Abstract
This Selected Issues paper analyzes spillover risks for Colombia. It highlights that external shocks could spill over to the Colombian economy through the country’s important and growing trade and financial linkages with the rest of the world. Colombia would be most exposed to a decline in oil prices, which could have a sizable adverse impact on the balance of payments, the fiscal accounts and growth. Growth shocks in key trading partners could also have a negative impact, particularly in the United States, which is Colombia’s main trading partner. Colombia’s fiscal rule and adjustment in the context of resource wealth is also analyzed.
Selected Financial Sector Issues1
A. Overview
1. A Financial System Stability Assessment (FSSA) was conducted in 2013 in Colombia.2 The financial system was found to be sound and reasonably resilient to shocks; banks were well capitalized, profitable, and moderately efficient. While there was some scope for improving central bank’s stress testing methodology, some of the main challenges reflected risks related to assets and liability concentration, and expansion of bank’s conglomerates abroad with challenges for consolidated and cross-border supervision. Increasing house prices were also found to be a source of fragility, yet exposure of banks and households was considered moderate.
2. This note attempts to provide an update on selected topics from the FSSA that remain of primary interest today. A year into implementation of FSSA recommendations the situation could be considered broadly unchanged. House prices and mortgages have kept increasing despite overall slowing of credit growth. Legal protection of supervisors and regulation of some non-bank institutions remain a challenge. The Financial Superintendence of Colombia (SFC) authority over financial holding companies or industrial members of a conglomerate is still limited. Yet, progress was made in some areas, notably the introduction of new and improved capital requirements measure and efforts to obtain more information of Colombian banks’ exposures in Central America. The following sections document the evolution of authorities’ efforts to making the financial system stronger and more resilient to existing and future challenges.
B. Supervision of Complex Conglomerates and Cross-Border Supervision
Background
3. Large and complex financial conglomerates dominate Colombia’s financial system. Ten holdings constituted about 80 percent of total financial sector assets at end-2011. Bancolombia alone accounted for 25 percent of banking system assets in 2013. Concentration is similar to Latin America and the Caribbean (LAC) region averages and is also reflected in banks’ credit portfolios, in which a small share of debtor account for the bulk of the loans. Banks’ concentration is also believed to be a deterrent to financial inclusion (see “Financial Inclusion, Growth and Inequality” section).
4. Since 2007, major Colombian conglomerates have been expanding into Central America through mergers and acquisitions. In 2013, they had 162 branches in 21 countries in LAC, representing substantial shares in total assets of destination countries’ banking system assets. Operations in Panama are the largest also in terms of local banking system’s assets. In terms of banking conglomerates, Bancolombia’s operations are the largest, closely followed by those of Banco de Bogotá. The total value of bank’s investments abroad from 2007 to 2013 amounted to almost 7 billion U.S. dollars.
| Banco de Bogotá | Total | 18,126 |
| Banco Bac San Jose, S.A. | 3,804 | |
| Banco de América Central S.A. (El Salvador) | 5,854 | |
| Banco Reformador | 1,377 | |
| Banco de Bogotá S.A. | 888 | |
| Banco Corficolombiana Panamá S.A. | 122 | |
| Bac Bank Inc. | 290 | |
| Bac International Bank, Inc. | 3,726 | |
| BBVA Panamá | 2,065 | |
| Bancolombia | Total | 19,367 |
| Banco Agrícola S.A. | 3,996 | |
| Bancolombia Panamá | 4,972 | |
| Banistmo S.A. | 10,399 | |
| Banco de Occidente de Colombia | Banco de Occidente Panamá S.A | 874 |
| Davivienda | Banco Davivienda S.A. | 5,986 |
| Helm | Helm Bank Panamá | 837 |
| Total | 45,190 | |
| Banco de Bogotá | Total | 18,126 |
| Banco Bac San Jose, S.A. | 3,804 | |
| Banco de América Central S.A. (El Salvador) | 5,854 | |
| Banco Reformador | 1,377 | |
| Banco de Bogotá S.A. | 888 | |
| Banco Corficolombiana Panamá S.A. | 122 | |
| Bac Bank Inc. | 290 | |
| Bac International Bank, Inc. | 3,726 | |
| BBVA Panamá | 2,065 | |
| Bancolombia | Total | 19,367 |
| Banco Agrícola S.A. | 3,996 | |
| Bancolombia Panamá | 4,972 | |
| Banistmo S.A. | 10,399 | |
| Banco de Occidente de Colombia | Banco de Occidente Panamá S.A | 874 |
| Davivienda | Banco Davivienda S.A. | 5,986 |
| Helm | Helm Bank Panamá | 837 |
| Total | 45,190 | |
Share of assets in the host country banking system.
