Peru
Financial Sector Assessment Program-Detailed Assessment of Observance - Basel Core Principles for Effective Banking Supervision

The overall quality of Peru’s supervisory approach and regulation of the banking sector is strong. Some areas for enhancement remain. A key area that needs strengthening relates to the powers and regulatory framework for consolidated and cross-border supervision. The FSAP undertook a full graded Basel Core Principles (BCP) assessment of the essential criteria. The 2011 BCP update assessment found that bank regulation and supervision was of high quality and no principles were scored non-compliant or materially non-compliant. The current assessment shows that the SBS has maintained and further enhanced its regulatory and supervisory framework.

Abstract

The overall quality of Peru’s supervisory approach and regulation of the banking sector is strong. Some areas for enhancement remain. A key area that needs strengthening relates to the powers and regulatory framework for consolidated and cross-border supervision. The FSAP undertook a full graded Basel Core Principles (BCP) assessment of the essential criteria. The 2011 BCP update assessment found that bank regulation and supervision was of high quality and no principles were scored non-compliant or materially non-compliant. The current assessment shows that the SBS has maintained and further enhanced its regulatory and supervisory framework.

Summary and Main Findings1

A. Summary

1. The overall quality of Peru’s supervisory approach and regulation of the banking sector is strong. Some areas for enhancement remain. A key area that needs strengthening relates to the powers and regulatory framework for consolidated and cross-border supervision.

2. The FSAP undertook a full graded Basel Core Principles (BCP) assessment of the essential criteria.2 The 2011 BCP update assessment found that bank regulation and supervision was of high quality and no principles were scored non-compliant or materially non-compliant. The current assessment shows that the SBS has maintained and further enhanced its regulatory and supervisory framework.

3. The SBS followed up on most of the recommendations made in 2011 BCP assessment. It expanded its resources and specialized units (e.g. information technology supervision), strengthened consolidated supervision, established continuous monitoring of beneficial ownership, and implemented Pillar 2. Additionally, the supervision of more qualitative elements such as governance, management and internal controls has been improved. The SBS also made progress on the implementation of consolidated supervision, however the current framework is not yet up to international standards and needs further enhancements. One of the few recommendations that has remained outstanding is related to the improvement of the legal protection of the SBS staff, for which the General Financial System Law (LGSF) would need to be amended.

4. Since 2011, the SBS has made significant progress on the implementation of the Basel regulatory reform agenda. While the implemented methodology for the capital conservation buffer, counter-cyclical buffer, and the buffer and framework for domestic-systemically important banks (D-SIBs) is different than that of the Basel framework, the developed approach, tailored to the local characteristics of the financial system, aims to achieve the same objectives. A remaining substantive difference is the use of the Basel II capital definition, which is embedded in the LGSF. The SBS also implemented the Liquidity Coverage Ratio (LCR), is in process of the implementation (tailored to the local characteristics) of the Net Stable Funding Ratio (NSFR), and incorporated in its regulatory framework the Basel guidelines for corporate governance.

5. Notwithstanding the progress made, some areas for enhancement remain. These relate amongst others to the SBS’s internal governance, control and accountability framework, which could be strengthened amongst others by enhancing the position of the internal audit department and setting up an Audit Committee, and its engagement with the Board of Directors of supervised institutions.

6. Although the SBS made progress on the implementation of consolidated supervision, the current supervisory powers and approach fall short of the international standards. Two of the four systemic banks are part of Peruvian (in terms of management and location of main activities) internationally active conglomerates. The SBS does not have the power to regulate holding companies and other entities of the wider conglomerate, two of which are companies incorporated in The Bahamas and Bermuda. The SBS, in assuming its role as home supervisor, is currently working through the supervised subsidiaries in Peru and using its powers to put limitations on the supervised institutions in Peru if it observes weaknesses on a conglomerate level. Finally, while ownership and group structures are transparent and the SBS has a sound supervisory approach towards related party and intra-group lending, the supervisory approach used to assess financial group’s governance, capital, and overall risk management and liquidity risk management needs enhancement.

