October 24, 2018

IMF published its staff report under the 2018 Article IV consultation with Dominican Republic. The report highlights that efforts to strengthen financial sector oversight will enable the financial system to continue supporting strong and inclusive growth. The ongoing emphasis on strengthening oversight over systemic macro-financial risks will further contribute to financial stability. Continued efforts to improve prudential regulation and supervision will complement these reforms, with the objective of fully aligning the regulatory and supervisory framework with international best practices.

The staff report reveals that the financial sector has emerged stronger and better supervised than before the 2003–04 financial crisis. The strengthening of banking supervision and prudential regulations, and monitoring by the Monetary Board, of relevant financial sector developments have also enhanced bank soundness indicators: when compared against its regional peers, the Dominican Republic stands high on all key bank soundness indicators, including solvency, asset quality, and profitability. The report states that non-performing loans (NPLs) increased by about 0.2 percentage points from a year earlier, given the deceleration in economic activity in mid-2017; however, at 1.9% for commercial banks, NPLs remain relatively low and appear overall adequately provisioned.

Ongoing efforts to continue improving prudential supervision and regulation should help to address the risks, but should be complemented with additional efforts. The authorities are considering regulatory changes to liquidity, leverage, and market risk management requirements in 2018 to better align them to international practice. They should also prepare for the eventual adoption of International Financial Reporting Standards (IFRS) 9 through a carefully timed and planned strategy that takes into account the impact on banks. The existing supervisory and regulatory framework may also need to be enhanced to strengthen assessment of intercompany activities, give supervisors adequate powers to require higher capitalization for individual banks, and align the banking law more fully to international standards, following lessons learned in the consolidation process since the 2003–04 crisis. 

The IMF assessment found that systemic risk oversight is being strengthened and macro-prudential policies should be developed in tandem. The central bank has set up a committee responsible for financial stability and macro-prudential policy, which will include a representative from the Superintendency of Banks. The committee is now formally responsible for systemic risk assessment and financial stability, and is working to strengthen systemic oversight and develop macro-prudential policy instruments to fulfill its mandate. Progress has been made to strengthen systemic risk assessment, which would be further enhanced through publication of a financial stability report. Addressing data gaps with respect to sectoral risks will be also be critical to strengthening systemic risk assessment and would enhance lenders’ ability to assess borrower credit risk, thus contributing to financial stability ex ante. Anti-money laundering and combating the financing of terrorism (AML/CFT) law finalized in 2017 will help strengthen technical compliance with international standards. The Dominican Republic is undergoing an assessment of its compliance with the 2012 FATF standard, which will be concluded in mid-2018. Advancing further on effective implementation of international AML/CFT standards will be essential to continued mitigation of risks stemming from the withdrawal of correspondent banking relationships.

 

Related Link: Staff Report

Keywords: Americas, Dominican Republic, Banking, Systemic Risk, Macro-prudential Policy, Financial Stability, IFRS 9, AML/CFT, Article IV, IMF

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