Cablegate: Colombian Banking Regulations Stabilize Sector

Published: Mon 13 Sep 2004 11:22 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. (U) SUMMARY. Colombia's banking regulators aided
struggling banks through the banking crisis of the late
nineties and have continued this work by strengthening banks
against risk. Colombia has implemented internal regulation
to ensure against another banking crisis while also
implementing Basel I standards (and beginning to implement
Basel II) and by moving toward a standardized system to
predict possible losses (SARC). These regulations have
advanced and strengthened the Colombian banking sector enough
that Colombian industry experts are confident that past
crises will not be repeated. END SUMMARY.
2. (U) Colombia's financial sector is at last emerging from
the 1998 crisis. Colombian bank regulators attributed the
bank failures of the late 1990s to improperly controlled
credit risk. The Senior Economist from Superbancaria,
Carolina Baron, expounded upon this by saying that the
banking crisis was triggered by skyrocketing interest rates
(due to the Asian and Russian crises) for emerging markets.
Individuals and companies simply could not pay the interest
on their loans, which led to high rates of default. This was
clearly evident in the mortgage sector as individuals
struggled to pay interest on mortgages. Baron said this
created a crisis of confidence in the banking sector.
Industry experts reported that in Q2 1999, a deep fiscal gap
(the fiscal deficit was 5.2 percent of GDP in 1999 compared
with 2.8 percent for 2003) sparked a currency crisis (the
peso devauled 20 percent). This further weakened investor
confidence. Non-performing loans rose from 8 percent of
total loans in 1998 to 14 percent in 1999. The GOC took
action to protect depositors and through direct intervention
rescued many of these banks, but the bailout cost a total of
4.3 percent of Colombia's GDP over a period of three years,
from 1998 to 2000.
3. (U) Founded in 1985 after a banking crisis, the Fondo de
Garantas de Instituciones Financieras's (FOGAFIN) goal is to
increase confidence in the Colombian financial system by
insuring individual deposits and by working with banks
through failures and restructuring, along the lines of the
U.S. Federal Deposit Insurance Company. FOGAFIN insured
deposits beginning in the mid eighties and continued its work
by restructuring banks throughout the financial crisis of the
late nineties; however, it has not effectively achieved its
goal of increasing investor confidence. Part of the blame
lies in the fact that FOGAFIN does not have the name
recognition among the Colombian population to effectively
build confidence in banking deposits. Additionally, FOGAFIN
insures less than USD 8,000 per individual account and takes
3 to 4 months to pay in the event of a failure.
4. (U) FOGAFIN's work to restructure banks has been more
successful. By purchasing a private sector asset management
company specializing in mortgage loan collection, Central de
Inversiones (CISA), FOGAFIN worked to stabilize the Colombian
banking system against future crises. CISA recapitalized
private and state owned financial institutions and dismantled
bankrupt institutions. FOGAFIN and CISA have taken on
non-performing assets from multiple banks in order to help
stabilize the industry. Industry experts told Econoff that
CISA did not use public funds to save private investors.
Instead, FOGAFIN issued bonds to capitalize CISA, and then
used those funds to purchase non-performing loans and
real-estate properties. CISA worked to collect or write-off
non-performing loans. In addition, once regulators increased
the capital requirements for these banks, FOGAFIN offered
loans to banks. This joint effort by FOGAFIN and CISA
stabilized banks and saved Colombia from even greater crisis.
5. (U) The banking superintendency, Superbancaria, is the
regulatory arm of the banking industry. It works closely
with FOGAFIN to offer greater access to credit for struggling
banks, but its main mission since 1923 has been to guarantee
the solvency and stability of the financial system in
Colombia. The superintendency is currently working with
banks to implement risk classification on a test basis and to
assist with loan provisioning). Superbancaria plays an
important role in monitoring weak mortgage institutions and
recently began monitoring market and institutional risk. In
December 2003, the Colombian Congress received a draft budget
from the Uribe administration requesting full budgetary
autonomy for Superbancaria, which should allow for more
effective monitoring across the financial sector. Law 795 of
January 2003 increased independence of the financial
institution's decision making; strengthened the code of
conduct for administrators at institutions; and gave the
banking superintendency greater regulatory and supervisory
6. (U) Regulators believe the implementation of Basel I
regulations, the implementation of a System of Credit Risk
Administration (SARC) and the beginning steps to put the
banking sector in line with the Basel II accord and
international accounting standards will reduce credit and
market risk and increase confidence.
7. (U) GOC regulators see all regulations as moving toward
SARC and cited two specific examples that they felt would
help implement SARC and would greatly strengthen the
Colombian banking sector. The SARC is a statistical model to
determine future losses from credit portfolios which can help
to evaluate risk. Currently, banks hold a lot of government
securities, increasing market risk. With a capital cushion
that is continually evaluated by bank regulators, banks and
the government are able to reduce this exposure to market
risk. The first step to move toward SARC was in 2000 when the
GOC instituted regulations establishing early warning signals
to indicate when a bank is nearing financial trouble, when
liquidity is compromised and when capital goes below a
certain level. Regulators see these warnings signs as an
important step to reduce market risk and give the government
time to react early when stability is compromised.
8. (U) 2002 regulations created a system in which banks must
evaluate the market value of their assets and electronically
send that information to Superbancaria. This system is
similar to the CAMEL ratings system, which was developed by
the US Federal Reserve (FED) to monitor and evaluate risk.
Much like with CAMEL ratings, Colombian banking regulators
classify risk as credit, market, liquidity, operational and
money laundering risk. While the FED evaluates banks by
on-site examinations, Superbancaria receives this information
electronically. While the lack of off-site evaluations
increases the risk that banks might send false information,
industry experts note that banks would face sanctions and a
possible revocation of their charter for false information.
In 2003 as part of SARC, banks were required to complete the
third phase of internal loan loss classification and reserve
methodologies based on expected loss.
9. (U) Regulators emphasized that these steps toward a more
closely monitored banking system will aid against market and
credit risk; however, there were laws passed after the
banking crisis that regulators saw as harmful or incomplete.
First, a 2001 ruling by the constitutional court requires
mortgage loans to be no more than fifty percent of the price
of the house. This law has negatively impacted poorer
families because it is now more difficult to get a housing
loan; individuals must pay up front fifty percent of the cost
of their mortgage. Second, the GOC passed regulation in 2000
for derivatives, which outlined how to calculate market
value. Regulators mentioned that they believe the GOC should
push for greater reforms in the area.
10. (U) COMMENT. Colombians are gaining confidence in their
banking system since the crisis of the late nineties. Experts
are generally confident in their banking system and those in
the banking sector believe the new regulations have raised
the system to international standards. While regulations
have improved and the banking sector has grown, many analysts
are still concerned about the market risk inherent in holding
a large amount of government denominated debt. END COMMENT.
View as: DESKTOP | MOBILE © Scoop Media