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Superfinanciera, Primera en Transparencia Superfinanciera, Primera en Transparencia ENHANCING THE SUPERVISORY INTENSITY AND EFFECTIVENESS OF SYSTEMIC BANKS ASBA PERSPECTIVE Gerardo Hernández Correa Financial Superintendent XVII ASBA Annual Assembly 9th High level meeting on global banking standards and regulatory and supervisory priorities in the Americas Lima, November 2014 Superfinanciera, Primera en Transparencia Agenda 1. Basel recommendations and their implementation at the regional level 2. Regional environment 3. Adjustment to international best practices Superfinanciera, Primera en Transparencia 3 Agenda 1. Basel recommendations and their implementation at the regional level 2. Regional environment 3. Adjustment to international best practices Superfinanciera, Primera en Transparencia 4 Basel III Fuente: BIS. Basel Committee on Banking Supervision. Basel III overview table. Superfinanciera, Primera en Transparencia 5 Regulatory reforms Challenges for implementation • The main implementation challenges focus on the following reforms related to Basel III: Capital and liquidity (Basel III). Derivatives markets OTC. G-SIFIs, including resolution mechanisms. Banking systems in Europe and United States(EMIR, Dodd Frank Act) • Concerns about the potential consequences of these reforms are in a qualitative level (not quantitative), reflecting that the implementation process in the region is in an early stage. • The implementation of these reforms represent major challenges for each economy and the need for proper coordination to identify and mitigate potential negative effects. • Attention has focused on liquidity ratios considering that most banks will comply the capital requirements. • Most G20 countries have a major reforms in the adoption of the new standars, while most emerging economies opted for a gradual process of adaptation in response to the needs of each of their financial systems. Superfinanciera, Primera en Transparencia 6 Regulatory reforms Some effects of reforms • Regulatory reforms have affected the credit behavior of banks. • Some international banks continue to increase their capital in order to comply in 2019 with the full set of measures introduced by Basel III that are part of the minimum capital requirements. • Concerns focus on action at the local level and the potential cross border impacts: Coordination among jurisdictions for the recognition of equity instruments, identification of differences in practices for risk management and the risk weighting of assets between parent and subsidiary. Resistance to activate counter-cyclical capital buffers in some emerging economies, from the difference in cycle time credit compared to other economies. Superfinanciera, Primera en Transparencia 7 Agenda 1. Basel recommendations and their implementation at the regional level 2. Regional environment 3. Adjustment to international best practices Superfinanciera, Primera en Transparencia 8 Regional framework • Sound macro economic policies and adoption of macro and micro prudential measures contributed to the performance of the financial sector in the region during the financial crisis. • High levels of capitalization of banks in the region, the absence of “toxic assets” on their balance sheets and low leverage levels helped to mitigate the impact of the international crisis in Latin America. • There is still a gap between the financial development of the region with respect to most advanced economies. However there have been significant changes that show a stronger financial system in the region. • Banking systems are characterized by an important concentration on big banks. • Regulation and supervision standards are uneven in the region. Superfinanciera, Primera en Transparencia 9 Superfinanciera, Primera en Transparencia 24 23 23 18 17 17 16 16 15 13 12 11 Nicaragua Uruguay El Salvador Bolivia Costa Rica Paraguay Peru Dom. Rep. Honduras Banks Mexico Ecuador Dom. Rep. Argentina Peru Colombia Nicaragua Guatemala Bolivia Average Latam Venezuela El Salvador Costa Rica 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Guatemala Colombia 35 Chile 51 47 Uruguay Total loans / GDP Ecuador 15% 180 160 140 120 100 80 60 40 20 0 Venezuela 0% Honduras 20% Mexico 33% Brazil 60% Panama 80% Chile 100% Argentina 120% Panama Argentina Ecuador Mexico Dom. Rep. Uruguay Venezuela Nicaragua Guatemala Peru Bolivia 140% Brazil Uruguay Ecuador Bolivia Nicaragua Chile Peru Argentina 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Average Latam Honduras CAR (Solvency) Average Latam Colombia 40% Dom. Rep. Guatemala Costa Rica Honduras El Salvador Brazil Chile Panama 160% Mexico Venezuela Brazil Colombia El Salvador Paraguay Regional environment Deposits / GDP 40% 155 81 6 Source: FMI, World Bank. Figures as of December 2013, own calculations. 