In this paper, the structure of Colombia’s financial sector is analyzed and various risks of the financial sector are studied. Supervision of the financial system can be performed by supervisory architecture, banking supervision, various securities, and insurance policies. Systemic liquidity provision, deposit insurance, and bank resolution form the financial safety net. Finally, financial stability and macroprudential framework have been discussed. Macroprudential tools and policies are also explained in detail.

Abstract

In this paper, the structure of Colombia’s financial sector is analyzed and various risks of the financial sector are studied. Supervision of the financial system can be performed by supervisory architecture, banking supervision, various securities, and insurance policies. Systemic liquidity provision, deposit insurance, and bank resolution form the financial safety net. Finally, financial stability and macroprudential framework have been discussed. Macroprudential tools and policies are also explained in detail.

I. Colombia’s Financial Sector

A. Overview

1. Colombia has a broad financial system, dominated by complex financial conglomerates and with a variety of intermediaries (Figure 1, Table 2). Over the past decade, assets of the supervised financial system have risen from about 60 percent of GDP in 2000 to about 90 percent of GDP in 2011. Credit institutions (mostly banks) account for about half of financial system assets, with the balance held by nonbanks (largely private pension funds, trust companies and insurance companies). Large domestic complex conglomerates dominate the financial landscape, with ten holding about 80 percent of total financial sector assets. In the banking sector, the top 3 banks (Bancolombia S.A., Banco de Bogota S.A., and Davivienda S.A) hold about 60 percent of banking system assets,1 and banks extend 90 percent of their commercial loans to 7 percent of debtors. Also, only one-third of the population has access to the banking system, reflecting in part the large informal sector. This underscores the importance of measures to broaden access to financial services, which would contribute to a more diversified financial system.

Figure 1.
Figure 1.

Colombia: Structure of Colombia’s Financial System

Citation: IMF Staff Country Reports 2013, 050; 10.5089/9781475530919.002.A001

Source: Colombian authorities & IMF staff estmates.
Table 2.

Colombia: Financial System Structure

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Total row includes pension & investment funds, excludes insurance premiums.

Premiums include direct written premiums and coinsurance premiums minus cancelled premiums.

2. Colombia’s capital markets reflect mainly activity in government debt and equity markets, with capitalization reaching 60 percent of GDP at end-2011. Non-government fixed income remains undeveloped (4 percent of GDP) and dominated by financial sector issues. The investor base comprises mainly domestic investors—the compulsory individual capitalization pension funds (20 percent of GDP), insurance companies (4 percent of GDP) and mutual funds (5 percent of GDP). Financial development is broadly in line with the region and the country’s characteristics.

3. The financial health of credit institutions appears sound.2 At end-March 2012, roughly half of their assets were loans to the corporate sector, another third lending to households. One fifth of their assets were claims on government—mostly holdings of government securities. These assets were funded primarily through customer deposits (64 percent of assets), bonds and commercial paper of more than one-year maturity (7 percent of assets) and equity (13 percent). Short-term wholesale funding is equivalent to 11 percent of assets. At end-March 2012, the regulatory capital adequacy ratio (CAR) was 15.3 percent (minimum of 9 percent), with a Tier 1 ratio of 12.5 percent.3 However, this measure includes the value of goodwill, and the CAR excluding the value of goodwill was 14.3 percent.

4. In August 2012, the authorities issued a decree to phase in by August 2013 a new capital adequacy regime that enhances the loss-absorbing capacity of bank capital. Under the outgoing regime, regulatory capital includes the value of goodwill, all voluntary reserves and investments in unsupervised bank holding companies. The new capital regime retains the minimum CAR of 9 percent and sets a new minimum of 4.5 percent for Tier 1 capital. It also excludes newly-generated goodwill, while grandfathering existing goodwill (which will be fully amortized over the next 14 years). It recognizes voluntary reserves as part of Tier 2 capital up to a limit of 10 percent of total regulatory capital. Also deferred tax assets and pension liabilities will be deducted from regulatory capital. Risk weights will continue to be broadly in line with the Basel I capital framework. Under the new regime (with the assumption that all existing voluntary reserves are declared permanent and excluding all goodwill), it is estimated that the system-wide CAR would have declined to 13.7 percent as of March 2012 (Tier 1 capital of 8.1 percent).

5. The borrowers from credit institutions have healthy balance sheets. As of end-2010, the estimated net worth of the corporate sector was 65 percent of GDP, with total liabilities of 35 percent of GDP. This sector’s exposure to the financial sector amounted to about 16 percent of GDP, and its liquid assets were well in excess of its short-term liabilities. The corporate sector has very little exposure to external debt, although the mining and transport sectors rely more on external borrowing. Gross household debt amounted to only 13 percent of GDP as of June 2011, with debt service at 15 percent of salaries—all in local currency. Gross debt of the public sector stood at 34 percent of GDP at end-2011, and CDS spreads on sovereign debt have ranged between 100-200 basis points since 2006. Over the past several years, public debt management has lengthened the duration of public debt to 4.6 years and increased the share of debt in local currency to almost 75 percent.

6. Against this background, credit quality is strong and banks are quite profitable. Nonperforming loans (NPLs) were manageable at 2.8 percent of total loans at end-March 2012.4 NPL ratios varied by portfolio, with consumer and microfinance loans exhibiting slightly higher ratios at 4.8 and 4.5 percent, respectively, and commercial and housing at 1.8 and 2.5 percent, respectively. Provisions appear adequate, covering 163 percent of total NPLs (one fifth of the provisions come from the countercyclical loan loss provisioning system adopted in 2007). Since 2005, the return on assets has fluctuated narrowly around 2 percent, and the return on equity has stayed near 26 percent, with profits arising mostly from a wide net intermediation margin. This strong profitability may reflect in part the concentration of the banking system, which can restrict competition and efficiency. Non-structural analyses using estimates of market power based on observed behavior by banks point to the presence of a degree of monopolistic competition similar to regional averages.5 Also administrative costs as a percentage of assets are higher than the regional median and the expected level given Colombia’s level of development.

7. The principal nonbank financial intermediaries are the private pension funds, which manage IRA-type pensions with total assets equivalent to almost 20 percent of GDP. These funds hold the largest share of these assets in government securities, followed by corporate securities, foreign assets and to a much lesser extent deposits and equity in other financial institutions. Over the past 5 years, the private pension funds have earned an average nominal return of 13 percent. These private pension fund accounts co-exist with a public pay-as-you-go (PAYGO) system, and individuals may switch regimes once every five years, making their last choice ten years before retirement. This means that the risk of poor investment returns on pension funds tends to be borne by the government as well as those individuals who retire under the private system.

8. There are a wide range of other non-bank financial intermediaries. Trust companies comprise a wide range of institutions, including pension funds for unionized employees and mutual funds. Together their assets amounted to 20 percent of GDP at end-June 2012, with most of their investment in fixed-income local currency private instruments, public debt and to a lesser extent domestic equity. Assets of insurance companies amounted to 4 percent of GDP at end-June 2012, with about half of these held in government securities. By June 2012, the return on these assets rose to 3.0 percent, and the capital of insurance companies reached 13.8 percent. Other nonbank financial intermediaries include broker-dealers and investment administrators, and accounted for less than 1 percent of financial system assets at end-June 2012.

Figure 2.
Figure 2.

Colombia: Financial Soundness Indicators

Citation: IMF Staff Country Reports 2013, 050; 10.5089/9781475530919.002.A001

Sources: Colombian authorities & IMF staff estimates.

B. Key Macro-Financial Risks for Banking System

9. As explained in the companion Article IV consultation report, the economic outlook remains favorable (Table 3). Reflecting the normalization of macroeconomic policies after the crisis, growth over the medium term is projected to stay at about 4.5 percent, while inflation would remain in the central bank’s 2–4 percent target range. Fiscal consolidation will continue under the recently approved fiscal rule. Colombia’s current account deficit is projected to remain relatively low, financed by continued high FDI inflows.

Table 3.

Colombia: Selected Economic and Financial Indicators

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Sources: Colombian authorities; UNDP Human Development Report; World Development Indicators; and Fund staff estimates and projections.

Includes the quasi-fiscal balance of Banco de la República, Fogafin balance, net cost of financial system restructuring, and statistical discrepancy.

Includes Ecopetrol and Banco de la República’s outstanding external debt.

Global risks

10. The main risk for the financial sector is the possibility of a protracted global recession that would cut economic growth and weaken the quality of the loan portfolio (Appendix I). Such a downturn could be fueled by adverse developments in Europe, a decline U.S. growth (Colombia’s major trading partner) or a hard landing in China, and would slow Colombia’s growth mainly by reducing commodity exports (about 80 percent of total merchandise exports), remittances or foreign direct investment. A sharp rise in global risk aversion could tighten financial conditions in Colombia through less access to external financing as well as through direct upward pressure on local funding costs.

Figure 3.
Figure 3.

Colombia: Private Sector Exposure to Foreign Financing

Citation: IMF Staff Country Reports 2013, 050; 10.5089/9781475530919.002.A001

Sources: Colombian authorities and IMF staff’s calculations.

11. However, the direct effect of deleveraging in Europe would probably have little effect on Colombia’s banking system. Banks’ outstanding borrowing from foreign sources accounts only for 2.5 percent of GDP. In Colombia, foreign banks have a small share of the financial market (19 percent of banking assets), well below most other countries in the region. The only two European banks operating in Colombia are BBVA—the fourth largest bank with 9 percent of banking system assets—and Santander—with just 3 percent of assets. In 2012, Santander sold 51 percent of its equity to Corbanco of Chile, with no impact on the domestic market. Both of these banks are subsidiaries that fund themselves almost entirely through domestic retail deposits. Foreign borrowing by either Colombian banks or non-financial corporations, either through cross-border banking loans or bonds, is small, especially from the Euro area.

Figure 4.
Figure 4.

Colombia: Credit Growth and Credit Composition

Citation: IMF Staff Country Reports 2013, 050; 10.5089/9781475530919.002.A001

Sources: Colombian authorities and IMF staff’s calculations.

Domestic credit growth

12. An important potential source of domestic vulnerability could be the pace of expansion in bank credit. Supported by growth in output and employment, credit to the private sector has been growing at an average of 14 percent a year in real terms in recent years, among the highest in the region. This expansion has been characterized by more consumer credit, with non-mortgage consumer loans now accounting for almost 30 percent of total credit (up from 18 percent in 2004), and an increase in loan size, as opposed to a growing number of borrowers. Moreover, there is some vulnerability to interest rate risk, as half of all loans are contracted at a floating interest rate.6 The risks from rapid credit growth are mitigated by the strength of household and corporate balance sheets. Also risks derived from currency volatility are contained, as there are strict limits on currency and liquidity mismatches in foreign currency and over 90 percent of lending is in domestic currency.

Asset bubbles

13. There are few signs of asset bubbles in equity or housing prices, but the lack of depth and liquidity in key asset markets call for continued vigilance. The equity market could be prone to excessive price volatility, as it is illiquid with low trading volumes and a small free float. The state petroleum company (Ecopetrol) accounts for 40 percent of market capitalization, adding to the sensitivity to world oil prices, and its shares are liquid and account for almost one-third of trading. Moreover, retail investors dominate holdings with over 1 million individual accounts, suggesting that equity price swings could have wealth effects on consumption. If sustained, the hike in housing prices could join with the reduction of the average debt-to-net wealth of households to 12 percent in 2011 (down from 19 percent in 2010) to fuel a consumption credit boom.

Figure 5.
Figure 5.

Colombia: Indices of Prices of Equities and Existing Houses

Citation: IMF Staff Country Reports 2013, 050; 10.5089/9781475530919.002.A001

Sources: Colombian authorities and IMF staff’s calculations.

Stress tests

14. Due to high profitability, low credit risk and conservative business models, Colombian banks appear resilient to a variety of shocks (Appendices II and III). Their substantial net interest income serves as solid cushion against the effects of losses related to credit risk, while their reliance on stable deposits for funding helps guard against liquidity shocks. The effect of market risk is contained by the low share of bank assets invested government and other fixed income assets. Banks maintain small exposures in the interbank market, keeping contagion risk quite low. However, more significant risks do arise from the high concentration of the commercial loan portfolio.

15. The stress tests were conducted with data as of March 2012 and with a measure of capital in line with international standards and broadly in line with the incoming regime. All existing goodwill was subtracted, and all voluntary reserves were included, on the assumption that shareholders would agree to make this permanent before the new regime takes effect. Under this capital definition, regulatory capital at end-March 2012would amount to 13.7 of risk-weighted assets (Tier 1 CAR of 8.1 percent), and this estimate was the starting point for the CARs used in these tests.

