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June 08, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Guatemala. Directors welcomed the soundness of the financial sector. Nevertheless, there remains a need to further develop macro-prudential policies and move toward Basel III standards, implement consolidated supervision, reinforce bank resolution, and strengthen the AML/CFT framework.

The staff report notes that the financial system is sound and well-regulated while vulnerabilities seem manageable. Banks are well-capitalized, appear to have sufficient liquidity, and have low non-performing loans (NPLs). The staff stress test results indicate that sharp increases in interest rates or severe liquidity shocks in the U.S. dollar funding markets could challenge banks’ resilience, although such shocks would be absorbed within available capital and liquidity buffers. Banks remain exposed to exchange-rate-related credit and funding risk. The report highlighted various measures that could further modernize the financial sector:

  • Guatemala should gradually move toward Basel III standards. The authorities could also strengthen the macro-prudential framework by developing systemic risk indicators and by designating, and clearly defining, the responsibility for macro-prudential regulations. Developing macro-prudential policies, implementing consolidated supervision, and reinforcing the bank resolution are all important steps to increase financial sector resiliency. 
  • The new banking law that is being considered by Congress merits support and would strengthen the bank resolution framework and reinforce depositor protection. The legislation would create greater clarity on the triggers for resolution as well as provide safeguards for the use of public funds.
  • The recently adopted laws on microcredit, collateral, and the securitization of accounts receivable are important steps toward fostering financial development and inclusion.
  • Strengthening the AML/CFT framework will help maintain the access of domestic banks to the international financial system and will support efforts against corruption.

The selected issues report examines banking sector vulnerabilities and resilience to shocks. The results of the stress tests to Guatemalan banks’ solvency and liquidity positions suggest that the financial sector is exposed to very severe liquidity shocks in U.S. dollars, but is well-prepared to absorb a range of shocks with available buffers. The capital adequacy ratio for the banking system was 15% as of September 2017, well above the 10% minimum regulatory requirements. The identified vulnerabilities could be mitigated by introducing capital requirements for market risks and adopting the Basel III liquidity coverage ratio in U.S. dollars. The top-down solvency stress test includes credit risk, through an aggregate NPL shock as well as differentiated sectoral shocks; market risk, through interest and exchange rate risk; contagion risk, through interbank exposure; and a set of reverse tests. The reverse test indicates that system-wide NPLs would need to increase substantially for the system-wide CAR to fall below minimum requirements. The liquidity stress test models a simple liquidity drain that affects all banks in the system proportionally to each bank’s liquidity holdings.

 

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Keywords: Americas, Guatemala, Banking, Article IV, NPLs, Basel III, Macro-prudential Policy, AML/CFT, Stress Testing, Capital Adequacy, IMF

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