As of September 30, 2013.
Issues
5. The consolidated supervision of financial conglomerates has been enhanced since the creation of the SFC. Improvements in the legal framework have empowered the SFC to conduct onsite examinations and obtain necessary information from non-financial corporations that form part of mixed conglomerates, order the consolidation of financial statements of companies of these conglomerates, exchange information with foreign supervisors and authorize investments in the capital of foreign entities. Supervisory procedures are in place and a dedicated team is responsible for the supervision of both financial and mixed conglomerates. However, expansion abroad poses challenges for consolidated and transnational supervision with implications for risk management. The SFC has no enforcement powers over the non-financial institutions that form part of a mixed conglomerate, which creates opportunities to bypass prudential norms.
Main FSSA Recommendations
Put in place a Pillar 2, Basel II supervisory framework. This would give the SFC explicit authority to tailor prudential norms to the risk profile of each financial institution, especially the systemic ones. This is important because, as Colombian banks’ businesses expand domestically and abroad, it will be important for the SFC to ensure banks have appropriate capital and liquidity buffers around an expanded loan portfolio to manage present and future risks.
Approve a law that gives SFC full supervisory and regulatory powers over the holding company of a financial conglomerate. Such a law should provide a clear definition of financial group to reduce possible legal gaps that may arise from the difficulty in demonstrating commonality of purpose, especially for horizontally integrated groups.
Actions
6. The SFC has established an effective network of cooperation for the purposes of consolidated supervision of the financial conglomerates that operate in Colombia. The SFC has signed bilateral and multilateral memoranda of understanding with most of the home and host supervisors of conglomerates (16 countries) and engages in regular exchanges of information with these agencies. The SFC has organized the college of supervisors for Bancolombia, Banco de Bogotá, and Davivienda with the participation of six foreign supervisory agencies, which has held five meetings since 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. The Council holds quarterly meetings during which it exchanges information related to balance sheets, financial statements and financial indicators, capital adequacy, related debtors, resident and non-resident debtors, supervisory details, and portfolios classified by risks. In addition, the Liaison Committee holds three meetings per year and monitors supervision activities. Over the past year the SFC performed two on-site inspections to conglomerates operating in El Salvador and Costa Rica.
7. The SFC is developing a comprehensive monitoring framework for risk-based supervision (RBS) with the help of the Toronto Centre. The migration of the SFC to RBS was born from the need to: have a holistic view of the risks of each institution, be it individual or conglomerate, foreign or domestic; have one voice against the industry; increase efficiency in the allocation of SFC resources focusing on key areas of risk; and being more forward looking. The framework follows closely the RBS methodology of the Office of the Superintendent of Financial Institutions (OSFI) and Basel international supervisory standards. The methodology is fully developed for credit institutions and insurance companies and it still under development for brokers, trust funds and the stock exchange. The full implementation began in 2014, and the goal this year is to have the full roll-out of the methodology to all entities prudentially supervised by the SFC.
8. The Central Bank has enhanced reporting of foreign currency (FX) and liquidity risks. In December 2013, the Central Bank implemented a monthly regulatory report detailing exposure to exchange rate risk by the FX market intermediaries and short-term exposure in each currency. The report also presents the net positions (assets minus liabilities) in each currency on both parents and their subsidiaries. In addition, to assess short-term liquidity exposure, the report includes information on liquid assets and short-term liquidity requirements in each currency.
Challenges
9. The effectiveness of consolidated supervision remains a work in progress. The 2013 FSSA found that individual banks that were part of large conglomerates were not subject to consolidated prudential requirements. While banks are required to meet capital ratios and liquidity ratios both at individual as well as consolidated basis, prudential control over all members of a mixed conglomerate is incomplete and uneven. It will be important going forward that the prudential requirements (capital adequacy, liquidity, leverage) remain robust at the consolidated and conglomerate level.
10. There is a need to ensure consistency of information on banks obtained from the host countries, including information on risks. Additionally, it will be important to further enhance granular reporting of cross-border liquidity and currency risk of Colombian banks’ in home and host jurisdictions. SFC’s technical cooperation on supervisory standards in supervisory colleges in the region and the CCSB is a welcome engagement. But, above all, a willingness of home and host supervisors to act upon emerging cross-border risks will ensure regional financial stability. Finally, it would be crucial to ensure no information gaps appear over time to enable the Central Bank to perform its lender of last resort functions.