10 1.0% 0.5% 0.0% Superfinanciera, Primera en Transparencia 0% Uruguay 100% Ecuador 171% Costa Rica 300% Costa Rica 400% El Salvador Honduras Brazil Bolivia Panama Mexico Chile Guatemala Average Latam Coverage indicators (Provisions/NPL) Chile El Salvador 200% Paraguay 1.5% Argentina 1.7% Colombia 2.5% Mexico 500% Honduras 3.0% Brazil 3.5% Uruguay 20% Average Latam 600% Dom. Rep. ROA* Guatemala 4.0% Panama Quality indicators (NPL/Total loans) Colombia 0% Dom. Rep. 0% Peru 10% Peru 1% Nicaragua 1.7% Nicaragua 3% Paraguay 60% Bolivia 5% Argentina 70% Venezuela 4% Venezuela Ecuador Costa Rica Brazil Honduras Bolivia Chile Uruguay Guatemala El Salvador Mexico Panama 6% Ecuador Venezuela Panama Nicaragua Guatemala Ecuador Uruguay Bolivia Argentina 2.0% Average Latam Peru Dom. Rep. Average Latam Dom. Rep. Peru Nicaragua Paraguay Colombia Argentina Venezuela 2% Costa Rica Chile El Salvador Paraguay Honduras Brazil Colombia Mexico Regional environment ROE** 50% 40% 30% 17.4% Source: FMI, World Bank. Figures as of December 2013, own calculations. *, **The information of Panamá corresponds to December 2012. 11 Regional framework • International crisis lead to a regional financial integration. • Regional integration is not only in the banking sector, but also in insurance, securities and pension fund administration vehicles. • Banks in the region are now bigger and have new risks due to integration. • Colombia is a good example. Superfinanciera, Primera en Transparencia 12 Regional environment Banking systems movements Buyer Bank Bank aquired Corpbanca Banco Santander (Colombia) Itaú Unibanco Corpbanca Bancolombia Grupo Banagricola Banco de Bogotá Grupo BAC Credomatic Davivienda HSBC (Costa Rica, Honduras, El Salvador) GNB Sudameris HSBC (Colombia, Perú, Paraguay) Bancolombia HSBC Panamá Banco de Bogotá Grupo Reformador de Guatemala Banco BBVA Panamá Superfinanciera, Primera en Transparencia 13 Presence of Colombian financial institutions abroad In the last years Colombian Financial institutions began expanding abroad. As of December 2013 they accounted for 208 subsidiaries abroad. Country (# subsidiaries) Country (# subsidiaries) Panama (57) El Salvador (24) Costa Rica (22) Peru (17) Guatemala (15) Chile (11) Mexico (11) Honduras (9) Cayman Islands (6) Netherlands (6) Nicaragua (6) USA (4) British Virgin Islands (3) Uruguay (3) Bahamas (2) Barbados (2) Bolivia (2) Dominican Rep. (2) Ecuador (2) Luxemburg (1) Paraguay (1) Puerto Rico (1) At the end of 2013 Colombian subsidiaries in Central America accounted ca. 22.2% of total assets of the financial sector of the region, excluding Belize. Spain (1) Superfinanciera, Primera en Transparencia 14 New players In recent years it has been common the entry of new players, driven by strong domestic activity and good performance of the financial system. New players Banks Financial corporations Jul 2012 Acquired the previous Banco Santander Oct 2013 Dec 2012 Mergers and conversions Finance companies Mar 2014 Mar - 2013 Jun 2013 Mergers Jun 2014 Conversions Sep 2013 Superfinanciera, Primera en Transparencia 15 Colombian banks abroad Higher participation of Colombian banks abroad Colombian financial institutions have increased their presence in the region. Subsidiaries represent around 18.5% of the total assets of Colombian credit institutions. BANKING SYSTEM ASSETS % OF COUNTRY’S BANKING SYSTEM COUNTRY ASSETS Salvador 7.676 14.363 53,44% Panama 23.780 102.690 23,16% Nicaragua 1.253 5.678 22,06% Honduras 2.804 15.433 18,17% Costa Rica 5.416 40.292 13,44% Guatemala 2.187 29.875 7,32% Paraguay 779 18.720 4,16% Peru 1.522 96.640 1,58% - USD million. Data as of 6/30/2014 Superfinanciera, Primera en Transparencia 16 Insurance companies Insurance companies have also participated in the regional expansion Recently the Colombian insurance companies entered into regional markets based on the expansion of banks. Subsidiaries represent around 12% of the total