April 29, 2019

IMF published its staff report and selected issues report under the 2019 Article IV consultation with Colombia. Against the backdrop of a sound banking system, Directors commended the authorities for continued advances in financial regulation and supervision; these developments include the steps taken to align regulation with Basel III standards over time and the implementation of the Conglomerates Law, which should further strengthen the financial system.

The staff report highlighted that credit growth is expected to increase and non-performing loans (NPLs) are expected to gradually decline in line with the economic recovery. Banks remain well-capitalized with provisions stable at approximately 130% of NPLs and core tier 1 and regulatory capital having been raised to 13.2% and 18.9% of risk-weighted-assets (RWAs), respectively. SFC, the financial supervisor of the country, is implementing the Conglomerates Law and Basel III capital and liquidity standards, in line with previous staff advice. SFC has the authority to supervise 13 identified financial conglomerates covered by the conglomerates law. These entities will have to comply with capital adequacy requirements by November 2019 while the guidelines for conflicts of interest within financial conglomerates will be introduced in February 2020.

To bring capital standards closer in line with Basel III, the parameters for calculating RWA will be redefined and the definition of technical capital will be modified to exclude intangible assets in February 2020. The net effect of these two changes will raise most banks’ capital ratios. Meanwhile, capital conservation buffers and systemic risk buffers for domestic systemically important banks (D-SIBs) will be gradually introduced over a four-year period (February 2020 to February 2024). The liquidity coverage ratio (LCR) has been modified with the assumed run-off rates now varying with deposit type. By June 2020, banks will also have to comply with the net stable funding ratio (NSFR). The authorities revealed their intention to introduce a capital requirement for operational risk for banks, with a decree outlining the specific details to be published in the fourth quarter of 2019. 

The staff report mentions that the planned regulatory measures should further strengthen the regulatory framework. The introduction of the Conglomerates Law is an important step to strengthen the stability of the financial system and mitigate risks associated with Colombian banks’ exposure to Central America. The gradual implementation of additional capital buffers is appropriate to prevent credit supply bottlenecks. However, redefining technical capital and risk weighted assets in 2020 will temporarily lower required capital ratios for most banks until Basel III capital standards are fully implemented. Heightened supervisory vigilance would, therefore, be appropriate during this transitional period.

With NPLs elevated, SFC should remain alert and proactive to ensure that problem assets continue to be sufficiently provisioned for. Furthermore, staff welcome the SFC’s continued commitment to closely monitor the modified loans portfolio to avoid build-up of excess credit risk. The authorities communicated that they will be more reliant on financial supervision during the transition period for new financial regulations. SFC expressed its continued commitment to exercise vigilance following a period of rising NPLs and to continue to closely monitor banks’ modified loans portfolios. The authorities also agreed that during the transition period under which additional capital buffers are introduced, financial stability would be more reliant on financial supervision.

 

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Keywords: Americas, Colombia, Banking, Basel III, NPLs, Article IV, Conglomerates Law, Regulatory Capital, RWA, LCR, NSFR, IMF

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