeveloped. The securities law and regulations are generally effective; however, resources for securities markets oversight are insufficient, and independence is affected by unfilled positions, including a commissioner’s post. For insurance, the legislation does not afford sufficient operational independence from government and industry, and resources for prudential supervision are strained.

• The authorities will need to be attentive to sustaining the favorable reputation of the international financial center by ensuring that any modification to supervisory and regulatory arrangements is not viewed as reducing operational independence from government and industry interference.

• Panama is largely compliant with the majority of FATF Recommendations for anti-money laundering and countering the financing of terrorism (AML/CFT), reflecting the efforts of the authorities and industry to put in place an effective AML system. Nevertheless, staff makes several recommendations regarding (i) modifications to the law to criminalize all money laundering predicate offenses; and (ii) resources for law enforcement authorities (investigators and judges) and the regulatory agencies overseeing AML/CFT compliance by nonfinancial businesses and professions.

Additional information on compliance with international standards is provided in the Reports of the Observance of Standards and Codes (ROSCs) for banking and insurance supervision, securities regulation, and anti-money laundering and countering the financing of terrorism (see Annex).

The AFSSR is a summary report on the implementation of financial sector standards. It has been developed to help jurisdictions identify and remedy weaknesses in their financial sector supervision. The assessments do not cover risks that are specific to individual institutions such as asset quality, operational or legal risks, or fraud, or vulnerabilities to macroeconomic and cross-border shocks.

Contents

• Acronyms

• Executive Summary

• I. Introduction

• II. Financial System Overview

  • A. Economic Background

  • B. Financial System and Regulatory Arrangements

  • C. Financial Soundness Indicators for the Banking System

  • D. Findings from Earlier Assessments

• III. Main Findings and Recommendations

  • A. Sectoral and AML/CFT Assessments

  • B. Cross-Border Cooperation and Information Exchange

• Tables

• 1. Deposit-Taking Institutions Structure

• 2. Stock Market and Insurance Industry Indicators

• 3. Financial Soundness Indicators for Banking System

• Box

• 1. Summary of Key Recommendations

• Annexes

• Reports on the Observance of Standards and Codes

• A. Summary Assessment of Observance of the Basel Core Principles

• B. Summary Assessment of Observance of the IOSCO Principles

• C. Summary Assessment of Observance of the Insurance Core Principles.

• D. Summary of Assessment of Observance of the FATF Recommendations.

Acronyms

Executive Summary

1. The Panamanian financial system is dominated by its banking system, which is the largest in the Central American region. A revised banking law and the creation of the Superintendency of Banks (SdB) in 1998 helped to modernize the regulatory and supervisory framework for banking. This modernization was observed in the IMF’s 2001 assessment and in this assessment, with both assessments showing a high level of observance with the Basel Core Principles for banking supervision.²

2. In contrast to the banking sector, the regulatory frameworks for the capital markets and insurance sectors remain underdeveloped. The securities law and regulations are generally effective; however, resources for securities markets oversight are insufficient, and a key commissioner position remains unfilled, which affects the overall independence of the National Securities Commission (CNV). The Superintendency of Insurance and Reinsurance (SSRP) does not have independence from the industry and the executive branch of government, and lacks resources for prudential supervision, which will require revision to the underlying legislative framework to address.

3. Cross-border arrangements are in place to facilitate information sharing for financial sector regulation by the SdB and CNV, and both agencies have good records of cross-border cooperation. For the CNV, however, there are legislative impediments that limit information sharing, including its ability to implement the IOSCO multilateral MOU (MMOU). For insurance, the legislative framework does not define the level of cooperation with the home-country supervisors of the foreign-owned insurance companies.

4. Supervisory and regulatory arrangements are less developed for cooperatives and savings and credit institutions as compared to banks. These two sectors are small; however, the different regulatory treatment creates an uneven playing field particularly as some of the cooperatives have achieved the asset size of smaller banks.

5. Essential components for an effective system for anti-money laundering and countering the financing of terrorism (AML/CFT) are in place; although, resources (financial, human, information technology) are a concern for law enforcement authorities (investigators and judges) and nonfinancial businesses and professions. Supervision of AML/CFT for banks, securities firms, and cooperative institutions is generally sound but weak for the insurance industry (which largely reflects a general lack of resources for supervision by the SSRP).

6. Box 1 summarizes the key recommendations from the four assessments. A number of other technical recommendations are discussed in the main body of this report and in the Annex.