May 29, 2018

IMF published its staff report and selected issues report post conclusion of the 2018 Article IV consultation with Colombia. Directors noted that the banking system has been resilient amid the economic slowdown, reflecting partly effective financial supervision and ample capital and liquidity. They welcomed the recent regulatory measures to homogenize banks’ loan restructuring practices and to bring regulation closer to Basel III standards, including through the implementation of the Conglomerates Law. Finalizing the Conglomerates Law and moving closer to Basel III standards will strengthen financial stability.

The staff report reveals that policy measures in Colombia since the 2017 Article IV consultation have been broadly aligned with past IMF advice. Regulatory changes to risk management and loan restructuring practices of banks have improved the monitoring of nonperforming loans (NPLs) while the implementation of the conglomerate laws has continued. Although rising (to 4.3% in December 2017, from 3.3% a year before), NPLs are expected to start decreasing in the second half of 2018. Provisions fell to 126% of NPLs but continue to be ample. tier 1 and regulatory capital increased to 12.4% and 18.6% of risk-weighted assets, respectively, by December 2017. SFC, which is the financial supervisor introduced a new regulation, in October 2017, to foster early detection of credit risk and intensified bank-by-bank monitoring. Official stress tests suggest banks are resilient to macroeconomic shocks. The authorities performed a top-down stress testing exercise, in which the economy experiences a slowdown over six quarters. The scenario would lead to a significant deterioration of the lending portfolio, with NPLs nearly doubling, but the aggregate solvency ratio would remain above the 9% regulatory minimum. 

The Conglomerates Law that follows FSAP recommendations was passed in September 2017 and will come into effect in 2018. Draft regulation specifying capital adequacy and related-party exposures for conglomerates has been circulated for comments and a final version is expected to come into effect by September 2018. Capital requirements for all banks are to be gradually strengthened over a six-year period. The plan is to introduce tier 1 capital minimum of 6%, along with the conservation and domestic systemically important bank (D-SIB) buffers at 2.5% and 1%, respectively, by 2023. During 2018, the plan is to modify the definition of capital and risk-weighted assets to bring them closer to international standards. Modification of the liquidity coverage ratio to differentiate by type of depositor, in accordance with Basel III, is in progress and is expected to be sent for comments during the first half of 2018. The plan to introduce a liquidity indicator similar to the net stable funding ratio, while taking into account currency mismatches and roll-over risks of derivatives, is in progress and is to be sent for comments during the first half of 2018. 

The selected issues report examines the outlook for export growth, the significant reduction in labor informality, and the fiscal response to the oil shock in Colombia. 

 

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Keywords: Americas, Colombia, Banking, Basel III, Conglomerates Law, NPLs, Stress Testing, Article IV, FSAP, IMF

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