C. The New Capital Requirements
11. By putting greater emphasis on common shares and legal reserves, the new capital requirement regime has strengthened the quality of the core capital. Starting in August 2013, new deductions on capital include (i) committed assets, such as pension liabilities (unamortized actuarial value calculation) and net deferred assets, and (ii) intangible assets, such as goodwill. Some additional instruments are also recognized as equity, including:
voluntary reserves (conditional on a commitment to keep these reserves for at least 5 years and upon approval of SFC up to a maximum of 10 percent of the regulatory capital);
current profits (conditional on the commitment to capitalize or increase legal reserves prior to SFC approval); and
the valuation of investments in debt available for sale and equity (with a haircut), but not the valuation of real estate.
The consolidated solvency ratio must be met by all credit institutions (quarterly) and are calculated on consolidated financial statements of all financial institutions, by netting out all the equity of the financial group. Moreover, in the consolidation process only the participation of minority investors who are unrelated parties is recognized as minority interest and thus adds to capital. Unconsolidated investments are not deducted from capital. These new regulations will maintain the minimum regulatory capital at 9 percent of risk weighted assets and create a new measure, the ratio of “base” capital to risk weighted assets at a minimum of 4.5 percent. The regulation excludes future intangibles and goodwill from the calculation of base capital.
12. As expected, following the introduction of the improved capital measure, capital ratios have declined across banks and other financial institutions. During 2013, banks, financial corporations and finance companies increased their capital by COP 9.8 billion that reached a technical worth of COP 53 billion by end-year. However, aggregate capital ratios fell from 17.2 percent in July 2013 to 15.2 percent at end-year. Regulatory Tier 1 capital to risk-weighted assets declined from 12.6 percent to 10.2 percent over the same period.3 At the consolidated group level capital adequacy has also fallen bringing to light the weakness of the previous capital adequacy framework.
Capital Ratios (“base”)
(Dec-2013)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Capital Ratios (“base”)
(Dec-2013)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Capital Ratios (“base”)
(Dec-2013)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Capital Ratios (“total”)
Dec-2013
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Capital Ratios (“total”)
Dec-2013
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Capital Ratios (“total”)
Dec-2013
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Consolidated Group Captal Ratios for Credit Institutions, 2012-13 (percent)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Consolidated Group Captal Ratios for Credit Institutions, 2012-13 (percent)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Consolidated Group Captal Ratios for Credit Institutions, 2012-13 (percent)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
13. For internationally active Colombian banks it would be important to move over time to the Basel III capital measure. New capital regulation better defines Tier 1 capital. However, it includes a broader recognition of Tier 2 (subordinated debt) as capital and is not as strict in terms of deduction of future intangibles and goodwill from base capital calculations relative to Basel III capital standards. Internationally active banks are more likely to need higher loss absorbency to reflect higher and more complex cross-border risks.
D. The SFC’s Stress Tests
14. The stress tests described here are conducted by the SFC. The SFC has identified the following main risks for the financial sector and the economy as a whole that can easily translate into financial sector stress:
Increase in interest rates on U.S. bonds and effect on interest rates of Colombia;
Increased volatility in financial markets, affecting Colombia’s asset prices;
Increased risk aversion and decreased foreign investment;
Exchange rate depreciation.
To assess credit risk, liquidity risk, market risk and exchange rate risk the SFC conducts three stress testing methodologies, including inputs by the Central Bank on loan delinquency, devaluation of TES instruments and the foreign currency portfolio.4
Concentration
While below that of some other countries, notably Brazil, Mexico and Peru, banks concentration in Colombia is very high. The 5 largest banks held a 66.5 percent share in total loans and 65.5 percent in total deposits in 2013. The concentration in the largest debtors of the commercial portfolio declined between 2010 and 2013. The participation of the 1,000 largest debtors of the commercial portfolio follows the Herfindahl concentration index for this portfolio.
5-Bank Asset Concentration
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
5-Bank Asset Concentration
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
5-Bank Asset Concentration
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Commercial Portfolio Concentration
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Commercial Portfolio Concentration
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Commercial Portfolio Concentration
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Concentration risk is assessed by simulating a credit shock in three steps. The first two stress tests assume a decline in debt rating of the 100 largest debtors of the banks, while the third test reduces the rating of the top 5 debtors to default. In each scenario the additional required provisioning and profitability is calculated. This test is conducted top-down, from the largest debtors of the system to bank level effects.