B. Main Findings

Responsibilities, Objectives, Powers, Independence, and Accountabilities (CPs 1–2)

7. SBS responsibilities, objectives and powers are clearly defined albeit impaired by legal limitations regarding consolidated supervision. SBS is the banking supervision authority in Peru and it has all the necessary powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns. A significant shortcoming, nevertheless, is that its supervisory powers are limited with regard to direct access to parents and affiliates, including non-financial subsidiaries and other affiliates of the parent, all being outside of the direct supervisory perimeter. To redress the absence of this power, the SBS is working through the licensed subsidiaries in Peru and using its powers to put limitations on the licensed institutions if it observes weaknesses on a group level. However, the regulations imposed through this approach on financial groups, for which the SBS has assumed the role of home supervisor, are not as comprehensive (in particular regarding corporate governance and risk management) as the regulations for the licensed entities. These observed weaknesses in the regulatory framework for the supervision of Peruvian financial groups have as a root cause the absence of adequate powers to include holding companies and affiliates in the scope of supervision.

8. SBS has operational independence and no budget constraints, however, further enhancements in terms of legal protection and accountability would be beneficial. Legal protection should be enhanced as current provisions extend only to the Superintendent and Deputy Superintendents and even in those cases covering only the first five years after they have left office. Governance and accountability arrangements have further room for improvement, particularly regarding the assessment of the effectiveness of supervisory activities and further disclosure to the general public. This will require enhanced transparency of supervisory actions beyond the issuance of annual reports. Allocation of resources within banking supervision does take into account the risk profile and systemic importance of individual banks, although the proportion of staff allocated to banks and banking groups, in comparison to the microfinance institutions might need to be reevaluated.

Cooperation, Consolidated Supervision and Home-Host Relationships (CPs 3, 12, and 13)

9. Cooperation and collaboration arrangements with local and foreign authorities are in place. Arrangements currently in place in Peru provide a framework for cooperation and collaboration with relevant domestic and foreign supervisors and do reflect the need to protect confidential information. SBS seems to be actively engaged in cross-border cooperation, including exchanges of information and cooperation on examinations, even beyond its supervisory powers. Particularly regarding domestic authorities, SBS does not seem to feel the need to exchange much information in order to perform its supervisory duties, although providing information as requested.

10. Consolidated Supervision is a priority for SBS, albeit impaired by gaps in the legal framework. Given the legal limitations, SBS has done a remarkable job over recent years in terms of gathering information on the conglomerates, monitoring their activities and requiring, by enforcing through the supervised entities and moral suasion, prudential requirements and controls, and, to a certain extent, also acting as “the facto” home supervisor. The lack of legal enforceability of supervisory requirements directly to the holding company and the existence of non-negligible cross-border operations (and taking into account that one of the financial groups has the strategy to look for expansion opportunities abroad), outside the direct supervisory perimeter are issues of concern. The fact that the holding company can have all types of investments in non-financial entities and its risk management and controls are not under the formal scrutiny of the SBS are also reasons for concern, even if the investments are deducted from the regulatory capital at the financial group level. Moreover, its supervisory approach to the group-level assessment of governance, risk management, capital adequacy and liquidity risk management needs enhancement.

Permissible activities, Licensing, Transfer of Ownership and Major Acquisitions (CPs 4–7)

11. SBS has a thorough authorizations regime, which would benefit from a few enhancements. Market entry is highly controlled and SBS does overall perform a thorough job in reviewing information provided for authorizations purposes. SBS has the power to review, reject and impose prudential conditions on proposals for transfer of significant ownership or controlling interest above 10 percent held directly or indirectly in existing banks to other parties. The legal and regulatory framework falls short in using the concept of significant influence as a qualitative indicator for significant ownership, which would encompass situations where in practice there is significant influence on the management or policies of the bank, even in situations of stakes below 10 percent. The SBS has the power to approve or reject major acquisitions or investments by a bank including establishment of cross-border operations. The limit established for investments in publicly traded companies (no more than 50 percent of the invested company, up to 10 percent of regulatory capital), nevertheless, might result in banks having high stakes and controlling interest/influence in non-financial companies.