16. In the credit stress tests, the system-wide capital adequacy ratio remained well above the minimum.7 Under a macroeconomic crisis scenario that represented a 2.5 standard deviation shock to annual GDP growth—about twice the size of the post-Lehman shock, the system-wide CAR would fall by 2.3 percent points relative to the baseline to 12.9 percent after two years. Medium-sized banks (between 1 and 10 percent of system assets) would be the hardest hit, as their average CAR would fall to 10.9 percent. The CAR of three non-systemic banks would fall slightly below the regulatory minimum of 9 percent (the equivalent of 0.1 percent of total assets would be required to bring these banks’ CAR above the minimum). The mission team simulated the effects of Colombia’s system of dynamic provisioning, and found that this system provided a significant buffer to a number of banks to help absorb the costs of increased provisioning. A reverse stress test was also conducted and found that an immediate and permanent rise in NPLs of 300 percent would be required to bring the system-wide CAR to 9 percent after two years.

17. The liquidity stress tests underline that the banking system as a whole is highly liquid in the short term and sufficiently liquid in the medium and long term. These tests included the SFC’s regulatory measure, the Liquidity Risk Index (LRI), as well as estimates of the Basel III Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio, which are not part of Colombia’s regulatory framework. The average LCR for the system is almost 500 percent, although the ratios for two larger banks (accounting for 20 percent of system assets) are about 95 percent, slightly below the LCR benchmark of 100 percent. The NSFR averages about 140 percent, although some of the small banks (accounting for just 2 percent of system assets) show deficiencies in stable medium and long term funding.

18. The banking system is also resilient to market risk. A 300 basis point parallel shift in the yield curve leads to a slight decline in the system-wide from 13.7 percent to 13.4 percent, and no bank encounters a CAR below the minimum. It should be noted that this analysis also includes domestic sovereign bonds in the held-to-maturity portfolio, which are marked-to-market in the stress scenario instead of being priced at book value.

19. The most serious risk facing the banking system comes from its high exposure to the largest corporate borrowers. In a hypothetical, low probability scenario where the credit ratings of loans to the 100 largest private borrowers are downgraded by two grades under the loan classification system, the banking system’s aggregate CAR would fall from 13.7 percent to 12.3 percent, while the Tier 1 ratio would fall from 8.1 percent to 6.7 percent. One non-systemic bank would fall below the regulatory minimum of 9 percent, while three non-systemic banks would have their Tier 1 capital fall below the new minimum of 4.5 percent. Against this background, these results point to the merit of tightening the limit on large exposures to help manage the system’s exposure to concentration risk.

20. There appears to be a limited risk of contagion via direct interbank channels, given that banks hold relatively small claims on each other and other credit intermediaries. As of March 2012, banks’ gross asset exposures to each other and other intermediaries represented only about 5 percent of total banking sector assets and were distributed in such a way that there are no substantial concentrations. Banks’ high profits and large capital buffers mitigate losses incurred by nonpayment of other institutions. The limited effects of these interconnections were confirmed with a network analysis tool.

21. The stress test methodology of BR and SFC is sound, yet there is some room for improvement. The authorities have a well-functioning credit risk model in place that is linked to a structural macroeconomic model. The modeling of some elements of the income statement and of the evolution of risk-weighted assets could be enhanced along the lines of the FSAP stress test. Also, it would be useful to include scenarios that allow for access to the countercyclical capital buffer within the stress test, preferably by endogeneously assessing whether banks meet the access criteria. In light of the outcome of the concentration risk test, the authorities could also stress-test banks’ exposures to very large borrowers. In liquidity stress testing, the LRI represents a broad adaptation of the LCR under Basel III customized to capture structural characteristics of Colombian banking such as different run-off rates and projected cash inflows. To safeguard prudent longer-term funding at smaller banks, the authorities should take their initial efforts further and adopt a version of the Basel III Net Stable Funding Ratio. The assessment of market risks is in line with international best practices.

II. Supervision of the Financial System

A. Supervisory Architecture

22. The SFC supervises all financial institutions and has a wide range of mandates.8 While this broad authority presents challenges for the organization and resources of the SFC, it does enable the SFC to promote the development of a common supervisory framework for the financial sector, facilitate access to information needed for the supervision of financial groups, which are often anchored by banks, and help contain regulatory arbitrage. This structure helped with the recent liquidation of a broker-dealer, because there were no questions with regard to the regulatory or legal authority for taking this action. The SFC has been working with the Toronto Center for the past few years to streamline its management structure and to promote an even stronger capacity for consolidated supervision and a comprehensive assessment of risks.

23. While the SFC is fully responsible for supervision, the ministry of finance (MHCP) takes the lead in issuing prudential regulations for the financial sector. The SFC plays a critical role in the proposal, generation and comments of the decrees and regulations. It also has the full authority to issue instructions of mandatory compliance on a broad range of issues, including risk management, loan classification and provisioning, and accounting and reporting. The government recently created the Financial Regulation Unit (URF) to promote more fluid coordination between the SFC and the MHCP. This change was in response to concerns that the regulatory process at times was too slow and too prescriptive. There was no evidence of political interference, as the regulations followed technical considerations. This arrangement will continue to require excellent coordination between the two institutions to help ensure that SFC plays a key role in the regulatory process.

24. The SFC works with other institutions in many areas. On bank resolution, the SFC decides when to resolve a financial institution, but also works closely with the Guarantee Fund for Financial Institutions (FOGAFIN), which manages the deposit insurance system and administers intervened financial institutions. On anti-money laundering, the SFC works closely with the Unit for Financial Information and Analysis (UIAF)—a unit located in the ministry of finance that leads the country’s AML/CFT efforts—to ensure that the financial system complies with international norms in this area.9 The SFC is a member of the Financial Stability Monitoring Committee (CCSSF), which includes the Banco de la Republica (BR), the MHCP as well as FOGAFIN.

25. Since the SFC covers a broad regulatory perimeter, there are several critical supervisory issues that apply to all financial institutions:

  • Strengthening independence. The SFC has considerable de facto independence to undertake operations required by its mandates, and the supervisor carries out his functions with no political interference. However, there are issues with the jure independence of the SFC, as the President can dismiss the superintendent at any time without cause. Possible reforms to improve independence could include the requirement to appoint the superintendent for a fixed term or to require a public explanation of the reasons for dismissal.

  • Strengthening legal protections. The SFC and its staff lack legal protection for acts carried out in good faith performance of their official duties. While some procedures help shield staff, there is still a potential chilling effect on appropriate action. The legal framework could clarify that liability for failure to perform the regulatory mandate in good faith should be defined as equivalent to acting in bad faith; and that the judicial authorities might limit those circumstances in which private parties would have standing to sue.

  • Adopt a law extending its full regulatory and supervisory powers to holding companies of financial institutions. The SFC has no regulatory powers over financial holding companies, which can complicate its capacity for effective oversight. Such a law should provide a clear definition of financial group and give the SFC the powers to resolve a financial conglomerate as a whole. Now the SFC can resolve supervised members of conglomerate only on an individual basis.

  • Adopt IFRS. The SFC recently published a timetable for the full adoption of IFRS by end-2015.

  • Strengthen standards for external audits. While the SFC has the authority to oversee external auditors, it needs to adopt more rigorous standards for independence and publish the timetable to comply with international accounting and auditing standards.

B. Banking Supervision

26. The SFC exercises effective oversight of the banking system (Annex I). It enforces a robust framework for assessment of credit risk and asset classification and provisioning, and ensures that banks adopt prudent management of market, liquidity and operational risks. The authorization processes are well rounded and thorough, including licensing, transfers of ownership and investments. Of particular importance recently has been the process for the authorization of large acquisitions and investments, as Colombian banking groups have been expanding abroad through acquisitions of banks and banking groups, mainly in Central America. In this regard, the SFC has established an effective network of cooperation with other countries to exercise effective cross-border supervision of banking groups.

27. This new capital regime represents an important step forward from the outgoing capital adequacy rules. While the minimum capital adequacy ratio is 9 percent, the outgoing capital regime contains gaps, such as the inclusion of goodwill, all voluntary reserves and investments in unregulated subsidiaries. The BCP assessment evaluated the outgoing regime, because the new regime is not yet in effect, and concurred with the authorities’ view on the need for significant improvements to bank capital.

28. Colombia has a robust framework for AML/CFT and for addressing criminal activities.10 While the UIAF takes the lead in monitoring compliance with this framework, the SFC’s legal and regulatory framework provide guidance for the oversight for reporting suspicious activities for banks operating in Colombia. Nonetheless, there is some scope to improve its monitoring of the implementation of this framework by banks.

29. The SFC is in process of making supervision even more effective. While the SFC has a sound framework for the supervision of individual risks, it is still making progress in fully implementing comprehensive risk management. The SFC does have a general requirement that supervised entities manage their risks in a comprehensive way. However, this process would benefit from further formal written guidance with regards to the comprehensive risk management of banks and banking groups. Also there are no standards for the management of interest rate risk in the banking book and country and transfer risks, which matter in view of the significant share of loans with a floating interest rate and the expansion of Colombian banking groups abroad. In 2009, the SFC began to implement a risk-based supervisory approach called the Integrated Supervisory Framework (MIS), with support from the Toronto Center. This framework has already strengthened the comprehensiveness of the SFC’s assessments of each bank or conglomerate. Of course, the complete adoption of these reforms will take several more years, but once fully in place, these steps will ensure full implementation of a comprehensive risk-based approach.

30. Large exposure and related party limits are in place but need to be more comprehensive and streamlined. The rules for limiting large exposures could be simpler and allow fewer exceptions. More importantly, local affiliates are not consolidated and available unused credit lines are not taken into account in calculating neither large exposure limits nor related party lending. The definition of corporate control may create opportunities to bypass the related party limits.

31. The consolidated supervision of financial conglomerates has been significantly enhanced since the creation of the SFC. Improvements in the legal framework have empowered the SFC to conduct onsite exams and obtain necessary information from unsupervised members of financial conglomerates, to order the consolidation of financial statements of companies of these conglomerates, to exchange information with foreign supervisors and to authorize investments in the capital of foreign entities. Supervisory procedures are in place and a dedicated team is responsible for the supervision of financial conglomerates. The scope of the analysis covers the financial conglomerate, as well as the broader mixed conglomerate. However, the SFC would benefit from broader legal authority in this area, especially to oversee currently unregulated bank holding companies and to force changes in a group’s structure.

32. The SFC has established an effective network of cooperation for the purposes of consolidated supervision of the financial conglomerates that operate in Colombia. There are no legal limitations for the supervisory cooperation. The SFC has signed MoU with most of the home and host supervisors of these conglomerates, which are published in the SFC web page. It engages in regular exchanges of information with these agencies. The SFC has organized the college of supervisors for Banco de Bogota with the participation of six foreign supervisory agencies, which had its first meeting in January 2012. The SFC has also become a member of the Central American Council of Banking Supervisors (CCSB), which is an effective forum for the coordination with the most of the host supervisors of the three largest Colombian groups.

33. Going forward, it is highly recommended to put in place a Basel II, Pillar 2 supervisory framework. This would give the SFC explicit authority to tailor prudential norms to the risk profile of each financial institution, especially the systemically important ones.

C. Securities

34. The regulatory and supervisory regime for securities is highly transparent and comprehensive and provides substantial authority to the SFC to oversee supervised entities Annex II). The Securities Law adopted in 2005, together with subsequent amendments, has enhanced customer protection and the ability to combat market abuse. In 2006 the AMV, a self-regulatory authority, became the front-line authority for oversight and sanctioning of market conduct. The SFC has made substantial efforts to bring Colombia into compliance with international standards, in particular meeting the standard for exchange of enforcement and surveillance information set by IOSCO by signing the MoU in May 2012. It has also worked actively within the Colombian system to meet the new expectations contained in the IOSCO principles adopted in June 2010, relating among other things to systemic risk and hedge funds. In this regard, the SFC has extraordinary administrative powers in the securities sector that exceed those of many jurisdictions, including the ability to freeze and seize assets, including assets of non-supervised entities and parties, and to intervene in the event of market disruption and defaults.

35. Despite this significant progress, further improvements can be made in several areas. In particular, the SFC could tighten oversight of operators of collective investment vehicles, including broker-dealers, to strengthen investor protection and improve the management of uncollateralized risks. Another key area is to develop a better system for protection of minority shareholder rights—especially important given the complexity of Colombian corporations.

