IMF published its staff report and selected issues report in the context of the Article IV consultation with El Salvador. Directors noted that El Salvador’s banking system is well capitalized and very liquid. Recent credit growth to the productive sectors has been encouraging, but further room for healthy credit expansion remains. Directors acknowledged the recent progress made in risk-based and cross-border supervision. To further improve the resilience of the banking sector, they encouraged the authorities to accelerate the adoption of the crisis management and bank resolution draft law, to strengthen the financing of the lender of last resort facilities, and to create a bank liquidity fund. Directors encouraged continued efforts to strengthen the AML/CFT framework.
The staff report highlights that the banking sector appears solid and credit growth is moderate, but sovereign risk concerns and declining margins are affecting the (mostly foreign-owned) banks. The banking system’s capital adequacy ratio (16.6%) remains well above the required minimum of 12%. The nonperforming loan ratio is 2% and problem loans are amply provisioned. However, abundant liquidity, including due to the lack of viable investment projects, and a declining net interest spread continue to dent bank profitability. Credit growth is moderate at 6% in real terms. The authorities are implementing AML/CFT measures and maintain international cooperation with the U.S. Department of Treasury.
The report also reveals that progress has been made in risk-based supervision and financial inclusion by approving a new law in January 2017. The authorities should continue to strengthen the AML/CFT framework in preparation for the next round of assessment under the CFATF, in 2022. Efforts could be intensified in the areas of systemic liquidity (adequate funding of lender of last resort), banking resolution and crisis management procedures, cross-border supervision, and data availability. These steps would help promote a sound banking system and expansion of credit to productive sectors, including by limiting excessive liquidity holdings.
The selected issues report contains a feature estimating the credit gap, defined as the difference between the credit-to-GDP ratio and its long-term trend. In the case of El Salvador, the estimated threshold is equal to 1.43%, lower than the 2% Basel III micro-prudential rule, which triggers counter-cyclical capital buffers. This is currently positive, but declining and below the critical 2% threshold recommended by Basel III micro-prudential guidelines. The assessment concludes that there is still scope for financial deepening without excessive risks for financial stability. Furthermore, an econometric assessment shows that the recent credit growth is not excessive and is aligned to fundamentals.
Keywords: Americas, El Salvador, Banking, Article IV, Capital Adequacy, Resolution Regime, IMF
Previous ArticleBNM Consults on Pillar 3 Disclosure Requirements for Banks
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI published the key findings of a study on third-party risk management.
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.