assets of the Colombian insurance companies. COUNTRY ASSETS Salvador Panama Honduras Peru Dominican Rep. Chile Ecuador Costa Rica Mexico 151,76 311,18 73,32 1.314,02 53,23 1.455,28 28,58 11,62 31,87 INSURANCE SECTOR ASSETS 728,96 2.051,00 593,71 10.973,60 926,83 56.000,00 1.734,22 3.160,16 56.253,94 % OF COUNTRY’S INSURANCE SECTOR 20,82% 15,17% 12,35% 11,97% 5,74% 2,60% 1,65% 0,37% 0,06% USD million. Data as of 6/30/2014. Superfinanciera, Primera en Transparencia 17 Agenda 1. Basel recommendations and their implementation at the regional level 2. Regional environment 3. Adjustment to international best practices Superfinanciera, Primera en Transparencia 18 Adjustment to international best practices • The question is what to do with this new financial enviroment? • The answer is further implementation of international standards • Implementation and trainning are key elements in the new enviroment. • Cooperation between regulators and supervisors is a top priority Superfinanciera, Primera en Transparencia 19 Regional context Level of compliance with international standards Source: ASBA, 2014. Sharing of Members’ Experience in Promoting Financial Stability, VI Meeting of the FSB Regional Consultative Group for the Americas. Superfinanciera, Primera en Transparencia 20 Regional context Level of compliance with international standards Source: ASBA, 2014. Sharing of Members’ Experience in Promoting Financial Stability, VI Meeting of the FSB Regional Consultative Group for the Americas. Superfinanciera, Primera en Transparencia 21 Adjustment to international best practices Roadmap • Considering the regional expansion of both D-SIFIS and G-SIFIS and the increasing entry of new international players, it is necessary the institutional strengthening of the supervisors based on the cooperation and the adoption of international best practices. Basel III Best practices Strengthening prudential req. Integrated supervision of risk Role of operational risk Risk-based Supervision Leverage indicators Conglomerates supervision Explore developments in liquidity Stress testing Cooperation and exchange of information MOUs with foreign authorities Colleges of supervisors Fellowships and memberships with multilaterals Systemically important bank Superfinanciera, Primera en Transparencia 22 A tentative road map Strengthening of prudential requirements Procyclality Reduction Challenges Reforms to adapt or adopt capital, liquidity and risk exposures regulations should take into account the experience of supervisors and the recommendations issued by international organizations (BIS, IOSCO, IAIS). Instruments that considered countercyclical elements are crucial to mitigate effects due to changes in the economic cycle • • • • Requirements for systemically important institutions. Optimally risk coverage and measurement. Evaluate and implement leverage standards. Adjustments to prudential requirements of non-banking institutions (brokerage firms). Superfinanciera, Primera en Transparencia 23 A tentative road map Regional Framework Peru Colombia • In 2012 issued regulation for the liquidity risk management, introducing LCR. • The IRL was adjusted following the guidelines set out in the Basel III LCR (Liquidity Coverage Ratio). In addition to the already in place 7 days requirement, a 30-day horizon was introduced. Brazil • Since 2012 has a regulatory framework in line with BIS guideline. The regulation of LCR is being implemented. Chile • Regulation of LCR is being implemented. Central America • It is necessary to assess the relevance, advantages and disadvantages of implemented the Basel liquidity scheme in the region. Superfinanciera, Primera en Transparencia 24 Risk-based Supervision It is necessary to migrate to risk based supervision in order to respond to the following needs: • Have a complete view of the risks Financial Institutions (FIs) are exposed to either as a single institutions or as part of a conglomerate whether they are domestic or foreign. • Have one single view of the sector. • Increase efficiency in allocation of supervisor’s resources focused on key areas of risk of FIs. • Be more prospective. • Adopt international best standards. Risk Based Supervision methodology • Ensures a comprehensive view of the risks. • Has a fundamental emphasis on the risks of FIs. • Increases efficiency of the oversight process and allows supervisors to be more forward