D. Insurance

36. During the last five years, a number of important regulatory reforms have been introduced to improve the regulation and supervision of the insurance industry (Annex III). The solvency position of the industry has been strengthened through more risk-based and improved capital and solvency provisions, though not yet Solvency II. Requirements for risk management and internal control systems have been established and those for investments improved. Public disclosure of financial information is strong. New mortality tables for use in life insurance have been developed and introduced. Revised insolvency and liquidation procedures are being developed, and a stronger consumer protection regime has been crafted for financial services markets. Increasing consumer confidence and continued progress towards international regulatory standards depends on further progress in oversight.

37. Despite this progress, there are several areas for continued improvement. The SFC is working on further enhancements to align solvency requirements with international standards, especially with regards to reserving practices and capital requirements. Actuarial capacity in Colombia is low (perhaps less than 120 professionals), and fuller actuarial programs at local universities may be a start towards addressing this problem. In addition, a plan should be developed towards establishing a self-regulating actuarial profession charged with establishment of actuarial standards, accreditation and disciplining its members. Policyholders with outstanding claims need to be given clear legal priority in the event of liquidation.

III. Financial Safety Net

A. Systemic Liquidity Provision

38. Overall, liquidity flows through the Colombian financial system smoothly. Typically, the interbank interest rate trades virtually in line with the policy interest rate. The BR plays a central role in the liquidity system, adjusting liquidity under ordinary circumstances to the financial system through several channels, including open market repurchase operations against government securities with all financial institutions and intra-day repurchase operations (also against government securities) to participants in the payments system. The BR is wisely planning to extend access to intra-day repos to market infrastructure institutions, such as clearing houses, which are becoming systemic.11 The flip side of the BR’s prominent role is that the interbank money market is very limited.

39. The recent intervention of a broker-dealer points to the potential for liquidity and other risks to disrupt the payment system. Broker-dealers can be highly vulnerable, as they can take large net intraday exposures that vastly exceed their capital and liquidity buffers. These institutions are closely interconnected through payment relationships with other financial companies: two broker-dealers are among the ten financial institutions with the most interconnections in the payments system. In response, the BR is prepared to provide intra-day liquidity to broker-dealers to contain the possible contagion from a liquidity squeeze in a broker-dealer. In general, this liquidity is limited by the institution’s holdings of eligible collateral—government securities—although in the aftermath of the recent intervention the BR has been providing liquidity to other broker-dealers against corporate securities for a temporary period. Going forward, it would be advisable to tighten liquidity requirements for broker-dealers and other NBFIs and to undertake more rigorous stress testing of these institutions.

40. Although the BR’s routine liquidity operations function smoothly, there may be scope to strengthen the role of the interbank money market. Options include narrowing the range of counterparties for open market operations to banks and primary dealers in government securities, because of the liquidity risks they necessarily run and raising the cost of excessive use of overnight credit. Other remedial actions include phasing out the financial transactions tax more quickly than already planned and expanding the issuance of short-term government securities.

41. The BR’s lender of last resort facility could be strengthened. Now, the law requires it to lend only to credit institutions, although against a wider range of collateral than government securities. The BR may need to lend to broker-dealers, trust companies and clearing houses in a crisis when traditional channels of liquidity may break down. The intra-day repo facility, and the facility to convert intra-day repos to overnight repos, gives the BR the ability to lend to such companies if they have eligible collateral. The wider the range of eligible collateral, the better able the BR will be to assist in crisis management. In addition the foreign currency clearing house in Colombia could experience liquidity problems if one or more members failed to complete transactions, and in an emergency its liquidity providers might need temporary dollar liquidity support. As a back-up, it would be desirable for the BR to be ready to swap dollars from the foreign exchange reserves for pesos with liquidity-providing banks in case of need.

B. Deposit Insurance

42. FOGAFIN manages a sound system of deposit insurance. The current coverage limit is about US$11,000 (about 150 percent of per capita income) per depositor per institution. The system covers all deposit-taking financial institutions, who must participate in the system, and covers 98 percent of the depositors in full, but only 20 per cent of the total value of deposits, with no coinsurance. Deposit insurance is funded by annual premiums collected from member institutions and investment income. Besides managing the deposit insurance system, it provides open bank assistance, and conducts modified purchase and assumption transactions with the exclusion of assets and liabilities. As is the case with the SFC, FOGAFIN’s board and staff have no legal protection for actions carried out in good faith execution of their official responsibilities.

43. FOGAFIN relies on the SFC to assess the financial soundness of credit establishments, underscoring the importance of information sharing. Recently the SFC agreed to inform FOGAGIN when a financial institution is at significant risk of being intervened. With the support of the SFC, banks have been required to begin to report detailed information on their deposits directly to FOGAFIN starting in 2014.

C. Bank Resolution

44. The SFC has a broad range of preventive and corrective powers that have been used effectively. These measures include moral suasion and issuance of administrative orders, cease and desist orders and sanctions. Specific steps can include establishing an enhanced surveillance, under which the institution must follow the SFC requirements for its operation; coordinating actions with the deposit insurance; fostering the fiduciary administration of the assets and business by another authorized institution; ordering the recapitalization of the institution; fostering the partial or total transfer of the assets, liabilities or contracts or the sale of its commercial establishments to another institution; ordering the merger of the institution; and ordering the adoption of a recovery plan.

45. The legal options for bank resolution are comprehensive and broad, yet could be improved in two areas.

  • Excessively long period of possession. Once a financial institution has been intervened, FOGAFIN has a period of two months (which can be extended) to decide on the best resolution option. Such a long administration period adds to the risks of shareholder lawsuits and a further loss of confidence in the institution, and it would be advisable to shorten this period.

  • Too much flexibility in the choice of options. Currently the authorities can choose among a wide range of resolution options, and this latitude opens the door to pressure to select an option that unduly favored shareholders or certain creditors. The authorities are preparing a protocol to organize the resolution options using a decision tree that would separate systemic from non-systemic cases and identify the resolution options applicable in each case. It would be important that the protocol incorporate essential resolution principles (selection of the least cost option, minimize contagion risks, first losses to shareholders, transparency and fairness, prefer private solutions and quick response) and be public. Moreover, while introducing a legal reform is always complex, there are clear advantages to embedding this protocol in the legal framework to limit risks to the resolution process.

IV. Financial Stability and Macroprudential Framework

A. Institutional Arrangements

46. The CCSSF—formed in the aftermath of the 1999 financial crisis—seeks to ensure close coordination among the SFC, BR, MHCP and FOGAFIN, especially during a crisis. It allows for discussion of proposed regulations and macroprudential policies. While respecting the autonomy and mandates of each institution, the CCSSF has fostered an exchange of information and stimulated the discussion about certain policy actions in support of financial stability, particularly in recent years.

47. However, the CCSSF’s effectiveness as a coordination body would benefit from a greater degree of formality. It would be important to introduce a strategic action plan for dealing with systemic risk that respects the legal mandates of each institution. The CCSSF should develop a long-term work plan to investigate key issues, such as an agreed methodology to identify and monitor systemic risk and establish the perimeter for measuring systemic risk. In the case of systemic crises, the CCSSF should be the entity coordinating systemic measures, including action plans and a clear process for decision making. This action plan should be comprehensive enough to deal with and possibly resolve SIFIs, financial conglomerates and large non-bank financial institutions.

B. Macroprudential Tools and Policies

48. The authorities have relied on a broad range of policy instruments to address macroprudential risks. Structural measures, such as the legal limits on loan to value and debt service to income, have been in effect since the 1999 crisis. Steps to contain systemic risks have included marginal reserve requirements, changes in provisioning and collateral requirements for consumer credit, limits on the exposure of financial institutions in derivative operations, limits on net open foreign exchange positions of financial institutions and a requirement to match the maturity structure of net foreign exchange positions. An unremunerated reserve requirement on capital inflows was used most recently as 2007. Going forward, there would be benefits to extending provisioning requirements on consumer credit on the unused portion of credit lines and tailoring provisioning rates to the debt service ratio of the borrower.12

49. The system for countercyclical loan loss provisioning has been beneficial, although it is more of a tool to mitigate microprudential risk. This scheme allows each credit institution to create an additional buffer of loan loss reserves in good times in order to cushion a rise in specific provisioning costs during a subsequent downturn. This system is capable of creating a broadly adequate buffer for a downturn, but staff simulations show that the countercyclical buffer may not be depleted fully during a moderately severe downturn episode, owing in part to an asymmetry between the rules for accumulation and drawing down. Going forward, the authorities might want to consider phasing in countercyclical capital buffers to address systemic shocks, but it would be crucial to understand how such a system would dovetail with the countercyclical loan loss provisioning.

Appendix I. Colombia: Risk Assessment Matrix

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Appendix II. Colombia: Stress Test Matrix for Solvency Risk

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Appendix III. Colombia: Stress Test Matrix for Liquidity Risk

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Annex I. Basel Core Principles—Summary Assessment

50. This assessment of the state of compliance with the BCPs in Colombia has been undertaken as part of an IMF / World Bank Observance of Standards and Codes (ROSC) mission.13 The assessment was conducted from May 28 to June 12, 2012. It reflects the banking supervision practices of the Financial Superintendency of Colombia as of May 2012.

I. Information and Methodology Used for Assessment

51. The assessment is based on the following sources: (i) a complete self-assessment prepared by the SFC; (ii) answers provided by the SFC to a pre-mission questionnaire; (iii) presentations and detailed interviews with the SFC staff; (iv) review of laws, regulations, and other documentation on the supervisory framework and practice, and on the structure and development of the Colombian banking sector; and (v) meetings with individual banks, the banking association, the Ministry of Finance (MoF) and external auditors.

52. The assessment was performed in accordance with the guidelines set out in the Core Principles (CPs) Methodology.14 It assessed compliance with the “essential” criteria (EC) only, albeit the detailed assessment includes a description of the compliance with additional criteria (AC). The Methodology requires that the assessment be based on the legal and other documentary evidence, combined with a review of the work of the supervisory authority as well as its implementation in the banking sector. The assessment of compliance with the CPs is not, and is not intended to be, an exact science. Banking systems differ from one country to the next, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world, and theories, policies, and best practices of supervision are swiftly evolving. Nevertheless, it is internationally acknowledged that the CPs set minimum standards.

53. This assessment is based solely on the laws, supervisory requirements, and practices that were in place at the time it was conducted. However, where applicable the assessors made note of regulatory and supervisory initiatives which have yet to be completed or implemented. In particular, regulations on capital, the planned reform of the SFC structure and the ongoing implementation of the Marco Integral de Supervision (MIS), a risk based supervisory framework.

54. The assessment team enjoyed excellent cooperation with its counterparts and, within the time available to perform their work, reviewed all the information provided. The team extends its thanks to the management and staff of the SFC for their openness and participation in the process.

II. Main Findings, Summary and Recommendations

A. Main Findings

55. Since the last FSAP update in 2004, Colombia has strengthened bank regulation and supervision in various respects. The merger of the securities supervisor with the banking and insurance supervisor to establish the SFC as an integrated supervisor has been an important step towards the development of a common supervisory framework for the financial entities and has facilitated access to information needed for the supervision of banking groups. A framework for the regulation and supervision of most risks (SAR) has been implemented and specialized risk units (including AML) are responsible for risk supervision of banks, insurance and securities companies. In addition, a specialized unit is responsible for the supervision of financial conglomerates and corporate governance. There are, however, shortcomings that would need to be addressed with regards to: the independence of the SFC, legal protection of supervisors, the capital adequacy framework, risk management, the supervisory approach, external audit and consolidated supervision.

Objectives, independence, powers, transparency, and cooperation (CP1)

56. The SFC has operational autonomy within a general framework established by the government, but the lack of procedures for the appointment and dismissal of the superintendent may limit his independence. The SFC has the ability to define its supervisory plans and methodologies, make major supervisory decisions and impose sanctions on supervised entities without prior authorization of other authorities. It also defines its budget, within the limits of the general public sector policies. However, there are no procedures for the appointment and dismissal of the Financial Superintendent, who can be removed by the President without disclosure of the reasons, a limitation that may make him vulnerable to political pressure.

57. The allocation of the regulatory powers on the Presidency demands a proper framework and a great deal of coordination to ensure its effectiveness. The main prudential regulations (capital, exposure limits, operations of financial institutions and corrective action and resolution framework) and the regulations on the organization of the SFC are issued through Presidential decrees processed by the MoF. The SFC can issue instructions of mandatory compliance on a broad range of issues including: risk management, loan classification and provisioning, accounting and reporting. This arrangement requires excellent coordination between the MoF and the SFC and a proper framework to ensure that the regulations are well grounded on international best practice, free of political interference and updated as frequently as necessary.

