May 22, 2019

IMF published its staff report on the review of Colombia's performance under the flexible credit line (FCL) arrangement. The review shows that financial system in the country remains sound and financial-sector supervision is being further strengthened, including through a gradual convergence to Basel III standards. A flexible exchange rate continues to be the primary mechanism of adjustment to external shocks.

The staff report notes that banks remain well-capitalized, with provisions stable at approximately 130% of non-performing loans (NPLs) and tier-1 and regulatory capital having been raised to 13.2% and 18.9% of risk-weighted-assets (RWAs), respectively. The authorities are further strengthening the policy framework and building policy space to ensure continued resilience to external shocks. The financial supervisor is implementing the Conglomerates Law and Basel III capital and liquidity standards, in line with previous staff advice. These standards will be gradually introduced over a four-year period (February 2020–February 2024). These measures should further strengthen the regulatory framework.

The authorities reiterated their intention to continue treating the FCL arrangement as precautionary and to gradually reduce access to Fund resources, risks permitting. The authorities see implementation of the Conglomerates Law and convergence to Basel III as well as continued adherence to the structural balance rule as important steps to further build resilience. They remain committed to the exit strategy communicated at the time of the 2018 FCL approval and see the reserve accumulation program as an important step in preparing for an eventual and gradual reduction, risks permitting, in FCL access. Colombia has a sustained track record of implementing strong policies and the authorities remain committed to maintaining such policies going forward:

  • Sound financial system and absence of solvency problems that may threaten systemic stability. Financial system solvency and liquidity has remained strong notwithstanding the credit issues in specific sectors. As of September 2018, capital adequacy ratio of banks stood well above the regulatory limit, while other financial soundness indicators are also well within adequate ranges. While NPLs have increased in the past few years, they declined in the last quarter of 2018 and are expected to further decline as the economy continues to recover. The 2019 Article IV mission did not find significant solvency risks or recapitalization needs. According to the periodic central bank stress tests, the banking sector remains robust to adverse macroeconomic shocks.
  • Effective financial sector supervision. The authorities are taking measures to further strengthen the supervisory framework. They are bringing capital and liquidity standards in line with Basel III, including definitions of RWA and regulatory capital and the size of capital conservation and additional risk buffers for domestic systemically important banks (D-SIBs). In addition, a capital requirement for operational risk for banks is expected to be introduced, with a decree outlining the specific details to be published in the fourth quarter of 2019. The authorities are also implementing the Conglomerates Law (approved in September 2017), which should enhance the effectiveness of supervision over cross-border banking groups, including capital adequacy requirements at the group and subsidiary levels, and guidelines for conflicts of interest within financial conglomerates.

 

Related Link: Staff Report

 

Keywords: Americas, Colombia, Banking, Basel III, Stress Testing, Capital Adequacy, NPLs, Systemic Risk, Regulatory Capital, IMF

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