Ongoing Supervision (CPs 8–10)

12. The SBS has a robust supervisory approach, moving towards a more risk-based framework. The Supervisory approach is supported by a rating methodology that encompasses a forward-looking perspective, assessing and addressing risk emanating from banks and the banking system. Elements related to the conglomerate of which a licensed institution is part are taken into account for overriding purposes, but are not embedded into the rating. SBS seems to have a deep knowledge of the operations and risk profile of the major banks operating in Peru, making effective use of a broad range of information sources. Interactions with senior management and board have been enhanced but there is still room for further improvement. Resolvability of banks is a topic yet to be tackled by SBS.

13. A broad range of techniques and tools, supported by a broad set of information and prudential reports, enable the implementation of the supervisory approach. The integration of its on and off-site activities has been beneficial and the split between a specialized risk Deputy Superintendence (SAR) and another one (SABM) in charge of individual banks seems to be working well. In addition to the on-site examinations, SBS produces an array of reports produced by both Superintendences, sometimes with overlap between them. Off-site surveillance is yet to acquire a platform similar as for the on-site activities, facilitating analysis and monitoring of follow up activities.

Corrective and Sanctioning Powers (CP 11)

14. Early action and moral suasion play an important role in SBS effectiveness. The broad powers granted by the legal framework, paired with a moral suasion culture have enabled SBS to successfully tackle supervisory concerns, acting at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. SBS has experienced senior staff that ensure consistency in the application of the corrective actions. SBS would benefit, nevertheless, from written procedures operationalizing its broad legal powers into a range of supervisory tools to be systematically applied depending on the severity of the situation.

Corporate Governance and Risk Management (CPs14–15)

15. The SBS issued in 2017 a new Corporate Governance and Risk Management Regulation incorporating the main elements of the Basel Corporate Governance Principles for Banks. In its regulatory and supervisory framework, the SBS puts significant emphasis on risk management and corporate governance of the licensed institutions and sets clear expectations regarding the role and responsibilities of the Board and the structure of its committees. However, the actual engagement with the Board and individual Board members could be intensified as it is currently mainly limited to an annual meeting with one of the independent Board members.

16. The essential criteria for the evaluation of corporate governance apply explicitly to banks and banking groups. SBS’ governance and risk management regulation does not apply on a group-level for institutions for which the SBS is the home supervisor. As a result, the individual group Board members are not subject to a formal fit and propriety review by the SBS, group Board members are not required to sign-off on their responsibilities as required for Board members of supervised institutions, and the supervisory approach to corporate governance on a group-level is less developed. As mentioned, the root cause of the indirect supervision and less comprehensive regulatory framework for financial groups for which the SBS is the home supervisor, results from its limited powers in this regard.

17. The Consolidated Supervision Regulation to a certain extent redresses the fact that the risk management regulations do not apply on a group-wide basis. The Consolidated Supervision Regulation requires the licensed institution to assure that the group has adequate risk management frameworks in place. This indirect form of regulation and supervision seems currently to work, because the main activities of the Peruvian conglomerates are still taking place in Peru. However, this approach is not optimal and might become ineffective when the cross-border activities of these groups increase.

Capital Adequacy (CP 16)

18. The SBS has made significant progress on the implementation of the Basel III regulatory reform agenda. Although there are differences in the implementation, in particular regarding the different capital buffers, the implemented approaches aim to achieve the same objectives and broadly equivalent overall capital levels. Apart from introducing the Basel III capital definition and formally incorporating the supervisory review of the Internal Capital Adequacy Assessment Process (ICAAP) into account in SBS’ internal rating methodology, there are other elements that could be improved. For example, the countercyclical buffer is activated if GDP growth is above 5 percent, which may be not effective in situations where there is excessive credit growth when GDP growth is still below 5 percent. In addition, the systemic risk and single name risk buffers need to be reviewed as they are currently not commensurate with the risk they are supposed to cover. These issues have already been identified by the SBS and are part of the review of the Additional Capital Requirements Regulation that is currently taking place.