58. The recent creation of the URF seeks to enhance the autonomy of the regulatory process and the opportunity of its response to regulatory needs. This is an important step toward the establishment of a proper framework for the development of prudential regulation. However, this framework could be further improved to strengthen its independence and effectiveness. It is recommended that: (i) the selection process of all the board members of the URF, not only the independent ones, ensure that they are technically fit and free of conflict of interest; (ii) all Board members are appointed for a fixed term in office and the reasons for their removal should be clearly stipulated in the decree; (iii) a formal understanding is developed to ensure an adequate balance between the regulations issued by the MoF, which should be generally principled based, and those issued by the SFC, which should cover areas that are more likely to require more frequent revision and deep knowledge of supervisory practice; and (iv) some language is introduced in the URF decree to ensure that the SFC has a key role in the regulatory process, so that regulations can be effectively supervised.

59. The law does not provide legal protection to the Superintendent and staff of the SFC against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. It is recommended that the law be amended to provide this protection. For instance, the law could require that, prior to suing supervisors in criminal or civil courts for actions or omissions during the course of duty, a judgment must be obtained against the SFC.

Licensing and structure (CPs 2–5)

60. The powers with regards to the declaration of illegal deposit taking and the intervention of establishments engaging in such activities were strengthened after the 2008 pyramid crisis. The 2008 events showed that these establishments had adopted schemes to circumvent the regulation and prevent the intervention of the authorities. Decree 4334 of 2008 allows the intervention of these establishments when, in the opinion of the Superintendency of Corporations or the SFC, there are objective or notorious facts that indicate the massive taking of money, directly or indirectly, through a broad variety of schemes. The SFC has a large dedicated group in charge of investigating and pursuing illegal deposit taking activities banking (25 people). In 2010, this group investigated more than 600 cases of suspected illegal deposit taking, conducted inspection to more than 100 and concluded that 18 of them were conducting illegal activities, of which most of them took action to adjust to the legal limits and 6 of them were intervened and prosecuted). The SFC also informs the public about entities that are posing as supervised entities or deposit taking entities.

61. The SFC authorization processes are well rounded and robust, including licensing, transfers of ownership and investments. Of particular importance recently has been the process for the authorization of large acquisitions and investments. In the past few years, Colombian banking groups have expanded abroad through acquisitions of banks and banking groups, mainly in Central America. The significance of ensuring proper identification of the risks of these acquisitions and adequate ongoing control of these investments by the acquiring banks, has been taken very seriously by the SFC. In this regard, the SFC has significantly strengthened the process for authorization of acquisitions abroad.

Prudential regulation and requirements (CPs 6–18)

62. The capital adequacy rules would benefit from further enhancement. Colombia has not formally adhered to any of the Basel capital standards, albeit the regulation follows many of the Basel I rules. The capital adequacy ratio is higher than the minimum Basel standard but there are some gaps in its scope of application and in the range of risks covered; and some of its components do not have the appropriate loss absorption capacity. Banks are required to maintain a capital adequacy ratio of 9 percent of risk weighted assets for credit and market risks, on a solo and consolidated basis. However, capital for market risk does not cover foreign subsidiaries and the SFC cannot require capital for other risks. The definition of capital includes voluntary reserves and does not deduct goodwill and investments in unregulated subsidiaries. Finally, the risk weight applied for exposures with sovereigns is low and independent of risk (zero the local government and 20 percent for foreign governments).

63. The authorities recently adopted a revised capital adequacy regulation that will take full effect on August 1, 2013. This change was made with a view to strengthen the quality of capital by incorporating some of the Basel III recommendations. The proposed capital regulation would include: (i) a minimum Tier I capital of 4.5 percent of risk weighted assets; (ii) deduction of goodwill from Tier I capital with a grandfathering clause; (iii) some restrictions for the inclusion of voluntary reserves and current profits, to include only those that are expected to be permanent; and (v) amendments on the consideration of minority interests to mitigate the risk of multiple leveraging. In addition to this reform already underway, it is recommended that the authorities consider their adherence to one of the Basel standards and, in the medium term, the adoption of the Pillar two of Basel II.

64. The SFC has a robust framework for the supervision of several individual risks, albeit some gaps need to be addressed. The SFC has issued norms containing the standards for risk management of financial institutions (referred to as SARs for its initials in Spanish) on credit, market, liquidity, operational and anti-money laundering risks. The SFC has specialized risk units that have responsibility for the overall supervisory process of each of these risks, including autonomous powers to issue administrative orders and sanctions. The scope of application of the SARs is the individual institutions and the individual risks. There is a general requirement that supervised entities manage their risks in a comprehensive way, but there are no further specifications with regards to the comprehensive risk management of banks and banking groups. Also there are no standards for the management of interest rate in the banking book and country and transfer risks. These latter risks, which were originally considered low priority, have become significant with the expansion of Colombian banking groups abroad.

65. Asset classification and provisioning regulations and supervision in Colombia are comprehensive and robust and the SFC seems up to date with market developments. Banks are required to segregate exposures into retail (with sub portfolios for auto loans, credit card loans and others), commercial (with sub portfolio for large, middle and small companies), mortgages and microcredit. Each commercial and retail sub portfolio is required to be classified into seven levels of risk (which take into account past due information and other criteria) with increasing levels of provisioning, which are calculated through transition matrixes and encompass a pro-cyclic and a counter-cyclic element. Mortgages and microcredit are provisioned based in past dues and collateral, as well as through a generic provisioning.

66. Large exposure and related party limits are in place but need to be more comprehensive and streamlined. Colombia has in place an overly complex set of rules for limiting large exposures. More importantly, local affiliates are not consolidated and available unused credit lines are not taken into account in calculating neither large exposure limits nor related party lending. In addition, for large exposures, a statement under oath of nonrelation can exempt certain parties from the definition of connected parties. The SFC is also recommended to require that exposures to directors, senior management and key staff, their direct and related interests, and their close family in affiliated companies also comply to the limits for related party lending, as well as require banks to have policies in place to prevent persons benefiting directly or indirectly from the exposure from being a part of the process of granting and managing the exposure.

67. The SFC has a robust framework for AMLTF and for addressing criminal activities but actual oversight of its implementation by banks must be enhanced. The SFC has a clear scope of activities and seems well versed and up to date with recent developments on the matter. The legal framework, together with the SAR and other regulations set a clear and robust guidance for the allocation of functions and responsibilities for the processes and controls oversight, reporting suspicious activities for banks operating in Colombia. Nevertheless, the actual monitoring of the effectiveness of banks’ policies and processes, including strict KYC, in preventing banks from being used, intentionally and/or unintentionally needs to be enhanced.

Methods of ongoing banking supervision (CPs 19–21)

68. The SFC is in process of strengthening its supervisory approach, which should significantly enhance its ability to maintain a thorough understanding of the risk profile of banks and banking groups. The approach adopted by the SFC after the merger of the securities insurance and banking superintendence’s has resulted in quasi-autonomous risk areas planning and performing supervision oversight with lack of coordination and a limited consolidated and strategic view of each bank/conglomerate risk profile. Acknowledging such shortcomings, the SFC initiated a restructuring process, which started by developing a risk-based supervisory annual plan, which has already resulted in increasing coordination among the various areas. Among the next planned steps is the establishment of an actual relationship manager, which can be of significant help in insuring that the SFC has a thorough understanding of the risk profile of banks and banking groups. The SFC is also working on the implementation of a risk based supervisory approach called Marco Integral de Supervision (MIS). Once fully implemented, the MIS together with the establishment of a relationship manager will contribute to ensure more consistency in quality and depth of reports among the various areas, as well as a move towards less compliance focused and more conclusive reports.

Accounting and disclosure (CP 22)

69. Currently, the accounting standards applicable for banking institutions have some deviations from international standards, some of them on the prudent side and some of them on the lax side. On the prudent side, provisions are based on the sum of incurred loss plus an estimation of probable loss reflected in the countercyclical component and some items (such as brands) cannot be included in the goodwill. Deviations on the lax side include: various deferred charges, the amortization of goodwill, guarantees issued and labor and pension benefits. Also disclosures on related party and minority interest are not according to IAS. Under IAIS banks would need to identify transactions with indirect related parties and whether a minority interest is in fact minority interest. External audit norms are currently rather general and do not cover all the aspects of the international audit standards. While the SFC has the authority to oversee external auditors, it needs to adopt more rigorous standards for independence. For example, an auditor can receive as much as 25% of its revenues from non-audit services from a firm it audits without being disqualified and disqualifications appear to only apply to the term of the specific engagement.

70. Colombia has initiated a process of convergence toward International Financial Reporting Standards and Auditing standards. The general framework was issued in 2009 (Law 1314) but full implementation needs additional regulation to be issued by the MoF and the Ministry of Commerce. The process is currently in a stage of voluntary testing, by which some entities (only two of them are banks) have announced to the SFC that they will participate in the testing, which implies that they will prepare their 2012 opening balance under IFRS. The SFC is assessing the best way to move to IFRS and there is a tentative plan to adopt this by 2014. However, the SFC has not yet published a timetable for implementation of IFRS.

Corrective and remedial powers of supervisors (CP 23)

71. The SFC has a broad range of preventive and corrective powers and there is ample evidence of their effective use. Early on, the SFC can issue administrative orders, moral suasion, cease and desist orders and sanctions. The sanctioning process is rather lengthy and time consuming. Thus, in order to be more effective, the SFC has adopted a more proactive policy of issuing administrative orders early on, as soon as the risk of a potential violation is detected. Administrative orders are, therefore, the preferred course of action of the SFC to correct risky behavior and unsafe practices. For more serious problems the SFC has a comprehensive range of bank resolution tools and triggers that set in motion decisions with regards to the problem institution.

Consolidated and cross-border banking supervision (CPs 24–25)

72. The consolidated supervision of financial conglomerates has been significantly enhanced since the creation of the SFC. Improvements in the legal framework have empowered the SFC to conduct onsite exams and obtain necessary information from not supervised members of financial conglomerates, to order the consolidation of financial statements of companies of these conglomerates, to exchange information with foreign supervisors and to authorize investments in the capital of foreign entities. Supervisory procedures are in place and a dedicated team is responsible for the supervision of financial conglomerates. The scope of the analysis covers the financial conglomerate, as well as the broader mixed conglomerate.

73. In spite of this progress, there are key issues which hinder the effectiveness of the consolidated supervision performed by the SFC, such as:

  • There is no regulation that frames the consolidated supervision activities of the SFC, only general references in the law and regulations covering reporting requirements on consolidated financial statements, access to information, consolidated exposure limits and a consolidated capital requirement. There are no risk management requirements on a consolidated level, besides limited references in some of the SAR resolutions.

  • The legal powers of the SFC with regards to effective consolidated supervision are narrow, as they only cover supervised entities and their subsidiaries, leaving out the unregulated bank holding companies. So consolidated supervision, capital requirements and exposure limits are applied from the bank down and only cover supervised entities.

  • The scope of the consolidated prudential requirements is incomplete and uneven (some exclude domestic subsidiaries, others exclude foreign subsidiaries). The regulation should be amended to correct this problem.

  • The SFC lacks powers to force changes in the group’s structure if it is inadequate, albeit it has succeeded in a few cases using moral suasion.

74. The SFC has established an effective network of cooperation for the purposes of consolidated supervision of the financial conglomerates that operate in Colombia. There are no legal limitations for the supervisory cooperation. The SFC has signed MoU with most of the home and host supervisors of these conglomerates, which are published in the SFC web page. It engages in regular exchanges of information with these agencies. The SFC has organized the two colleges of supervisors, one with Banco de Bogota with the participation of six foreign supervisory agencies, which had its first meeting in January 2012, and another one with Bancolombia on November 2012, with the participation of supervisory agencies from Central America. The SFC has also become a member of the Central American Council of Banking Supervisors (CCSB), which is an effective forum for the coordination with the most of the host supervisors of the three largest Colombian groups.

Table 4.

Colombia: Summary Compliance with the Basel Core Principles—Detailed Assessments

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Table 5.

Colombia: Recommended Action Plan to Improve Compliance with the Basel Core Principles

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C. Authorities’ Comments

General comments

75. In 2011, the Colombian government requested that the International Monetary Fund (IMF) and World Bank conduct a comprehensive financial sector assessment, including the specific analysis of standards applicable to the banking, insurance, securities, payment systems, and financial infrastructure provider sectors. In response to the request, IMF and World Bank experts and experienced supervisors from other countries conducted a detailed evaluation of the regulation and supervision of the financial system, the securities markets, their agents, and financial infrastructures during the period from May to July, 2012.

76. The preliminary findings were provided to the authorities for comment, as well as a general summary for publication. It should be noted that the previous assessment of this type in Colombia was conducted at the end of 2004, in a markedly different context insofar as there were two supervisory authorities (the banking and securities superintendencies) responsible for oversight of the entities within the Colombian financial sector.