Liquidity shock is simulated based on the episode of market volatility that took place between May and August 2013. The internal liquidity ratio (ILR) of credit institutions is calculated by simulating two market type risk shocks: the first shock assumed a 28.6 percent devaluation of the government bonds (TES) portfolio entities corresponding to the 80th percentile of variations that occurred between April 26 and May 31, 2013; the second shock assumes in addition an increase in loan delinquency by 13.8 percent, corresponding to the highest growth of this indicator in the past 10 years.
To assess market risk and exchange rate risk three scenarios are elaborated assuming an increase in interest rates of fixed income securities by 100, 200, and 400 bps. In addition, a 9 percent devaluation of the foreign currency portfolio and a 14.7 percent devaluation of variable income securities are assumed.
15. Based on these stress tests the SFC concluded that:
Credit risk: The concentration in the largest debtors of the system has been declining, reducing the vulnerability of credit institutions. The current level of individual and countercyclical provisions enables banks to better respond to the shock.
Liquidity risk: The enforcement of the liquidity rule (introduced in June 2012) allows entities to fulfill adequately their obligations over a period of 1–30 days.
Market risk and exchange rate risk: Before the dismantling of QE3 and its likely effect on portfolio value, credit institutions are able to adequately support the impact of tapering, given strong solvency levels and the higher quality capital since August 2013.
SFC’s Stress Test Results
Credit shock: Compared to the baseline scenario, for the total of 18 banks, additional provisions under the stress scenario would amount to 8.7 percent, 70.3 percent and 70.4 percent in the first, second and third tests, respectively. The bank with the largest increase in its provisions in the first test would have to increase then to 19.4 percent, while under the second and third tests the maximum increase in provisioning would be 160.7 and 178.8 percent, respectively. Compared to the baseline scenario, for the total of 18 banks, the return on assets (ROA) decrease by 0.3 percentage points in the first test and 2.1 percentage points in the second and third test. Under the first test the banking system ROA ends up at 2 percent. In the second test the ROA declines from 2.2 percent to 0.10 percent, and a similar result is observed in the third exercise that leads to a decrease by 2.1 percentage points.
Comment: While the system level credit shock (rating downgrade) results in a manageable increase in provisions and reductions in profitability, with increased severity of the credit shocks the increase in provisions and profitability reductions are more significant with some banks much more adversely impacted. Identifying the impact on solvency due to these credit shocks would also provide a clear sense of bank vulnerabilities and the extent of bank assumptions and actions to offset such shocks.
Liquidity shock: Two market risk type shocks were incorporated, first an impairment of 28.6 percent of the portfolio of TES securities corresponding to the 80th percentile of changes between April 26–May 31, 2013. Second, in addition to the first shock, 13.8 percent of delinquent loans were incorporated (a historical high over the last 10 years). Only one bank fails the combined TES and portfolio shocks, presenting an ILR at 30 days of 80.7 percent as opposed to 100 percent required in the regulation. In addition to this, four more institutions showed significant variations in ILRs in monetary terms.
Comment: This finding suggests that while system liquidity remains presumably fine due to large deposit bases and lower run-off and draw-down rates, some banks with below average deposit funding, or those that are reliant to a greater degree on wholesale funding, could be exposed to short-term liquidity risks.
Market risk and exchange rate risk:
Impact 1: Portfolio deterioration–this incorporates the combined market and exchange risk impact of three scenarios. Scenario 1 looks at an increase in 100bps in the yield of fixed income securities plus a devaluation of 9 percent of the entire portfolio in other currencies (other than Latam) including impairment of equity of 14.7 percent (maximum daily variation). Scenario 2 and 3 are the same except for larger yield changes of 200bps and 400bps.
Impact 2: Portfolio deterioration affects solvency via a: reduction in the additional equity (16.6 percent of earnings (committed), 100 percent of the depreciation available for the sale of debt and equity), a reduction in the value-at-risk (VaR), and potential variation in APNR for equity (financial corporations) depending on the effect of domestic vs. foreign currency.
Impact 3: it is assumed that the 30 days ILR would be affected mainly through a reduction in the adjusted liquid assets.
Comment: Market and exchange rate risk tests at system level appear not to adversely affect both solvency and liquidity. However, the impact on individual banks is not known from these tests given that impact and variation of solvency and liquidity is much greater for the adverse scenarios.