19. The supervisory group capital adequacy assessment needs enhancement. The group capital adequacy assessment could be further enhanced by also taking into account: i) the capital adequacy of the holding on a solo level (in order to determine if the excess capital is available on a holding level); ii) the location of capital within the conglomerate, including the risk of ringfencing/non-transferability of capital allocated to entities supervised by authorities abroad; iii) the extent to which excess capital at a group level can be completely allocated to support the financial activities of the conglomerate. The assessment of the consolidated capital adequacy does not take adequately into account the necessary adjustments to account for the change in accounting standards; solo financials based on SBS accounting standards, while consolidated financials might be based on IFRS (which could impact the provisioning levels and therefore the available capital on a consolidated basis).

Prudential Regulations and Requirements (CP17–CP25)

20. The regulatory and supervisory approach and practices regarding the other prudential regulations and requirements are in general sound. As observed in the 2011 BCP assessment, the market risk regulation is outdated. The SBS has recently issued a revised regulation for consultation to the industry, which when issued should bring this regulation again in line with international standards.3 In practice the outdated regulation has not constrained the SBS in conducting effective supervision. With regard to liquidity, the SBS has implemented the LCR (tailored to the local circumstances) and is in the process of implementing the NSFR. With the revised liquidity risk management regulation as issued in 2012, the SBS also requires groups for which it is the home supervisor, to have liquidity contingency plans on a group level. While the regulation requiring liquidity contingency plans on a group level has been issued in 2012, the actual development of these plans are still in their initial phase.

Internal Control, Internal and External Audit, Financial Reporting and Disclosures (CP26–28)

21. The regulatory and supervisory frameworks for internal control, audit and financial reporting and disclosures are adequate. Regarding disclosures, the SBS could further improve the qualitative disclosures by implementing the recommendations of Enhanced Disclosure Task Force of the Financial Stability Board and/or the implementation of Pillar 3. The SBS could also improve its engagement with the external auditors. In addition, it could assess more in depth whether the current provisioning requirements are adequate when compared with the new IFRS9 standard, while also considering possible issues as a result of the widening gap in accounting standards between supervised institutions (SBS standards) and consolidated financial groups (might be based on IFRS standards). Overall the frameworks covering these principles are considered adequate taking into account the current state of development and complexity of the financial markets and banking system.

Abuse of Financial Services (CP 29)

22. SBS has a robust AML/CFT framework, but the limited sanctions can potentially curb its effectiveness. The regulatory and supervisory framework has been strengthened in recent years with the issuance of the AML/CFT risk management regulation and continuous enhancements in supervisory procedures. An important limitation in the current framework is the fact that sanctioning for banks is confined to fines up to USD 250,000, not enough to curb behavior.

Introduction and Methodology

A. Introduction

23. This assessment of the current state of the implementation of the Basel Core Principles for Effective Banking Supervision in Peru has been completed as a part of the Financial Sector Assessment Program (FSAP) mission undertaken by the International Monetary Fund (IMF) and World Bank during October of 2017 at the request of the Peruvian authorities. It reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment (November 1, 2017). It is not intended to represent an analysis of the state of the banking sector or crisis management framework, which are addressed in other parts of the FSAP.

24. An assessment of the effectiveness of banking supervision requires a review of the legal framework, and detailed examination of the policies and practices of the institutions responsible for banking regulation and supervision. In line with the BCP methodology, the assessment focused on the Superintendence of Banks, Insurers and Private Pension Funds (SBS) in their role of supervisor of the banking system, and did not cover the specificities of regulation and supervision of other financial intermediaries. It is important to note, however, that to the extent that SBS is a unified supervisor responsible for other entities of the financial sector, the assessment of banking supervision in Peru may provide a useful picture of current supervisory processes applicable to other deposit taking financial institutions supervised by it.4

B. Information and Methodology Used for Assessment

25. Peru has been assessed against the Revised Core Principles Methodology issued by the BCBS (Basel Committee of Banking Supervision) in September 2012.5 The current assessment was thus performed according to a revised content and methodological basis as compared with the previous BCP assessment carried out in 2011. It is important to note that the two assessments will not be directly comparable, as the revised BCP have a heightened focus on corporate governance and risk management and its practice by supervised institutions and its assessment by the supervisory authority, raising the bar to measure the effectiveness of a supervisory framework (see box for more information on the Revised BCP).