77. Based on the information provided by the IMF and World Bank in regard to the FSAP findings, Colombia has demonstrated considerable progress in implementing the standards and principles applicable to the regulation and oversight of banks, insurance companies, the securities market, and providers of financial infrastructure. One of the main aspects evaluated was the role of the supervisor. In this area, the assessment recognized that the Colombian Financial Superintendent (SFC) has improved its capacity to fulfill its responsibilities. In particular, the mission underscored the progress of the supervisory mechanism since the merger of the banking and securities superintendencies in the SFC and the enactment of Law 964 of 2005.

78. The mechanism of a single supervisory authority like the SFC serves to cover all financial sectors and activities, ensuring greater transparency and efficiency in terms of regulatory enforcement and eliminating regulatory gaps and arbitrage that may arise when there is more than one supervisory authority.

79. In particular, in regard to oversight of the securities market, the mission noted the fact that the SFC has the authority to access a wide variety of sources of information to evaluate the conduct of the market, its agents, and associated risks, as well as the capacities of market participants. The mission also recognized that the SFC has a comprehensive regulatory framework that appropriately addresses industry risks, and has well-developed supervisory procedures and methodologies. In addition, the mission underscored the regulatory powers granted to the SFC to take preventive and corrective measures and impose sanctions, including much broader powers than are accorded supervisors in developed countries. The mission also recognized that the SFC staff were quite professional and competent and were becoming increasingly expert in conducting risk-based supervision, thereby meeting the challenges presented by the new international standards and guidelines.

80. The FSAP evaluators recognized the SFC’s achievements but also indicated that certain weaknesses persisted and supervision should therefore be strengthened. In this regard, they noted the need to continue working to improve the SFC structure in order to strengthen and make better use of its status as sole supervisor, for example, by reforming its organizational structure – a project the SFC was already working on and would serve to increase its independence; increase efficiency in the performance of its functions and its interactions with the supervised entities; and deepen the oversight of the securities market, particularly in regard to the development and increased use of new products and instruments.

Comments on assessment of the banking sector in accordance with Basel Principles

81. On the assessment of banking supervision, while we agree with many aspects of this assessment, we would like to offer some clarifications and highlight several areas where our views differ from those expressed in this annex.

82. For quite some time, we have recognized the need to upgrade the definition of bank capital, and since 2011, have been developing the new capital adequacy regime, which was published in August 2012 and will take full effect on August 1, 2013. This revised capital regime will address many of the shortcomings pointed out by this assessment. It is unfortunate that the assessment of banking supervision could not evaluate the new regime, but we understand that the rules of these assessments stipulate that the assessors can only review the regulatory framework in place at the time of the assessment.

83. On the issue of the independence of the SFC, we want to emphasize that, while Colombia’s legal and constitutional framework may make it difficult to establish de jure independence, the SFC has full de facto independence. It conducts supervision of the financial system without any political interference whatsoever, and works with the MHCP to develop regulations and other aspects of the legal framework also without political influence or interference.

84. We would also like to feature our close collaboration with the Toronto Center over the past few years, which has greatly strengthened our capacity for risk based supervision and improved the comprehensiveness of risk assessments conducted by the SFC as well as by the financial institutions themselves. We fully expect that this program of technical cooperation will continue to bear fruit in the next several years and to strengthen supervision even further.

85. In regard to principles 2 to 5 it must be included that Decree 4334 0f 2008 allows the intervention of the Superintendency of Corporations or the SFC when there are objective or notorious facts that indicate the massive taking of money, directly or indirectly, through a broad variety of schemes.

86. In regard to principles 6 to 18, concerning prudential regulation and requirements, the document states: “(…) the risk weight applied for exposures with sovereigns is low and independent of risk (zero the local government and 20 percent for foreign governments).” The low risk weight for sovereign debt is used on many other jurisdictions. In opinion of the SFC, for an entity with peso-denominated financial statements, the investments with the lowest risk are those issued by the Colombian government, weighted at zero percent on the RWA, acknowledging this low risk. Regarding other sovereign debt, almost all of the resources are allocated on highly rated issuers, which is why their weight is 20 percent (being this sometimes higher than the weight recommended by Basel).

87. The SFC propose the following statement be included on the end of paragraph 14 instead of paragraph 13:In addition to the reforms already being planned, it is recommended that the authorities consider their adherence to one of the Basel standards and, in the medium term, the adoption of the Pillar two of Basel II.”

88. Also, on paragraph 18, the document states: “The SFC has a robust framework for AMLTF and for addressing criminal activities but actual oversight of its implementation by banks must be enhanced.” On this matter is necessary to mention that both in-situ and extra-situ procedures are conducted, according to the criteria defined on the principles. All of the supervised banks have been included into the supervisory cycle on a period no longer than three years, with an exception of one entity with a share of only 0.16 percent of the market. In this case, the supervisory cycle took four years to complete.

89. The oversight procedures are complemented with internal and external auditors and compliance officers. There is also an agreement with the UIAF to identify failures on the reports.

90. Regarding BCP 22, accounting and disclosure, it is important to mention the following: The regulation for NIIF implementation in Colombia was issued on December 28, 2012. Decree 2784 of 2012 establishes that most of the SFC’s supervised entities, among other companies, must issue NIIF financial statements starting in 2015, with the following transition and enforcement deadlines:

  • Mandatory preparation period: 2013.

  • Transition deadline – opening statement: January 1, 2014.

  • Enforcement deadline (first comparative): December 31, 2014.

  • Reporting deadline – NIIF Financial statements: December 31, 2015.

91. On Table 4. Summary Compliance with the Basel Core Principles-Detailed Assessments, regarding risk management process (7) and supervisory approach (19), the SFC has been working on the development of the MIS (Marco Integral de Supervisión), which allows for a consolidated risk assessment of all supervised entities, enabling the strategic view and the prioritization of the supervision.

92. Also on Table 4, regarding Market Risk (13), it is important to mention that the SARM must be implemented by every credit institution, and it is subject to be revised on in-situ inspections conducted by the Deputy Office for Supervision of Market Risk and Integrity.

93. Additionally, given that the measurement model of the market risk must be sent to the SFC on a daily basis, an extra-situ supervision takes place with this frequency, using a range of indices and early warnings that allow identifying individual and systemic risks of the portfolios. This measurement includes foreign currency denominated assets.

94. Finally, on Table 4, Liquidity Risk (14), we highlight that the SARL must be implemented by every credit institution, and it is subject to be revised on in-situ inspections conducted by the Deputy Office for Supervision of Market Risk and Integrity.

95. Additionally, given that the measurement model of the liquidity risk, known as IRL (similar to the LCR of Basel III), must be sent to the SFC at least on a weekly basis, an extra-situ supervision over individual and systemic liquidity risk takes place at every time. The IRL includes, among others, the ratio of foreign currency denominated liquid assets. On the other hand, it is important to highlight that the SFC has, apart from the IRL, a wide range of tools for the oversight of liquidity risk: money market operations reports, deposits, interest rates, deposits concentration, liquidity of investments, etc.

Annex II. IOSCO Principles—Summary Assessment

I. Summary, Key Findings, and Recommendations

96. The SFC of Colombia has a highly transparent and comprehensive securities regulatory and supervisory regime. In particular, Colombia has made major progress since the adoption of the new Securities Law in 2005 in developing an integrated financial services authority whose oversight and supervisory activities span the entire financial sector. Further, SFC has an increasingly expert staff dedicated to executing an ambitious program, including the use of external expertise, to meet international standards and develop best practices on an ongoing basis. SFC also has invested heavily in incubating the benefits of its unified structure. Nonetheless, more work is necessary to assure that conduct matters are given sufficient prominence, particularly as a matter of structure, insofar as they interplay with prudential matters, and in the area of enforcement related to market abuses like manipulation. Further, there remain areas related to the supervision/regulation of securities functions where further improvements are in process that could be accelerated. Additionally, the overall structure of the system could be enhanced to increase its independence and its intervention capabilities.

A. Introduction

97. This assessment was conducted as part of a mission to Bogota, Colombia in May and June 2012.

B. Information and Methodology Used for Assessment

98. This assessment was conducted using the Assessment Methodology for the IOSCO Objectives and Principles of Securities Regulation adopted in September 2011. Although the assessment makes some general comments about Principle 38, the financial market infrastructure assessment has been completed by a separate assessor.

99. Caution should be applied when comparing the results of this assessment to any previous reviews. Although Colombia has to date weathered the financial crisis well, the rigor and thoroughness of the review cycle of which this review is a part, as well as the increased weight being given to the effective implementation of the various key issues and questions is a product of the heightened interest globally in meeting international standards. In consequence, this assessment is not comparable to prior evaluations. Any changes in ratings from the assessment of 2005 generally do not reflect a decline in the quality or level of regulation; rather they result from increased rigor in the the application of the assessment criteria.

C. Main Findings

100. Principles 1-8, Principles relating to the Regulator. The SFC has taken steps to make the most benefit from its integrated structure that combines prudential and conduct supervision, including bringing its experience to the cross-sectoral financial stability network in matters related to systemic risk, conflicts and policing the perimeter. Nonetheless (a) there are structural impediments to SFC making the most effective use of its resources, b) the structure of the SFC currently does not give sufficient relevance to the conduct function, but this issue will be tackled within the proposed new structure of the SFC;. (c) the institution is distracted by suits assessing liability against the SFC and its staff, (d) work should continue to assure that information flows are not adversely affected by silo-thinking and (e) while very powerful as a matter of day-to-day practice and from the perspective of intervention powers, the lack of a board or a specified term of service for the Superintendencia may compromise, or be perceived to compromise, its independence.

101. Principle 9, Principle for self-regulation. In 2006, a strong self-regulatory institution to which membership is mandatory for intermediaries of all types was created to assist the SFC by acting as the front-line regulator with respect to certification of professionals, market oversight, dispute resolution, complaints handling and for the prevention and sanctioning of conduct inconsistent with the rules of the market by AMV members, pursuant to a memorandum of understanding between the authorities that was concluded in 2007, and for other matters as further agreed. The provisions for oversight of the SRO are strong and there is good cooperation between the authorities. Nonetheless there should be an appeal to the SFC for denial of access to membership in that membership in the SRO is mandatory in order to participate in the industry.

102. Principles 10-12, Principles for the enforcement of securities regulation. The powers of the SFC with respect to administrative enforcement activities and access to records, statements and testimony are extensive as they pertain not only to regulated institutions, but also to all market participants, and even to non-participant third parties. AMV complements the SFC powers, which include disgorgement, and has undertaken an active disciplinary program that assesses credible, dissuasive and proportionate sanctions. The law and decrees clearly sets forth the sanctioning process. Nonetheless, there remains the perception that enforcement is sometimes an unduly lengthy process. While recognizing the length and depth required for proper investigation of certain types of complex misconduct; more efforts/resources should be expended to combat fraud and market abuse. The SFC, as augmented by the AMV program, has active monitoring and disciplinary programs, but action to deter misconduct could proceed more quickly, sanctions could be stronger and more “message” cases could be selected for their deterrent purposes.

103. Principles 13-15, Principles for cooperation in regulation. SFC was just this May admitted to Annex A of IOSCO’s MMoU, the gold standard of information sharing. The SFC does actively cooperate and provide and receive information under its various arrangements which are designed to give priority to those jurisdictions which are linked with Colombia.

104. Principles 15-18, Principles for Issuers. Standards for issuance of securities and related disclosure are high, however in the governance area, although progress has been made, there are still substantial gaps in the protections accorded minority shareholders and potential gaps in the information as to who has the capacity to influence the decisions of financial entities within conglomerates (see also Principles on Intermediaries).

105. Principle 19-23, Principles for auditors, credit rating agencies, and other information service providers. The SFC has adopted the international best practice with respect to rating agencies and has even brought enforcement actions, it has preceded the development of international standards in working toward more independent pricing methodologies for securities for which there is not an active market. In September 2012, after the IOSCO assessment was conducted, the SFC issued a timetable for bringing its accounting and auditing standards up to the standard of international practice and its local standards are not in practice of international quality.

106. Principles 24-28, Principles for collective investment schemes. The rules for those schemes that fall within the definition of carteras colectivas are comprehensive and meet IOSCO standards. There is however the possibility that certain trusts may operate trusts with multiple participants that are not truly private offers, which while subject to regulation have a lesser standard than would a collective investment offering similar types of financial products.

107. Principles 29-32, Principles for market intermediaries. SFC treats all intermediaries substantially equivalently, applying the prudential, risk and conduct regimes to each. However, there have been cases where intermediaries have assumed excessive exposures, and more thought could be given as to how to address at the SFC level the failures of firms and other disruptions.