The findings from the stress tests should be utilized to question and investigate the bank’s own risk management practices (including stress tests and risk controls). In particular, the loss forecasting and provisioning on specific portfolios should be examined, and the business models of banks should be questioned by looking closely at their income and profit projections, their liquidity and funding profiles, and concentration risk. Stress tests could be improved by combining adverse macroeconomic scenarios with these various scenario shocks that are of a prolonged (multi-year) nature. This may better help supervisors to identify banks with weaker solvency and liquidity profiles, and supervisors could then use firm specific prudential enhancements for capital and liquidity to rectify bank-specific vulnerabilities.
Challenges
16. While stress testing is undertaken by the central bank and the supervisor, it is not clear whether these are fully coordinated to account fully for cross-border and longer-term liquidity risks. It is not clear whether top-down and bottom-up exercises by banks are fully coordinated for both capital and liquidity purposes. This restricts authorities’ abilities to question banks own stress testing capabilities. Moreover, there is no requirement for Colombian banks to abide by longer-term liquidity measures. Development of longer-term liquidity metrics would be useful to assess the resilience of Colombian banks to longer term funding concerns and asset-liability mismatches from liquidity stress. The adoption by authorities of the Basel III liquidity metrics that started in 2012, especially the liquid coverage ratio (LCR) and the net stable funding ratio (NSFR), goes some way in addressing these issues.
17. The development of low-growth tail risk scenarios, joint testing and linking solvency, liquidity and contagion stress testing would be a useful enhancement. Currently tail risks are determined by large (beyond) historical moves in asset prices, credit deterioration, or liquidity shocks. However, tail-risks may also endure and may not necessarily be larger than previous historical shocks. These shocks, embedded within multi-year low-growth scenarios provide useful processes to see how banks can suffer losses in the downturn, and be restricted in recovering income and revenues in the upturn. The Colombian authorities currently lack comprehensive, consistent, and comparable data on a cross-border basis for its banks and large financial and mixed conglomerates to stress test their exposures fully. Improved and joint stress-test exercises between home and host supervisors and central banks may be helpful for such entities. Contagion stress testing should also be implemented both for banks and nonbank sectors, but also connecting these two together and linking contagion risk stress testing more completely with solvency and liquidity stress testing.
18. Stress testing should be linked to capital and liquidity planning for banks. Using stress testing linked to capital and liquidity planning for banks as a robust supervisory tool would help provide transparency to supervisory bank-specific actions on capital and liquidity. It would also help improve banks’ own stress testing and risk management processes.
E. Housing Prices and Housing Finance
19. Housing prices have increased substantially in recent years. House prices have nearly doubled in real terms over the last decade and are 20 percent above the peak in 1996, driven mainly by prices in the capital and two other cities. House prices increase equally for subsidized and commercial housing and there are some indications that Colombia may be undergoing a bubble.5 Nevertheless, adjusted by household income level purchasing power remains high, though the return on housing investment through rental flows has fallen.6
Price Index of Homes, 2006=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Price Index of Homes, 2006=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Price Index of Homes, 2006=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Real House Price Index, 1990=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Real House Price Index, 1990=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Real House Price Index, 1990=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
20. Various factors affect prices of new homes. On the supply side, the trend in the prices of new housing at a national level is partly explained by rising construction costs and the long process of obtaining building permits, although an increase in the quality of housing may also play a role. However, the price of land seems to be the main factor behind the downward price rigidity, in particular in cities with the biggest restrictions on land (such as Bogota, Bucaramanga and Medellin). A chronic shortage of serviced land has brought the housing deficit at the national level to over an estimated one million units and mostly affects poorer households. On the other hand, demand has been boosted by demographic trends, income growth, as well as the government’s subsidy program.
Sales Price to Construction Price Index
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Sales Price to Construction Price Index
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Sales Price to Construction Price Index
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
21. The government support to housing includes a number of benefits and programs. Financial subsidies are given for (i) demand support: upfront subsidies up to 4 minimum wage incomes, accessible to 80 percent of households; buy down interest subsidy (up to 8 minimum wage); non means-tested tax exemption on savings for housing accounts and on interest payments on mortgages; (ii) supply stimulation (various tax incentives for VIS developments); and (iii) the extension of social housing (VIS)7 loans and residential leasing through tax relieves. In addition, a June 2012 housing law created a program to build and distribute 100,000 new units for free to non bankable—poor or vulnerable—households. Local governments often supplement the national schemes.