26. The Peruvian authorities chose to be assessed and rated on the Essential Criteria (EC), and therefore the Additional Criteria were not considered in the final rating. To assess compliance, the BCP Methodology uses a set of essential and additional assessment criteria for each principle. The EC were usually the only elements on which to gauge full compliance with a Core Principle (CP). The additional criteria (AC) are recommended best practices against which the authorities of some more complex financial systems may agree to be assessed and rated. The assessment of compliance with each principle is made on a qualitative basis. A four-part grading system is used: compliant; largely compliant; materially noncompliant; and noncompliant. This is explained below in the detailed assessment section. The assessment of compliance with each CP is made on a qualitative basis to allow a judgment on whether the criteria are fulfilled in practice. Effective application of relevant laws and regulations is essential to provide indication that the criteria are met.

27. The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with officials of the SBS, and additional meetings with auditing firms and banking sector participants. The SBS provided a comprehensive self-assessment of the CPs and facilitated access to all the relevant supervisory documents and files, staff, and systems.

28. The team appreciated the very high quality of cooperation received from the SBS. The team extends its thanks to the SBS staff who provided excellent cooperation, including extensive provision of documentation and access and for facilitating meetings with other stakeholders. In particular, the team would like to thank the SBS staff who responded to the extensive and detailed requests promptly and accurately during the assessment.

29. The standards were evaluated in the context of the Peruvian financial system’s structure and complexity. The CPs must be capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, a proportionate approach is adopted within the CP, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the CPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, and risk profile and cross-border operation of the banks being supervised. In other words, the assessment must consider the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.

30. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions required judgments by the assessment team. The assessment of the current legal and regulatory framework and supervisory practices against a common, agreed methodology should, however, provide the supervisors of Peruvian banks with an internationally consistent measure of the quality of its banking supervision in relation to the CPs, which are internationally acknowledged as minimum standards, and point the way forward.

31. To determine the observation of each principle, the assessment has made use of five categories: compliant, largely compliant, materially noncompliant, noncompliant, and non-applicable. An assessment of “compliant” is given when all ECs are met without any significant deficiencies, including instances where the principle has been achieved by other means. A “largely compliant” assessment is given when there are only minor shortcomings, which do not raise serious concerns about the authorities’ ability to achieve the objective of the principle and there is clear intent to achieve full compliance with the principle within a prescribed period (for instance, the regulatory framework is agreed but has not yet been fully implemented). A principle is considered to be “materially noncompliant” in case of severe shortcomings, despite the existence of formal rules and procedures and there is evidence that supervision has clearly not been effective, the practical implementation is weak or that the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve compliance. A principle is assessed “noncompliant” if it is not substantially implemented, several ECs and ACs are not complied with, or supervision is manifestly ineffective. Finally, a category of “non-applicable” is reserved for those cases that the criteria would not relate the country’s circumstances.

Peru: The 2012 Revised Core Principles

The revised BCPs reflect market and regulatory developments since the last revision, taking account of the lessons learned from the financial crisis in 2008/2009. These have also been informed by the experiences gained from FSAP assessments as well as recommendations issued by the G-20 and FSB, and take into account the importance now attached to: (i) greater supervisory intensity and allocation of adequate resources to deal effectively with systemically important banks; (ii) application of a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analyzing and taking pre-emptive action to address systemic risk; (iii) the increasing focus on effective crisis preparation and management, recovery and resolution measures for reducing both the probability and impact of a bank failure; and (iv) fostering robust market discipline through sound supervisory practices in the areas of corporate governance, disclosure and transparency.

The revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. The supervisors are now required to assess the risk profile of the banks not only in terms of the risks they run and the efficacy of their risk management, but also the risks they pose to the banking and the financial systems. In addition, supervisors need to consider how the macroeconomic environment, business trends, and the build-up and concentration of risk inside and outside the banking sector may affect the risk to which individual banks are exposed. While the BCP set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.

The number of principles has increased from 25 to 29. The number of essential criteria has expanded from 196 to 231. This includes the amalgamation of previous criteria (which means the contents are the same), and the introduction of 35 new essential criteria. In addition, for countries that may choose to be assessed against the additional criteria, there are 16 additional criteria.

While raising the bar for banking supervision, the CPs must be capable of application to a wide range of jurisdictions. The new methodology reinforces the concept of proportionality, both in terms of the expectations on supervisors and in terms of the standards that supervisors impose on banks. The proportionate approach allows assessments of banking supervision that are commensurate with the risk profile and systemic importance of a wide range of banks and banking systems.

Institutional and Market Structure—Overview

A. Institutional Overview

32. Peru’s General Financial System Law (“Ley General del Sistema Financiero, or LGSF) assigns responsibility for the approval and supervision of banks and other nonbank financial intermediaries to the SBS. The law provides the SBS with the powers necessary for licensing entry, approving permissible activities, enacting regulations, and supervising compliance with laws and regulations, including its enforcement and to resolve failing institutions. The LGSF together with the regulations (Resolutions) issued by the SBS provides a comprehensive legal and normative framework for banking supervision in Peru. Under the Law, the SBS has no supervisory board, but is on certain aspects accountable to the General Controller of the Republic.

Figure 1:
Figure 1:

Peru: Organogram SBS

Citation: IMF Staff Country Reports 2018, 366; 10.5089/9781484390139.002.A001

Source: SBS.

33. The SBS is a large organization, with seven deputy superintendents in charge of supervising financial institutions. The Superintendeces for Private Pension Funds Administrators, Banking Sector (incl. microfinance companies) (herein further SABM) and Insurance are in charge of the day-to-day supervision of the supervised financial institutions. The three Superintendences responsible for the day-to-day supervision are supported by four advising Superintendences: Legal Advice; Economic Studies (SAEE); Financial Risks (SAR), and; Market Conduct and Financial Inclusion.

34. The SABM has two General Intendance; one for Banking Supervision (BSD) and one for the supervision of microfinance institutions over which the staff are about evenly distributed. The nine different specialized departments of the SAR support the supervision of financial risks of the three-line Superintendences, however about 55 percent of its resources are spent on bank supervision, which combined with the BSD staff implies that about 130 staff are involved on a day-to-day basis in prudential supervision of the twenty (sixteen commercial and four state-owned) licensed banks. Both SABM and SAR conduct a mix of onsite and offsite activities governed by the internal rating assigned to each institution. Among several others, two standing committees, notably on Internal Classification of Financial Institutions (Rating Committee) and on Consolidated Supervision, coordinate the relevant supervisory actions. In addition, there is a Supervision Policies Committee, which reviews and approves the policies, and supervisory tools and more recently the SBS has set up an internal Financial Stability Committee.

35. SAEE provides input on stress-testing, conducts biannually a top-down stress test for the banking system and prepares a quarterly (internal) financial stability report that highlights macro financial risks. Apart from legal advice on policy development, the Superintendence for Legal Advice also has a Department for the Supervision of Contracts of Financial Services, which supports the evaluation of the management of losses due to disputes, trails, breaches of contracts, the compliance officer function and contracts of regulated entities.

B. Market Structure6

36. The financial system is relatively small, with total assets of 95 percent of GDP, and displays uneven levels of development across subsectors. The largest sub-sectors are comprised of banks (sixteen commercial and four state-owned) and private pension funds and the banking sector is quite concentrated, with the four largest banks accounting for more than 83 percent of commercial banks assets (Table 1). There are two large Peruvian (in terms of main shareholders, activities and management) conglomerates with foreign holding companies for which the SBS is operating de facto as the home supervisor. There is a substantial presence of foreign banking groups: eleven of the sixteen banks are foreign-owned, including two of the top four banks, and they account for about 48 percent of commercial bank assets. Banks have generated high levels of profits with system return on equity (ROE) at around 19 percent in 2016. The insurance sector is small and penetration is low.