108. Principles 33-37, Principles for the Secondary Markets. The markets and trading systems of Colombia meet international standards with respect to transparency, including the reporting of over-the-counter transactions, and the rules for market abuse, although with multiple systems for the same securities, some consideration should be given to further consolidating price reporting. Additionally, the SFC has impressive ability to intervene to address disruption and excellent real-time facilities to address surveillance for misconduct, with strong proprietary systems for identifying trading exceptions. Due to how trading and settlement is organized on multiple systems and orders are entered, the SFC should be careful to have appropriate measures in place to ensure that any trading within the settlement period does not result in misallocation of customer transactions in the clearing and settlement process, or insufficient collateral to address the potential risks and that nonprofessional clients in fact receive best execution.

Table 6.

Colombia: Summary Implementation of the IOSCO Principles

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D. Authorities’ Comments

109. The report recognizes the progress made in regard to the supervision and regulation of the securities market, and in particular the technical capacity of SFC personnel.

110. In regard to principles 24 through 28 concerning collective investment vehicles, the document states: “(…) There is however the possibility that certain trusts may operate trusts with multiple participants that are not truly private offers, which while subject to regulation have a lesser standard than would a collective investment offering similar types of financial products.”

111. As mentioned in the comments to the aide-mémoire of the August 2012 missions, the SFC does not agree with the statement to the effect that certain trusts, as investment vehicles, are subject to lesser standards than those applicable to collective investment schemes (carteras colectivas). In the evaluation of IOSCO principles, it is determined that serious confusion exists between the collective investment product and another product, the “investment trust” (fiducia de inversión) administered by trust companies (sociedades fiduciarias).

112. This class of products corresponds to a group of trust operations defined in the regulations as trust instruments whereby one person transfers possession of one or more given assets to another person, with or without transfer of title thereto, in order for the transferee to accomplish a specific purpose with them, for the benefit of either the grantor or a third party.

113. Without prejudice to the differences between individual investment trusts and the administration of collective investment schemes, it cannot be said that the former have no legal protections. In entering into any trust operation, the trust company is bound by the duties and general principles for trusts established by applicable regulations, including the duties to inform; provide reliable advice; protect the trust assets; act in fairness and good faith; and act prudently and with diligence, professionalism and expertise.

114. This group of principles is defined in the regulation, especially in the External Circular 007 of 1996, issued by the SFC.

115. In Table 6, concerning principle 28,15 the document states: “(…)The offering designated as a speculative cartera colectiva is not required however to be maintained in a way that permits the separate identification and treatment of the interests of customers as separate from those of the operator, and 100% of the value may be loaned. There is a potential for confusion about the safety of funds invested in such vehicles despite the risk warnings.

116. As stated in the self-evaluation and the comments sent to the mission, all standards and regulations relating to issues such as conflicts of interest, investor protections, the principle of segregation, custody, advice and disclosure of risks, risk management, the authorization process, and the reporting of information to investors and the SFC are applicable to all types of collective investment schemes, including the speculative collective vehicles. This view is supported by numerous regulatory and supervisory provisions, especially those included in Part 3, Decree 2555 of 2010.

117. Regarding principle 19-23, principles for auditors, credit rating agencies, and other information service providers, accounting and disclosure, it is important to mention the following: The regulation for NIIF implementation in Colombia was issued on December 28th, 2012. Decree 2784 of 2012 establishes that most of the SFC’s supervised entities, among other companies, must issue NIIF financial statements starting in 2015, with the following transition and enforcement deadlines:

  • Mandatory preparation period: 2013.

  • Transition deadline – opening statement: January 1st of 2014.

  • Enforcement deadline (first comparative): December 31st of 2014.

  • Reporting deadline – NIIF Financial statements -: December 31st of 2015.

Annex III. Insurance Core Principles (ICPS)—Summary Assessment

I. Introduction and Scope

118. This report is an assessment of the insurance sector and Colombia’s compliance with International Association of Insurance Supervisors’ Insurance Core Principles (ICPs), as adopted in October 2011. It is based on the regulatory framework in place, the supervisory practices employed, and other conditions as they existed in June 2012.

119. Supervision of the insurance industry in Colombia is the responsibility of the Financial Superintendency of Colombia (SFC). Among the institutions subject to SFC supervision are insurers, reinsurers, savings companies, and insurance and reinsurance intermediaries. The SFC reports to the Ministry of Finance, which is in turn accountable to the President and the Congress of Colombia.

120. The assessment is based solely on the laws, regulations, and other supervisory requirements and practices that were in place in June 2012. Ongoing regulatory initiatives are noted by way of additional comments. The assessor had access to a complete self-assessment on the ICPs and responses to a detailed questionnaire that had been provided by the SFC prior to the commencement of the exercise.

121. The assessment has been informed by discussions with regulators and market participants. The assessor met with staff from SFC, various insurers, the insurance industry association, professional bodies and a rating agency. The assessor is grateful for the full cooperation extended by all. Colombia is one of the first jurisdictions to be assessed under the 2011 version of the ICPs. The efforts required by SFC to prepare the self-assessment, as well as its tremendous support during the mission, are especially appreciated.

A. Executive Summary

122. The insurance industry in Colombia is a small but rapidly growing part of the economy. In the last 5 years, gross premiums written and assets managed by the sector have more than doubled. Insurance penetration (gross premiums as a share of GDP) has increased from 2.0 percent of GDP to 2.3 percent of GDP. The industry is profitable, competitive, well capitalized, and widely held in terms of ownership. However, insurance penetration remains far below that seen in several other countries in Latin America.

123. Much of the growth in insurance has been related to the steady growth and recent stability of the economy and changes to social benefit programs in past years. The latter has helped stimulate demand for personal health and accident products, workers compensation, and annuities. Further growth appears to be reliant on increasing confidence and trust in the industry, improving growth and increasing depth of capital markets, and finding ways to increase access to insurance in underserved parts of the population.

124. During the last five years, a number of important regulatory reforms have been introduced to improve the regulation and supervision of the insurance industry. The solvency position of the industry has been strengthened through improved solvency requirements. Requirements for risk management and internal control systems have been established on insurance companies in the areas of credit risk, market risk, operational risk and AML/CFT. Investment requirements have been improved. The technical reserve standards for earthquake insurance have been improved. Rules have been introduced relating to the market risk management of assets backing the technical reserves of general insurers. Public disclosure of financial information on insurance activity is stronger. New mortality tables for use in life insurance have been developed and introduced. Revised insolvency and liquidation procedures have been developed, and a stronger consumer protection regime has been crafted for financial services markets.

125. A number of institutional and regulatory challenges remain, however, if Colombia is to benefit from continued growth and if it is to move towards fuller compliance with international supervisory standards. Some of these challenges are within the authority of the SFC while others will require changes in laws or ministry decrees. They include the following.

126. The independence of the SFC should be strengthened, particularly with respect to the processes around the appointment, performance assessment and dismissal of the Superintendent. Establishment of a fixed term of appointment (e.g. five to seven years) should be considered in this regard.

127. Consideration should be given to the balance of authority between the Ministry of Finance and the SFC in the oversight of the insurance sector. Greater thought should be given to making decree requirements with respect to technical areas as well as the organization of responsibilities within the SFC less prescriptive and more principle based or minimum threshold based. The SFC should then be empowered to establish and manage the technical details. Better consultation with industry and more expeditious timing of regulatory changes will also aid the supervisor and industry in responding to rapidly changing markets.

128. Licensing, changes in control, portfolio transfers and suitability requirements are generally in line with international standards; however, a clear definition of insurance business in the law may assist the SFC in dealing with issues related to “near insurance” products. The licensing requirements are clearly stated and cover both financial as well as nonfinancial aspects to warrant sound operations. It the past, however, there have been some issues associated whether some products are insurance or not (e.g. funeral service related products). A clear definition of insurance business in the law may assist the SFC in dealing with such issues.

129. Many of the regulatory requirements with respect to solvency and internal controls are relatively new. It will take time to fine tune and further develop these requirements. Additional changes to technical reserve requirements and the solvency regime are also necessary to address the full range of risks that insurers face. The SFC and the MoF are aware of the pressing need for these changes. It is important that they be introduced in a timely manner and in full consultation with the regulated industry.

130. The SFC should be commended for the steps it has taken in developing a risk based supervisory framework for insurers, but much work remains to ensure that this approach to supervision is effective. A risk based approach to supervision requires not only changes to the policies and procedures of the organization, but to the basic supervisory culture. Care needs to be taken to ensure that the new framework is properly documented, that staff are well trained and competent, that they communicate with each other and are properly focused in the execution of their duties. Some reorganization of the supervisory departments to focus on the entity being regulated rather than risk categories should be considered to help ensure this takes place. Increased legal protection for staff exercising their authority in good faith may also aid in implementation of the framework and other supervisory responsibilities.

131. Governance and enterprise risk management for solvency purposes need to be further developed. Enterprise risk management is an evolving field, both in Colombia and internationally. Some Colombian insurers have sophisticated enterprise risk management systems, while others are at early stages of development. Consideration should be given to developing a stronger enterprise risk management cultures within organizations starting with the boards of institutions. This may require additional governance requirements (e.g. mandatory establishment of risk management committees, asset liability management policies, risk tolerance statements); it may also require development and promulgation of best practices suited to small and medium sized institutions. The industry association should be encouraged to play a role in this work.

132. Continued development of capital markets and creation of long term investment products is critical to the continued development of the life insurance industry. At present, it is very difficult for the industry to match the long term liability associated with annuity products (or other long term products) with assets of similar duration. Unless ways can be found to address this issue, insurers will be unwilling or unable to provide such products because of the asset liability matching risks associated with them. Furthermore, increased certainty needs to be established around pension annuities. At present, many private pension annuities are linked to minimum wage increases. An increase in the minimum wage results in an increase in the benefits that insures must pay to beneficiaries of most annuity contracts in place. Given that insurers cannot predict the rate of minimum wage increase they cannot properly price pension annuity products. As the private pension system depends on the availability of affordable annuities, the future stability and feasibility of private pension programs depends on a solution to this issue.

133. Colombia has signaled its intention to move towards adoption of International Financial Reporting Standards and international auditing standards. The insurance industry is expected to begin adoption of these practices in 2014 or 2015. It is not clear, however, that all insurers are prepared to begin this transition. SFC survey information suggests that many are not. Other difficult regulatory changes such as the changes to reserving requirements are also contemplated for the same time frames. Care will need to be taken to ensure that all of these initiatives are completed in a coordinated fashion that leads to real improvement in asset and liability valuation and reserving processes.

134. Continued development of the insurance industry is dependent on the availability of actuarial skills and the development of an actuarial profession. Actuaries play an important role in insurer risk management and control and in developing more sophisticated products. Actuarial capacity in Colombia is low (perhaps less than 120 people). Establishment of fuller actuarial programs at local universities may be a start towards addressing this problem. In addition, a plan should be developed towards establishing a self regulating actuarial profession charged with establishment of actuarial standards and licensing and disciplining its members. A proposal from actuarial associations and the universities has been developed by the actuaries associations and industry. Timely consideration of this proposal is warranted.

135. Consumer protection has made important progress in the last three years, but more work is needed. The establishment of comprehensive consumer protection systems as described in Law 1328 of 2009 is a major step forward. Further improvements can be made by improving oversight of the activities of insurance agents. Consideration should be given to establishing a basic public registration system for insurance agents, including basic suitability requirements, and minimum educational standards, and a code of conduct and training. The system should include a public database on those agents who have been formally disciplined for actions in the conduct of insurance business or disqualified from registration. At present, consumers have few options to check the suitability and character of agents selling insurance to them and a large portion of consumer complaints relate directly to the actions of agents. Insurers also have difficulty checking the background and suitability of prospective agents and would benefit from such a system. An industry based self regulating organization, overseen by SFC, may provide a model that benefits both industry and consumers.

136. The regulatory framework for group supervision needs improvement. The Colombian market is dominated by insurers belonging to large financial groups. The supervision of large conglomerates, however, does not extend to all relevant entities in the group. The Superintendent’s authority over financial holding companies or industrial members of a conglomerate is extremely limited, impacting the SFC’s authority to require that consolidated financial reporting and consolidated risk management take place.

B. Institutional Overview

137. Under the Colombian Constitution, the President of Colombia exercises the authority to inspect, monitor and control financial activities through the Superintendencia Financiera de Colombia (SFC). The SFC was established by Presidential decree 4327 of 2005. The decree merged the banking and insurance regulator (Superintendencia Bancaria) with the supervisory authority for securities markets (Superintendencia de Valores). The SFC is established as a technical body under the Ministry of Finance, with legal, administrative and financial autonomy. The organization has approximately790 staff and is largely funded from fees set by the Superintendent on regulated entities. The fees for insurers are paid twice per year and are based on a rate applied to institutional assets. The Superintendent also has authority to make additional assessments in the event of funding shortfalls.