22. More recently an interest rate subsidy was implemented as a counter-cyclical measure to spur construction. In April 2013 a subsidy program targeting middle-income earners—called Plan to Boost Productivity and Employment (PIPE)—extended coverage of the interest rate on new homes with a value above that of VIS but below COP 198 million. The government provided a subsidy of 250 basis points, with the financial system undertaking a further 250 basis points cut. Implementation rate of this program is high (Box 3).
Real House Price Index, 1990=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Real House Price Index, 1990=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Real House Price Index, 1990=100
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
23. Mortgages have increased more recently but credit risks appear to be largely under control. In 2013 and early 2014, the housing portfolio had the highest annual growth in total loans. In January 2014 the real annual growth of this portfolio was 25.7 percent. Slightly more than 1/3 of the mortgage portfolio was for non-subsidized housing at end-2013. The level of provisioning for mortgage housing is generally lower than the balance due, because collateral quality is high. However, vulnerabilities are mitigated by a low stock of mortgages in banks’ portfolios (about 9 percent of total at end-2013), and prudent debt-to-income and loan-to-value ratios (LTVs) of households (LTVs are about 55 percent on average). The Central Bank sets caps on housing finance interest rates which are referenced to the lowest rates prevailing for other type of lending, while the maximum rates for loans to VIS are below those for non social loans (non VIS). Lending norms are prudent (first mortgage, LTVs, affordability), and loans are generally extended at fixed rate. Borrowers have the right to prepay at no cost which they generally do. The average loan life is about 7 years. Housing loans extended in 2013 showed less deterioration compared to those made in 2008 and 2012.
Credit Institutions Mortgage Portfolio
(Percent change, unless otherwise indicated)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Credit Institutions Mortgage Portfolio
(Percent change, unless otherwise indicated)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Credit Institutions Mortgage Portfolio
(Percent change, unless otherwise indicated)
Citation: IMF Staff Country Reports 2014, 167; 10.5089/9781498302128.002.A004
Interest Rate Subsidy Programs
Law 546 of 1999 established the Reserve Fund for the Stabilization of the Portfolio Mortgage (FRECH), designed to facilitate conditions for financing housing mortgages indexed to the CPI. The Law granted the following resources to the Fund:
Revenues from a national tax introduced by the Law, amounting to 50 percent of the monthly remuneration of reserves. This was retained by the Central Bank at the time of payment to credit institutions. The amount transferred amounted to COP 153.6 billion.
COP 150 billion from central bank profits in 1999.
Revenues from the difference between the interest rate adjusted for the inflation index (UVR) and interest rate DTF, when the first is greater than the second, that should be provided by credit institutions that have mortgage loans denominated in UVR and liabilities denominated in DTF.
Revenues from the Fund.
Revenues from credits that were contracted for this purpose. The Central Bank, as fiscal agent of the Government, may contract credits the repayment of which will be dedicated to the Fund.
The Central Bank is authorized to provide a conditional subsidy to facilitate financing of new housing using the resources of the Fund. The subsidy is a swap calculated on the agreed interest rate on new loans for new homes granted by credit institutions to individual borrowers that meet certain conditions, only during the first seven years of loan life. The size of the interest rate subsidy depends on the value of the home. The interest rate subsidy also applies to obligations incurred under the system of residential leasing.
In 2011, the program was expanded and the budget increased to COP 100 billion to cover loans granted through March 2012, while in 2013 new resources were allocated to FRECH to higher value housing, corresponding to 2.5 percent of the interest rate under the Plan to Promote Employment and Productivity (PIPE). These resources were included in an account called countercyclical FRECH–2013 financed from the general budget.8 Implementation of these programs was very high in 2013.
In 2014, the Ministry of Housing introduced an interest rate subsidy for household beneficiaries of the “Program of Priority Interest for Savers”. This program provides a subsidy amounting to 5 percentage points of the interest rate on loans for the purchase of priority urban housing (up to COP 41.3 million). Some 86,000 subsidies of this type are expected to be granted and disbursed in 2014-15 with the program budget amounting to COP 739 billion.
F. Prudential Measures in Place
24. Four institutions constitute the financial stability committee—the central bank, the SFC, the Ministry of Finance, and the Deposit Insurance Agency. The Ministry of Finance is the regulator for the entire financial system, and the SFC is the primary supervisor for the financial system. The central bank is responsible for the normal functioning of the economy’s internal and external payments, regulates the foreign exchange system and is the lender of last resort. The deposit insurance agency implements decisions taken by the SFC on intervened deposit-taking institutions. This committee has recently redoubled efforts to coordinate and facilitate information exchange. Each of the four institutions retains its supervisory responsibility to identify risk, implement and enforce policies, and report to Congress.