37. A wide range of microfinance institutions (MFIs) also offer financial services, often in rural areas and for the lower income urban population. These MFIs include: finance companies (empresas financieras), savings and loans (cajas municipales and cajas rurales de ahorro y crédito), and traditional microfinance (entidades de desarrollo de la pequeña y microempresa). The system also includes financial cooperatives (cooperativas de ahorro y crédito - COOPAC) on which little information is available. Currently a three-tier regulatory framework is being contemplated in which the supervision of the top 8-10 COOPACs will go to the SBS, Tier 2 institutions will be supervised by FENACREP (as per current model) and Tier 3 COOPACs will be registered and receive basic monitoring. Although the different MFIs only represent about 6 percent of the total financial sector assets (but in rural areas important from a financial inclusion perspective), the SBS has allocated significant supervisory resources to these institutions given their level of risk management and corporate governance practices.

Table 1.

Peru: Financial Sector Structure

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Source: SBS.

Preconditions for Effective Banking Supervision7

A. Sustainable Macroeconomic Policies

38. Peru has been one of the top performing Latin American economies over the past decade, and prospects remain sound. Despite a challenging external environment, Peru’s average GDP growth exceeded 5 percent during the period 2008-2016, while inflation remained subdued, averaging 3.25 percent. GDP growth slowed down in early 2017, largely due to the impact of the El Niño flooding and uncertainty caused by the Odebrecht scandal, and is estimated to finish the year at 2.7 percent. In the coming years, however, Peru is expected to grow near potential (3.75 percent), driven by increasing investment, with inflation staying below 3 percent. The robust growth, along with a conservative fiscal management, has led to a reduction of public debt to about 24.4 percent of GDP in 2016, from 32 percent at end-2007.

39. High financial dollarization continues to be a source of vulnerability. Although financial dollarization has declined substantially from its peak level of around 80 percent in the early 2000s, the current levels of credit and deposit dollarization—around 29 and 40 percent, respectively—are still a source of risk for the private sector balance sheets. The strong exchange rate depreciation between May 2013 and February 2016 led to some reversal of the dedollarization of deposits. During this period, BCRP and the SBS implemented policies to disincentivize lending in foreign currency, such as dedollarization repos, FX credit reduction targets, and additional capital surcharges on dollar lending, which contributed to a sustained decline in credit dollarization.

B. Framework for the Formulation of Financial Stability Policies

40. Peru’s macroprudential framework is less formal than in many other countries, although it has been working effectively so far. There is no designated macroprudential authority. However, the SBS Superintendent attends the quarterly BCRP Board of Directors meetings, and high-level staff of the MEF, BCRP, and SBS meet on a regular informal basis to discuss financial sector developments and policy issues. Systemic risk analysis is fragmented among the BCRP, SBS and Superintendencia del Mercado de Valores (SMV), but information gaps exist. The BCRP and SBS prepare regular Financial Stability Reports; only BCRP publishes its report semiannually.

41. The bulk of the macroprudential tools are with the SBS. These include capital surcharges for systemically important financial institutions, capital conservation buffers, countercyclical capital requirements, dynamic provisioning, liquidity requirements, and capital surcharges for a range of risks. The BCRP uses reserve requirements and repo operations both as monetary policy and macroprudential tools. In recent years, a large focus has been on reducing the dollarization levels of the economy, particularly on household borrowing.

C. Public Infrastructure

42. Corporate legislation includes the following laws.

  • General Law on Societies (GLS), Law 26887, that provides for corporate matters related to legal entities for profit. It includes the different types of societies.

  • General Financial System Law, Law 26702 (LGSF), including corporate matters that must be complied with by institutions under SBS supervision in addition to the ones provided by the GLS.