138. The SFC in an integrated financial services supervisory authority. Its activities extend to insurance, banking, securities, pensions, endowments and trusts. In regard to insurance, under the office of the Superintendent there are two key Supervisory divisions: Institutional Supervision and Supervision of the Risks and Market Conduct. The latter department is primarily responsible for the supervision of risks in all financial institutions under the SFC’s supervisory framework and has branches responsible for credit, market, operational risk as well as money laundering, financial conglomerates and institutional governance.

139. The Institutional Supervision department is primarily responsible for licensing and regulatory approvals and verifications and is organized by particular area of financial services (e.g. pensions, insurance, securities brokers and agents). The insurance section is responsible for insurance, reinsurance, and insurance and reinsurance brokers. Its mandate includes: insurer licensing, reinsurer registration, insurance broker licensing, authorization of classes, policies and maximum rates of insurance, review and monitoring of actuarial calculations, technical reserves and capital requirements. There are 60 staff dedicated solely to insurance in this section. Other areas of the organization impacting on insurance include the risk supervision areas (which have 216 staff) and the research and development area which has 49 staff.

140. The SFC has a Department of Financial Consumer Protection which provides information and advice on market conduct and financial literacy issues across the financial services sector. This office reports directly to the Superintendent and has a staff of 15. In addition, Colombia has recently established the Judicial Power Department which is a judicial body established to hear financial consumer cases. It was established as an alternative to the court system or commercial arbitration and has only recently begun operations.

141. The SFC also has a five member Advisory Council comprised of experts with backgrounds in economics, finance, securities markets or general legislation. Council members are appointed and removed by the President of the Republic and provide advice in areas like the strategic plan of the SFC, its operational framework, management policies of the organization, and major regulatory decisions such as those involving licensing, amalgamation or wind-up of a financial institution.

142. The Federacion de Aseguradores Colombianos (Fasecolda) is a non-profit industry association that represents 24 out of 25 non-life insurers and approximately 18 out of 19 life insurers. The association is headed by a former Minister of Finance and funded by industry contributions. It is governed by a Board of Directors comprised of Chief Executives from member companies. It has several technical sub-committees that provide services to members along major lines of business.

143. Colombia also has an insurance brokers association (Asociacion Colombiana de Corredores de Seguros – ACOAS) which represents insurance brokers operating in the country. It currently has eight members.

C. Market Overview

144. Colombia is currently Latin America’s fourth largest economy and its sixth largest insurance market. The insurance sector is a small component of the country’s economy as total industry premiums were only 2.3 percent of GDP and total assets were 5.5 percent of GDP. The average Colombian spends approximately $140 dollars per year on insurance. Relative to its neighbors, Colombia ranks below Chile, Venezuela, Panama, Brazil, Argentina and Ecuador in terms of market penetration (the ratio of insurance premiums to GDP). The sector is, however, growing rapidly. Gross premiums written were approximately COP 6,520 bn. in 2005 and increased to COP 14,162 bn. in 2011, at an average annual rate, of approximately 13.8 percent. This significantly exceeded the nominal GDP growth rate of approximately 9 percent for the same time period. As a result, the insurance penetration ratio has increased from 1.91 percent to its current level. Significant potential for further growth appears to be possible given the low levels of penetration.

145. Non-life insurance comprises the largest portion of the insurance market accounting for approximately 49 percent of gross premiums written in 2011 excluding Personal Accident and Healthcare. From 2005 to 2011, non-life premiums grew at an average annual rate of approximately 11.5 percent. Motor insurance accounted for approximately 44 percent of total non-life premiums. Property insurance accounted for a further 23 percent, surety, for 9 percent and construction and engineering insurance, at 7 percent, accounted for much of the remainder.

146. Life insurance accounted for approximately 43 percent of gross premiums written in 2011 excluding Personal Accident and Healthcare. Life insurance premiums have been growing at an average annual rate of approximately 12.5 percent since 2005. Group life, workers compensation and disability insurance account for almost 74 percent of the life total. Workers compensation and group life have been the fastest growing areas of the life sector over the last five years. Pensions and annuities growth has also been strong except in 2010. Government policy decisions with respect to pensions, health care and workers compensation have helped spur growth rates in private insurance markets in these areas. Workers compensation insurance is purchased by employers from private insurers. Annuities and voluntary pensions have expanded due to changes in the state pension system and changes in the healthcare system have increased interest in voluntary health insurance and group benefit programs.

147. Personal Accident and Healthcare Insurance comprised approximately nine percent of premiums written or COP 1206 bn. Roughly 44 percent of this total is personal accident insurance and 56 percent is healthcare insurance. Both non-life and life insurers can write this business but the larger portion is written by life insurance companies.

148. On average, the non-life industry has retained between 69 -74 percent of gross premiums written over the last five years, although this varies considerably depending on the line of business. There is no minimal risk retention limit in Colombia though there is a maximum retention for an insurer - any one risk insured cannot be more than 10% of the company’s equity. Property is the largest reinsurance class and treaty reinsurance is typically sought for both single risk and catastrophic exposure. Earthquake is the largest catastrophic exposure. Quota share treaties are used in surety lines. Facultative reinsurance arrangements are used in areas like marine hull, aviation, and terrorism. In the life insurance market approximately 94 percent of gross premiums written were retained in 2010. Smaller life insurers in Colombia tend to place reinsurance on a quota share basis backed by excess of loss while larger life insurers have only excess of loss coverage.

149. The Colombian market has a number of compulsory insurance products. These products are listed below:

150. The insurance market is comprised of 25 non-life insurers (including two cooperatives), and 19 life insurers. Insurers must be either life or non- life insurers and can be either joint stock companies or cooperatives/mutuals. Insurers may be formed as local companies, foreign owned subsidiaries, or foreign branch operations. Colombia’s reinsurers are all foreign companies some of which operate through local offices while others are accessed through brokers. There are two state owned insurers: La Previsoria, a non-life insurer and Positiva, a life insurer. In 2011, La Previsora was a significant participant in the non-life market accounting for 6.9 percent of non-life premiums. Positiva, underwrites individual life business and workers compensation business. It assumed the assets, liabilities and workers compensation (professional risks) contracts of the Social Insurance Institute (Instituto de Seguros Sociales-ISS) in 2008.

151. Table 3 lists the ten major non-life and life insurers in terms of premiums written in 2011. The five largest non-life insurers account for approximately 48 percent of premiums written while the ten largest insurers account for 77 percent of premiums written. The non-life industry has a Herfindal-Hirschman index of approximately 727 indicating an un-concentrated market. In the life sector (including personal accident and sickness premiums) the five largest insurers account for 67 percent of total assets while the largest ten account for approximately 91 percent of total assets. The life industry has a Herfindal-Hirschman index of approximately 1123, indicating moderate concentration. The levels of concentration for both life and non-life have not increased significantly over the last five years.

152. Colombian financial conglomerates and internationally active insurance groups play a very important role in the market. Insurers associated with Colombian financial conglomerates account for more than 36 percent of gross premiums written while approximately 40 percent of gross premiums written are by companies that are ultimately foreign controlled.

153. Both the life insurance industry and the non-life insurance industry have been profitable over the last five years and the capital position of the industry is improving as insurers have been required to meet stronger minimum solvency requirements. Net earnings in 2011 have declined from 2010 levels but much of the decline appears to be due to declining investment earnings and the introduction of new measures to strengthen solvency requirements of the industry. These changes have resulted in assets and equity growing faster than premiums over the last five years. The ROE has decreased from previous years largely due to declining investment returns in 2011.

154. Asset growth in the life insurance industry between 2007 and 2008 largely reflects the transfer of assets, liabilities and contracts for workers compensation insurance (professionals risk business) from the state run Social Insurance Institute (Instituto de Seguros Sociales-ISS) to Previsora Vida in accordance with the Resolution 1293 of August 11, 2008. This resolution was part of a number of broad social benefits reforms undertaken by the government. In October 8, 2008 the insurer changed its name to Positiva Compania de Seguros.

155. Investments in the insurance sector appear to be conservative and short term, primarily comprising fixed income instruments. Approximately 51 percent of investments are government securities, 29 percent are corporate securities (mainly fixed term deposits), and 12 percent are equities. All other types of investment comprise less than 8 percent of the total. Treasury decree 2953 of 2010 updated the investment regulations applying to technical reserves.

156. Insurance products are distributed primarily through traditional agent and broker networks. Agents account for perhaps 60 percent of the business. Agents are not supervised by the SFC. Insurers are responsible for the actions of the agents that represent them. While there are no official statistics on agents, industry sources suggest there are more than 10,000 agents in the country. Most of their work tends to be in personal lines. Agents are also allowed to represent more than one insurer. Some insurers also have in-house agent sales staff who are remunerated through a combination of salary and commissions. With the exception of Bancassurance, non-traditional distribution methods (e.g. internet sales, telemarketing) comprise a small share of the market. A 2009 study by the insurance industry association indicates that Bancassurance is responsible for distribution of approximately 20 percent of life insurance products. Approximately 81 percent of these sales were for group life (including creditor group life) and personal accident insurance products.

157. There are approximately 50 insurance brokerages in Colombia: 34 insurance brokers and 14 reinsurance brokers. These are regulated by the SFC. Insurance Brokers tend to specialize in commercial or industrial clients. For example, in the life insurance sector life agents tend to dominate individual life sales while brokers control group product sales. Agents and Brokers are largely remunerated through commission income. Commissions tend to range between 5–20 percent depending on the type of insurance for non-life business. Life insurance commissions, other than group insurance and workers compensation, can be considerably higher. First year premiums for renewable term and universal life insurance can range from 35 to 40 percent with commissions in the 25 percent range in subsequent years. Commissions on health care insurance range up to 25 percent. Brokers tend to garner slightly higher percentage commissions than agents.

D. Preconditions for Effective Insurance Supervision

158. Colombia’s economic policies have supported increasing stability and strong economic growth in recent years. Real GDP grew by 5.9 percent in 2011 and inflation ended 2011 at 3.7 percent, continuing almost a decade of strong economic performance. The growth was largely driven by both domestic demand and the strength of the mining and energy sectors. The country has one of Latin America’s highest unemployment rates, however, and faces problems with physical infrastructure and catastrophic risks (e.g., earthquakes and more recently with major floods).

159. Colombia has an established civil law system. It includes a constitution, civil and criminal codes, congressional legislation, presidential decrees and ministerial regulations. The general faculties and powers set out in Congressional laws are further developed and defined by decrees and regulations and by SFC circulars. Colombia has a Commercial Code which acts as the basic business law for the country, a corporate regimen (law 222 of 1995) and an insolvency regime (Law 1116 of 2006). There is a bifurcated judicial system, one system for private law (civil and criminal matters) headed by the Supreme Court, and one for public law (administrative law) which is the responsibility of the Council of State. The Supreme Court is comprised of 23 judges who are appointed by Congress for a period of eight years. In addition, there is a Constitutional Court, which is charged with protecting the integrity and supremacy of the Constitution.

160. The court system is active and the number of cases is growing but the legal process can be costly and lengthy. Most civil claims for loss injury or damage must be initiated within two years of the event occurring. In June 2011, however, the World Bank estimated that the length of time from the point when a plaintiff launches an action to enforce a contract until payment of a claim can take more than three years.

161. Colombia has an established financial reporting framework and is moving towards IFRS. Under the Colombian Constitution, Congress has the authority to issue generally accepted accounting principles (GAAP). Congress can delegate this authority to the executive branch and other institutions through an act of law. Law 43 of 1990 created the Technical Council for Public Accounting (Consejo) to issue technical guidance on accounting standards. Consejo developed a set of accounting principles that they termed Colombian GAAP. In 1993, the President Colombia issued Decree 2649 which established Colombian GAAP as the accounting standards for all enterprises in the country. Subsequently under Law 222 of 1995, However, by Law 45 of 1993 and Decree 663 of 1993, the SFC can issue accounting standards related to their supervisory duties.

162. Colombian GAAP was developed by Consejo in early 1990s on the basis of U.S. GAAP and International Accounting Standards. Colombian GAAP is not, however, fully compliant with the U.S. GAAP or international standards. With regard to audit, Colombia relies on statutory auditors whose appointment, in the case of financial institutions, must be approved by the SFC. Insurers are required to have a statutory auditor conduct an annual audit of the finances of their organization. The auditors must be certified public accountants and must ensure and attest to the accuracy of the published accounting information. Audits must be conducted in accordance with Colombian audit standards.