looking in analysis and diagnosis. Superfinanciera, Primera en Transparencia 25 The Supervisory Framework Rule Based Supervision Risk Based Supervision • Strict compliance of defined rules (checklist). • Based on a historical analysis of the performance of the institution. • Case-to-case evaluation of individual operations. • Emphasis on the activities developed by the institution (lines of business) • Evaluation of risk profile is based on the institutions capacity to manage risk and the implementation of adequate controls to mitigate them. Advantages of Risk Based Supervision • Promotes higher level of transparency. • Incorporates “early-warning” signals, enabling for a more prospective approach to supervision. • Promotes an auto-evaluation of risk on behalf of supervised institutions. • Enhances efficiency and effectiveness in the supervisory process (scarce resources are better allocated, according to risk profile and systemic importance). Superfinanciera, Primera en Transparencia 26 Stress testing Objective • FIs are exposed to different risks that in case of materialization could affect his financial stability and viability, as well as the financial system integrity and the public perception about it. • To avoid this situations, the supervisors must consider and scheme to develop and implement periodically stress testing by the entities, allowing identify, measure, control and monitoring in a best way the financial risks. • Stress testing has become in a fundamental part of the international best standards (FSAP, Bank of England, BIS). Superfinanciera, Primera en Transparencia 27 Integrated supervision Roadmap Integrated supervision strengthening Conglomerates supervision framework • Risk analysis methodologies on a consolidated level including analysis of new risks inherent in financial conglomerates and cross-border activities. • Defining regional standards for financial conglomerate supervision, including holdings or parent companies and powers of the supervision for the purpose of exercising supervision on a consolidated. • The objective of risk management systems should be integrated, Integrated supervision of risk avoiding the segregation of each risk, allowing an analysis of the risks of the financial conglomerate, providing a comprehensive understanding of their operations. Superfinanciera, Primera en Transparencia 28 Cooperation and exchange of information Given the expansion of LATAM FIs abroad, the supervisors must established different channels with foreign authorities in order to receive and exchange information. • Actually the most of statutory bodies only covers banks and their subsidiaries, excluding the nonregulated parent companies and associated. Supervisors has no authority to change the structure of a financial conglomerate, prudential requirements do not cover the entire group as a whole. • It is necessary to consider schemes of integrated supervision How we do it? • Signing of Memoranda of Understanding (MOU's) bilateral and multilateral. • Be a part of international entities of supervisors, fellowships and memberships with multilaterals i.e. Central Council of Supervisors of Banks, Insurance and Other (CCSBSO), ASSAL, IOSCO, among others. • Member of the International Committees to develop mechanisms for cooperation in the region • Regular exchange of information through all supervisors of the region. • Visits to subsidiaries abroad, in coordination with the relevant supervisors. • Colleges of supervisors. Superfinanciera, Primera en Transparencia 29 Thank you Superfinanciera, Primera en Transparencia Superfinanciera, Primera en Transparencia Colombia Overview • • • • • • Credit institutions are the intermediaries with the largest share of the Colombian financial system’s assets. The rate of credit growth in Colombia is one of the highest in Latin America, registering a growth between 14% -15% nominal annual. The quality and coverage of the loan portfolio continue at adequate levels. Deposits in credit institutions increased mainly at saving products. Colombians access for the first time to the financial system primarily through savings accounts. Dynamic of Credit institutions has been supported by favorable indicators of solvency and profitability. In Colombia, the level of financial deepening registered an increase of 3.2 percentage points, going from 29.8% to 33.0% between December 2012 and 2013. Risk