IMF published its staff report and selected issues report in the context of the 2017 Article IV consultation with Costa Rica. The reports discuss the challenges facing the financial sector in Costa Rica and examine the implementation of Basel III in the country.
The staff report highlights that the introduction of micro- and macro-prudential tools to contain systemic financial risks is welcomed, but more may be needed. Further tightening of regulatory requirements should be considered if there is no evidence of a reduction in banks’ foreign exchange exposures, or if the deceleration of foreign exchange credit proves temporary. In addition, implementation of the pending 2008 FSAP recommendations and adoption of Basel III standards would improve resilience of the financial system. Substantial progress has been made in adopting risk-based supervision; however, advances toward the implementation of other key FSAP recommendations, notably crisis management and the bank resolution framework, have been slow due to the crowded legislative agenda. Staff argued that the regulatory and risk management frameworks would also benefit from gradually introducing Basel III capital requirements and liquidity standards. The mission welcomed the authorities’ plan to introduce in 2018 a Net Stable Funding Ratio, in addition to the Liquidity Coverage Ratio enacted in 2015. Additionally, the credit gap proves to be a robust early warning indicator of future financial distress, and the activation of countercyclical capital buffers (CCyBs) based on it would strengthen the resilience of banks through the financial cycle, although their implementation would likely entail non-negligible challenges. Progress toward past FSAP advice and the implementation of Basel III standards will be assessed, among other topics, by an imminent financial sector stability review.
The selected issues report reveals that Costa Rica is gradually adopting Basel III standards. The authorities expect to finalize regulations to introduce the Basel III definition of regulatory capital and leverage ratio by the end of 2017 and implemented, in 2016, the countercyclical provisions based on the growth of bank-specific loan portfolios. In general, banks are well-placed to comply with Basel III capital requirements: the minimum capital requirement is 10%. The capital adequacy ratio of banks and cooperatives satisfies Basel III requirements when adjusted for the new capital guidelines, although it declines due to increases in risk-weighted assets (RWA). Supervisory authorities have also advanced in implementing risk-based supervision (Pillar 2) and adopting a cross-border consolidated scheme that allows for the identification of risks taken by financial conglomerates. Along with the capital conservation buffer (CCB), the CCyB is a key macro-prudential policy tool to promote the conservation of capital and the buildup of adequate buffers above the minimum that can be drawn down in periods of stress. According to Basel III guidelines, the CCB is to be set at 2.5% of RWA and it can be drawn down when losses are incurred, to avoid the breach of minimum capital requirements. The CCyB varies between zero and a “non-binding” cap of 2.5% of RWA: authorities should increase the buffer rate when risks associated with excessive credit growth build-up and they should lower it when risks materialize to sustain the flow of credit to households and corporations and contain the risk of systemic deleverage.
Keywords: IMF, Americas, Costa Rica, Banking, Basel III, CCyB, Capital Adequacy
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