163. In July, 2009, the Congress enacted Law 1314 which states the government’s intention to converge Colombian GAAP with international standards. In June, 2011, Consejo submitted an official proposal to the Colombian Minister of Finance and Commerce regarding the adoption of international accounting and auditing standards and in December of 2011 the President decreed that large and medium sized enterprises can voluntarily implement IFRS starting in 2012. The SFC recently published a timetable for the implementation of IFRS.

164. Colombia has a small actuarial community and there are concerns about the number of actuaries available to support the insurance sector. There are perhaps 120 trained actuaries currently working in the country. They do not currently have professional standing and a signing actuary is not required to be a member of an actuarial association. The country’s two actuarial associations do not have the ability to self regulate actuaries; however, they do have minimum education requirements as part of their general membership requirements.

165. The integrity of the financial system is supported by the Coordinating Committee of the Financial System (CCSSF). This is a high level committee comprised of the Minister of Finance, the Chair of the Central Bank, the Superintendent of the Financial Superintendency of Colombia and the Director of the Guarantee Fund for Financial Institutions (FOGAFIN). The committee meets at least four times per year with the mandate of strengthening financial stability. It serves as a vehicle for coordinated decision making and has a medium term agenda that includes the development of an early warning system for systemic issues, issue resolution mechanisms and an interagency information sharing protocol.

166. The financial and capital markets have experienced significant growth since the last FSAP assessment but still lack depth and long term instruments. The availability of long-term fixed-income investments to support the long duration insurance products is limited. This is important because the growth of the life insurance sector and the payout phase of Colombia’s pension system depends on the availability of such instruments.

E. Main Findings
General:

167. Significant progress has been made over the last five years. The SFC is a well-resourced professional organization with a clear strategic direction in the insurance area. There have been significant improvements in regulatory and supervisory practices and more changes are planned. Significant challenges remain, however, if insurance supervision is to move towards fuller compliance with international standards and if it is to continue to build confidence in the growing insurance sector.

Supervisory Objectives and Independence:

168. The independence of the SFC should be strengthened by strengthening processes around the appointment, performance assessment and dismissal of the Superintendent. Establishment of a fixed term of appointment (e.g. five to seven years) should be considered in this regard. At present, there are no explicit procedures regarding the appointment, performance evaluation and dismissal of the Superintendent and there has been frequent turnover in the position in recent years (e.g. the average term of the last three superintendents has been less than three years). The Superintendent is appointed and can be removed the President without disclosure of the reasons. The Superintendent may also be censured and removed by Congress.

169. Greater thought should be given to making decree requirements dealing with technical areas, and organization of responsibilities within the SFC, less prescriptive and more principle based. This may empower the SFC to manage rapidly changing financial markets better and establish appropriate technical details. Better consultation with industry and more expeditious timing of regulatory changes will aid the supervisor and industry in responding to rapidly changing markets.

170. Improved protection for staff from lawsuits for actions taken in good faith should be given a high priority and implemented as soon as possible. Strong protection is necessary if the SFC is to move toward a risk based supervisory approach that requires the exercise of greater judgment than compliance oriented supervisory frameworks.

Licensing, Suitability and Control:

171. Licensing, suitability and control processes while strong in many respects would benefit from a clear definition of insurance business in the law. This may help address licensing issues related to “near insurance products” (eg. funeral insurance, prepaid medical). The licensing regime might also benefit from the ability to attach conditions to licenses as a way of increasing market participation without endangering the protection of consumers. These issues are likely to become more important as the market grows and as insurers seek to develop more inclusive insurance products like microinsurance products.

Governance and Control:

172. Board training, explicit minimum competency requirements for directors and the development of guidance on best practices with respect to board governance and enterprise risk management should be considered as means of improving the functioning of boards. Fine tuning of internal controls and the development of an actuarial control function and greater actuarial capacity within institutions is also necessary if insurers are to move towards better enterprise risk management and the development of more complex insurance products.

Supervisory Process:

173. The SFC has taken very significant steps towards developing and implementing an improved risk based supervisory framework. Much work remains to be completed to ensure that supervision is carried out in a risk based and cost effective manner. A risk based approach to supervision requires not only changes to the policies and procedures of the organization, but to the basic supervisory culture. Care need to be taken to ensure that the new framework is properly documented, that adequate guidance and training are provided, that it is implemented in a consistent manner, and that the framework does not result in unreasonable and unnecessary regulatory burden on the supervised entities. Some reorganization of the supervisory departments to focus on the entity being regulated rather than risk category may aid in framework implementation.

Prudential Standards:

174. Changes in the solvency requirements, internal control requirements, and the introduction of new mortality tables for life business and the introduction of new investment regulations in recent years have helped to improve prudential practices and the measurement of solvency position in the industry. Further changes, related to reserving practices and solvency requirements, are necessary to move towards international solvency standards. The SFC is aware of these issues and is moving to address them.

175. In addition, policy holders with outstanding claims need to be given a clear priority in law in the event of a liquidation. ICP 12.1 requires that a high legal priority be established for the protection of the rights and entitlements of policy holders in such circumstances.

Group Supervision and Cross Border Cooperation and Management:

176. The regulatory framework for group supervision needs improvement. The Colombian market is dominated by insurers belonging to large financial groups. The supervision of large conglomerates, however, does not extend to all relevant entities in the group. The Superintendent’s authority over financial holding companies or industrial members of a conglomerate is extremely limited, impacting the SFC’s authority to ensure consolidated financial reporting and consolidated risk management are taking place.

177. Weaknesses in group supervision can also increase problems with cross border crisis management. Cross-border cooperation and coordination specifically related to crisis management of Colombian insurers is progressing but many of the details of a crisis management system have yet to be completed. The SFC is working hard with other supervisors to complete its work in this area but much remains to be done.

Market Conduct:

178. Consumer protection has made important progress in the last years, but more work is needed. The establishment of the consumer protection system is a significant step forward. The requirement for an effective ombudsman in each insurer has proven to be a successful measure to protect consumers. Care is needed to ensure that the new system is adequately resourced and cost effective. Further fine tuning of policies and procedures will likely be required as the SFC gains more experience with the new requirements especially with respect to inclusive insurance products like micro insurance.

179. Better oversight of insurance agents is necessary to reduce the number of complaints and ensure that customers are treated fairly. Some of these requirements should include a basic licensing/registration system for insurance agents, a code of conduct, basic suitability requirements and minimum educational standards, and the establishment of a public database on those agents who have been formally disciplined for actions in the conduct of insurance business or disqualified from registration. Establishment of a self-regulatory organization for agents, with appropriate SFC oversight, should be considered as a potential delivery vehicle.

Table 7.

Colombia—Summary of Observance of the Insurance Core Principles

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Table 8.

Colombia—Recommendations to Improve Observance of ICPs

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E. Authorities’ Comments

180. The mission made note of advances made in the past five years in the insurance sector with respect to regulation and supervision as well as the SFC’s clear vision for its supervisory work.

181. The report emphasizes the need for broader consultation of the industry at the time regulations are issued. In regard to this point, it is important to mention that pursuant to quality policies and to achieve the vision and missions of the MHCP and the SFC, over five years ago both authorities committed to publishing proposed regulations for public comment. Also, the SFC’s integrated management system establishes a group of activities to take into account in designing, developing, and revising regulatory texts, and included among them is the presentation of the aforementioned solutions for public comment. In this regard, in developing any new regulations for insurance entities, the SFC conducts consultations with the parties involved as to the impact and content of proposed regulations.

182. In regard to governance of boards of directors and the suitability of its members, it should be noted that the SFC functions include the appointment and swearing in of directors, administrators, legal representatives, auditors, and others.

183. One of the requirements to be met by the above officials in order to be appointed is to provide the SFC with information on their education, professional and employment experience, and other aspects of their background. Based on this information and additional information requested, the SFC determines whether an individual is competent to fulfill the position for which he is applying.

184. In addition, External Circular (CE) 38 of 2009 (directives concerning review and adaptation of the internal control system) establishes that members of boards of directors have primary responsibility for corporate governance and must therefore act with professionalism, integrity, competence, and independence. It also defines a number of responsibilities including defining the entity’s strategy, performance, and internal control system.

185. In the same way, it establishes that all components of the internal control system must be appropriate to the organization’s size (in terms, inter alia, of number of employees, value of assets and revenue, funds received from the public, number of branch offices or agencies) and the nature of its activities and corporate purpose.

186. The SFC, in turn, has established a set of recommendations for corporate governance based on best international practices. These include the composition of the board of directors, the establishment of certain committees, the professional and personal profiles of board members, reporting to the shareholders’ meeting, and other aspects. All of the recommendations serve as the criteria by which the supervisor conducts a full evaluation of the corporate governance and issues any recommendations he deems relevant.

187. In regard to consolidated supervision, Colombian law (Financial System Founding Law (EOSF), Article 53) provides that persons requesting licenses must submit all information on the beneficial owners of capital, both at the time of applying for a license and thereafter at any point during the life of the financial entity. The regulations also provide a clear definition of beneficial owner (Decree 2555 of 2010, Article 6.1.1.3).

188. In turn, if a financial entity is registered with the stock exchange, it is required to disclose its 20 principal shareholders to the market (CE 02 of 2001, second chapter, section 2, issued by the former Superintendency of the Securities), which it does through the Securities Market Information System (SIMEV) administered by the SFC.

189. Also, the SFC’s quality certified processes establish the express requirement that applicants for licenses provide complete information about the beneficial owners of the entity’s capital (checklist provided for that purpose and published on the SFC website).

190. The SFC rules (the Basic Accounting and Financial Circular, CBCF) establish the obligation for insurers to submit quarterly reports on their shareholding structure, identifying shareholders owning 1 percent or more of the capital, up to the third level of ownership. This standard far exceeds those of other Latin American countries.

191. Given the importance of identifying the beneficial owners and the effects of ownership on several of the principles examined, a supervision exercise has been developed which identifies and evaluates the shareholding structure, capital structure, and beneficial ownership of the entity in question. The same exercise was conducted for the evaluation of banks. In practice, in the process of constitution as well as trading of shares, the SFC investigates the beneficial owner, and for this reason the identification of the beneficial owners is a requirement on the checklists. These processes also provide for the identification of operations that result in the acquisition of or change in control of the entity.

1

This treats the four banks owned by Grupo Aval as one bank.

2

These institutions include 23 commercial banks, 4 financial corporations, 22 finance companies, 6 cooperatives and 11 special official financial institutions. The state plays a very small role in Colombia’s financial system. Official financial institutions are second-tier banks and account for 7 percent of financial system assets.

3

Colombia generally applies a Basel I capital standard, including an adjustment for market risk.

4

In Colombia, loans that are 30 days or more past due are classified as non-performing.

5

An estimate for the H-statistic was 0.78 for Colombia, similar to the regional average of 0.77. The H-statistic equals 1 for perfect competition, less than or equal to 0 under a monopoly.

6

Almost 80 percent of business loans are contracted at floating rate, while most of consumption and microcredit loans are at fixed rates. Mortgages can be prepaid or restructured free of charge, which allows borrower to benefit from declines in the mortgage interest rate.

7

The credit risk tests were conducted using a top-down approach. The SFC has not validated the internal credit risk models of the banks, making a bottom-up test unreliable.

8

The only exception is non-deposit taking cooperatives, which are supervised by the Department of Economic Solidarity. These mandates include the preservation of the stability, safety and confidence of the financial system; organization and development of Colombian capital markets; protection of investors, depositors, insurance policy holders, and consumers of other financial services.

9

The most recent AML/CFT assessment was completed in 2008 and the authorities have agreed to undertake an AML/CFT assessment in the first quarter of 2013.

10

The LEG report “Anti-Money Laundering and Combating the Financing of Terrorism: A Review of Recent Experience” (May, 2011) ranked Colombia the best among 115 emerging market countries in terms of compliance with the 40 + 9 FATF principles. Colombia’s performance was on par with the United Kingdom and the United States.

11

The derivatives clearing house CRCC has prospered since 2008 without access to intra-day central bank credit, but it is growing very fast and becoming more systemically important. The BR’s plan will enable CRCC not only to receive intra-day repos, but also to convert intra-day repos into overnight repos (and longer) in case of need.

12

Much of the growth in consumer credit has been an expansion in authorized credit lines. Credit conversion factors are commonly used to address the probability of an unused credit line becomes outstanding credit one year ahead.

13

The mission was led by Mr. Robert Rennhack (IMF) and Eva Gutierrez (World Bank). The assessment was conducted by Ms. Valeria Salomao Garcia (World Bank) and Ms. Socorro Heysen (expert consultant).

14

Issued by the Basel Committee on Banking Supervision, October 2006.

15

The regulations should ensure that hedge funds and/or hedge funds managers and advisors are subject to appropriate oversight.