  • Consumer Defense Code, Law 29571, protects consumers’ access to products and services and benefit from rights and mechanisms for their protection, reducing information asymmetry, correcting, preventing, and eliminating behaviors and practices that affect their legitimate interests.

43. The SBS issues the accounting rules and establishes the structure of the financial statements that financial institutions must submit to the SBS and disclose to the public. The supervisor also provides guidance on valuation standards and detailed instructions for submitting reports with rules on loans and provisions, investments, derivatives, etc. Accounting standards are based on the International Financial Reporting Standards (IFRS), establishing guidelines that are the most prudential for systems such as the Peruvian system.

44. The SBS establishes external audit requirements and standards for supervised institutions. Audit firms will conduct their reviews in accordance with the International Standards on Auditing and Related Services issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC), as approved by the Council of Deans of the Association of Public Accountants of Peru, and with the provisions established by the SBS.

45. The Stock Market Superintendence (SMV) is the government entity in charge of regulating and supervising securities market. Likewise, in accordance with Law 29440, the Central Bank is the body that regulates payment systems, and the SMV does the same with security settlement systems. The National Institute for the Protection of Competition and Copyright (INDECOPI) is responsible for protecting the rights of consumers and ensuring the adequacy of financial services based on the information provided, amongst other functions.

46. The SBS, as established by the LGSF, manages the Risk Registry. The Risk Registry is an integrated system for registering financial, credit, commercial and insurance risk, containing information on debtors of the supervised institutions. Although the SBS Risk Registry can provide global and systematised information to third parties, such as the commercial credit registries (thus becoming one of the sources of information of these registries), and individually to information owners, its main purpose is for bank supervision. Its existence permits an internal analysis of credit risk evolution, the rating of debtors and provisions, the verification of individual credit limits; and supports credit management by the supervised entities themselves. These services are inherent to the oversight function of the SBS, which seeks to protect the creditworthiness of financial entities and thus protect the savings of the public with whom such entities operate.

D. Framework for Crisis Management, Recovery and Resolution8

47. The resolution legal framework is an administrative process with the potential for judicial review. The LGSF states that the SBS has the power to put a troubled financial institution under surveillance and/or in an intervention regime, culminating either in the institution’s recovery or—if applicable—with its dissolution and liquidation. Currently, the SBS uses the surveillance regime—which is limited to 45 days but renewable for another 45 days under certain circumstances—to prepare for intervention. In the surveillance regime, the SBS does not take control but permanently positions SBS personnel in the entity. In the intervention stage, the SBS takes control and the operations of the entity cease by law.

48. The resolution authority is the SBS, which triggers the resolution process and decides the tools to be used. The Fondo de Seguro de Depositos (FSD) is not involved in the resolution decision or in the process for deciding which tools to use. It only provides the financial support for the resolution tool selected by the SBS. The BCRP can provide Emergency Liquidity Assistance (ELA).

49. Peru’s deposit insurance system, administered by the FSD, is a “paybox plus” arrangement. Articles 144 through 157 of the LGSF govern the FSD and, inter alia, establish it as a special private legal entity but also provides that the SBS shall supply to FSD the personnel, premises, equipment, and installations that it will require.

50. All deposit-taking financial institutions authorized by the SBS are compulsory members of the FSD. Currently, there are 44 institutions that are members: 16 banks, 10 financial companies, 12 municipal savings and loan institutions, and 6 rural savings and loan institutions. The deposit insurance premium the institutions have to pay is determined on their external rating (the LGSF requires these institutions to have at least two external ratings).

E. Market Discipline

51. The SBS establishes the information disclosure standards to be applied by the supervised institutions. The Accounting Manual published by the SBS establishes the periodicity with which the information of supervised companies must be disclosed. At the same time the LGSF requires all banks to be listed in the stock exchange. As a result, all commercial banks are also subject to the disclosure requirements of the SMV. The qualitative and quantitative disclosures required by the SMV are available per institution on its website. In addition, the SBS publishes extensive quantitative information of the banks and banking system on its website.

Detailed Assessment

A. Supervisory Powers, Responsibilities and Functions

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