25. Colombia has used a large number of prudential measures in the past. The ones still in place at this time are also numerous and apply to all deposit-taking corporations and other financial intermediaries, except insurance corporations and pension funds.
Loan-to-value ratio (LTV)limits were introduced in 1999, following the banking crisis and apply to mortgage borrowers. The objective is to limit households’ leverage and financial institutions’ exposure to housing price movements. There are two limits in place: the LTV ratio for a loans targeted towards the financing of VIS is of 80 percent. All other mortgage loans have a LTV ratio of 70 percent. While there is no specific indicator for assessing the effectiveness of this instrument, since the implementation of the LTV ratios, households’ leverage has declined. For instance, the financial burden indicator, defined as the ratio between interest and capital payments on mortgage loans to income, has shown a significant reduction since 2000. In addition, the level of the LTV ratio post-2000 has also been consistently below the regulatory maximum and is close to 55 percent in 2013.
Debt-to-income (DTI) limits were introduced in 1999 and apply to mortgage borrowers. They limit the monthly debt service to 30 percent of disposable income.9 The DTI ratios are not adjusted counter cyclically and are applied only to new flows. All credit institutions are subject to this regulation.
Limits on foreign-currency loans have been in place since 1993 and their purpose is to limit currency and liquidity mismatches by limiting the currency and the maturity of foreign currency loans granted by credit institutions. Credit institutions are allowed to borrow externally only to on-lend locally in FX currency, with equal or shorter maturity. Hence, credit institutions operate as intermediaries between the borrower and a foreign institution. Financial institutions are also allowed to use foreign currency funding to create synthetic hedges for their derivatives portfolio. They are not, however, allowed to take FX currency-denominated deposits.
Dynamic loan-loss provisioning is aimed at ensuring stability of financial institutions’ own capital, and reducing profit volatility. It is applied to commercial and consumer loans, and differentiated by currency (foreign vs. domestic) and sector (households and corporate) and all commercial banks, financing companies, commercial financing companies, financial cooperatives and all entities supervised by the SFC who are authorized to engage in credit operations are subject to this measure. Individual provisions can be calculated with an internal model or with a benchmark model supplied by the SFC, with the latter being more commonly used and where all inputs in the calculation of the expected loss are supplied by the supervisor (probability of default and loss given default). Tying the countercyclical buffer triggers to bank-specific variables allows institutions facing difficulties to smooth their provisioning expenses, independent of overall economic conditions. This also implies that the SFC does not have to take a stance with respect to the economic cycle (or any other market condition to trigger the buffers).10 The methodology for calculating the individual provisions consists of estimating two components: an individual procyclical component, and an individual countercyclical component. Key variables that trigger a countercyclical adjustment are deterioration in the loan portfolio, loan portfolio efficiency, financial fragility, and credit growth. Currently, a benchmark model for micro-credit and mortgage loans is under construction by the SFC.
Limits on interbank exposures address system-wide credit concentration concerns and are applied on an individual counterparty basis. The limit establishes that no intermediary can lend an amount greater than 30 percent of its capital to a particular financial institution. The instrument was introduced in 1993.
Concentration limits address credit concentration risk. The limit establishes that no intermediary can lend an amount greater than 10 percent of its capital to a particular individual, provided the only guarantee is the debtor’s own capital. The instrument was introduced in 1993. Institutions are required to report the concentration of their loan portfolio quarterly. In addition, the SFC performs on-site inspections where these, and other limits, are verified. There are two exemptions to the 10 percent limit: (i) an institution can lend up to 25 percent of its capital to a single debtor provided that the individual has sufficient admissible guarantees to hedge all risk exceeding 5 percent of given capital, and (ii) there are certain “special” institutions created to help develop specific sectors of the economy (FINAGRO, BANCOLDEX, FINDETER, FDN and IFI) that work as second-tier banks, and offer special credit lines (called “redescuento”) to financial institutions, that are channeled to specific sectors. Loans granted by an institution funded by the “redescuento” credit lines are not subject to concentration limits.