Assessment • • • Oil dominates the Colombian economy and has traditionally accounted for almost 80 percent of export revenue. For this reason, Colombia is sensitive to fluctuations in international commodity prices. United States is the main trading partner of Colombia, thereby, the growth prospects of Colombia depend on the performance of the US economy. Infrastructure of roads and ports still being inadequate for a robust growth. Superfinanciera, Primera en Transparencia 31 Mexico Overview • The level of financial deepening registered an increase of 1.5 percentage points, going from 16.6% to 17.9% between December 2012 and 2013. • Mexico's institutional framework is aligned with international standards, except for IFRS, which are expected to be taken within the next five years. • Congress approved the financial reform (26, November 2013), which provides a more preventive approach to bank risk and may reduce the sector's vulnerability to financial crises. Risk Assessment • United States is the main trading partner of Mexico. For this reason, the growth prospects of Mexico depend on the performance of the US economy. • Mexico has one the lowest ratios of domestic credit to private sector and nonfinancial public enterprises-to-GDP in Latin America, at about 24%. • The low banking penetration is partly due to the following factors: Large share of informal economy Low average incomes (measured by GDP per capita) Borrowers' relatively weak track record for paying off loans. Superfinanciera, Primera en Transparencia 32 Brazil Overview • The level of financial deepening registered an increase of 2.2 percentage points, going from 53.9% to 56.1% between December 2012 and 2013, higher than the regional average (32.9%). • The three largest banks (Itau Unibanco, Bradesco, and Santander) have controlled about 56.7% of the market during the past five years, and this figure has been increasing recently. • Brazilian banking penetration remains relatively low compared with some of its regional and most of its global peers. However, the leverage has been increasing steadily in recent years (The private sector credit to GDP was 56.1% in December 2013). Risk Assessment • The economic imbalances have increased as a result of rapid credit expansion amid a slowly growing economy, further increasing the household debt burden. • Banks‘ lower profitability is mainly due to falling reference interest rates and competition from government-owned banks through their lower margins. Nevertheless, due to rising inflation and global volatile financial conditions, the Central Bank increased reference rates by 375 bps since April 2013. Superfinanciera, Primera en Transparencia 33 Chile Overview • The level of financial deepening registered an increase of 4.8 percentage points, going from 73.2% to 78.0% between December 2012 and 2013, the highest in South America. • Financial performance has remained healthy, with average return on assets of 1.29%, portfolio credit quality of 2.0% and solvency of 13.3%. • Rising house prices and mortgage lending could pose credit risks and pressure asset quality. Risk Assessment • Copper dominates the Chilean economy and has traditionally accounted for almost 40 percent of export revenue. For this reason , Chile is sensitive to fluctuations in international commodity prices. • The complex ownership structures of conglomerates in the country compared with other parts of Latin America, along with these groups' relatively large scale and influence on the national economy, complicate the supervision of the banking system. • Banks has gradually reduced credit growth commercial and to a lesser extent, consumer credit in response to the slowing economy. Superfinanciera, Primera en Transparencia 34 Basel III Basel III Capital Quality Systemically Important Banking Institution Procyclality Reduction Interconnection and size Countercyclical Capital Provisions Prospectives Another Mechanisms (Conservation Buffer) Risk Measurement Credit Risk Operational Risk Market Risk Superfinanciera, Primera en Transparencia Leverage Indicator Liquidity Standards • Review of prudential requirements (solvency, liquidity) following the proposal of Basel III • Proposal for Credit Institutions regarding the strengthening of : i. Capital quality. ii. Liquidity. 35 Integrated Supervision: An Overview Advantages Challenges Superfinanciera, Primera en Transparencia 36