Liquidity requirements are meant to dampen liquidity risks. Colombia uses a liquidity risk index which is very similar to the LCR proposed in Basel III. Liquid assets correspond to the sum of disposable liquidity and liquid investments, and the latter are adjusted by a liquidity risk haircut. Foreign currency liquid assets have an additional haircut to control for exchange rate risk. Liquidity needs for net cash outflows are calculated as the sum of contractual and net non-contractual expenses minus 75 percent of the minimum value between contractual inflow and the sum of contractual and net non-contractual outflow. The rationale for this is that institutions cannot fully compensate liquidity needs with contractual income, and have to at least consider a net cash outflow of 25 percent of their contractual and net non-contractual expenses. The time horizons considered in the stress scenario for calculating the ratio is of 7 and 30 days and under both stress tests the ratio between liquid assets and the net liquidity requirement must be greater than or equal to 0. Supervisors can restrict market operations of institutions not meeting the liquidity requirement.
Limits on open FX positions address currency risk by controlling derivatives position in the spot market. This measure applies to all types of foreign currency net positions. The limit on net currency FX position, introduced in 1991, is 50 percent of regulatory capital and reserves and cannot be negative, while the net total FX position limit, introduced in 1999, is 20 percent (with a lower limit of -5 percent, introduced in 2004) of capital and reserves.11
Limit to gross leverage position applies to dealing (buying and selling) of instruments in foreign currency with maturity equal or higher to one day. Dealing cannot exceed 5½ times the institution’s capital.
Transitional provisions are temporary individual measures that apply to consumer loans of institutions whose balance sheets have reported consumer loans for at least the last twenty-five months and for which the 6-month moving average of the semi-annual difference of the real annual growth rate of nonperforming loans is positive. The provision amounts to 0.5 percent of the outstanding capital of the loan. The additional individual provision stops to apply when the 6-month moving average described above is less than or equal to zero for a period of six consecutive months. The objective of this tool is to limit the deterioration of credit institutions’ loans portfolio.
26. Though Colombia has a wide range of prudential tools to tackle incipient systemic risks, there are challenges. A key challenge remains communicating and coordinating existing macro prudential policies to tackle systemic risks with micro prudential and macroeconomic policies to avoid policy conflicts and unintended impacts.
Prepared by Izabela Karpowicz and Mohamed Norat.
Colombia: Financial System Stability Assessment, 2013, IMF Country Report No. 13/50, International Monetary Fund
The numbers do not include Colombian banks’ holdings abroad. The capital ratios under the new capital scheme apply to banks, financial corporations, and finance companies. The old definition of capital included, besides these institutions, also financial cooperatives and special official institutions.
The Central Bank’ s credit risk stress tests include a VEC model estimation which involves macroeconomic projections and financial data. In particular, it assumes 2-year stressed paths for GDP growth, unemployment, interest rates and housing prices, and tests the response of banks’ profits and capital.
Gómez-González, José E., Jair N. Ojeda-Joya, Catalina Rey-Guerra, and Natalia Sicard, 2013, “Testing for Bubbles in Housing Markets: New Results Using a New Method", Borradores de Economia N.753/2013, Banco de la Republica. There are also papers that claim otherwise: Hernandez, G. and Piraquive, G. (2014), “Evolución de los precios de la vivienda en Colombia", Archivos de Economía, No. 407, Departamento Nacional de Planeación; and Salazar, N., Steiner, R., Becerra, A. and Ramírez, J., (2012), “¿Qué tan desalineados están los precios de la vivienda en Colombia?", FEDESARROLLO.
BBVA Research “Colombia Real Estate Outlook 2013". Families dedicate 24.7 percent of their disposable income for the first payment of their mortgage, under the legal limit of 30 percent.
VIS is defined as a house or apartment whose value is below 135 monthly minimum wages (approximately equivalent to $47,000 dollars).
For the countercyclical FRECH, the following conditions on the loan’ s interest rate must be met for the subsidy: the intermediary must guarantee an interest rate that does not exceed 9.5 pp for housing between 135 monthly minimum wages (MMW) and 235 MMW (the limit on the interest rate is 6.5 pp if the loan is indexed to the UVR). For housing whose value is between 235 MMW and 335 MMW, interest rates guaranteed by the financial institutions does not exceed 10.5 pp (7.5 pp if indexed to the UVR).
Income is defined as wage income and all other types of certifiable incomes earned (e.g. salaries, retirement income, government transfers) by the individual or the household.
The formulae for setting the provisioning level differ depending on whether the institution is in a “good phase” or in a “bad phase” (in a “good phase” the accumulation methodology is used, whilst during a “bad” the reduction methodology is used). Four individual indicators on the general financial health of the institution are used to differentiate between an upturn and a downturn and the indicators must be above or below a specified threshold for a period of at least three consecutive months.
The limits on open foreign currency positions were strengthened in 2004 to reduce the volatility of derivatives in the spot market
