## cr1912-panamasi ## Source details **Canonical URL:** [cr1912-panamasi](https://www.imf.org/-/media/files/publications/cr/2019/cr1912-panamasi.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1912-panamasi.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1912-panamasi.pdf.json) --- ### Growth performance and middle-income trap - Real GDP growth averaged over 6½ percent over the last decade; Latin America and the Caribbean averaged 2.4 percent; emerging markets and developing economies averaged 5.4 percent. - Post-1990 turnaround: - 1990s: economic growth averaged over 5 percent. - In 2010-15 no country at comparable or higher income per capita achieved higher growth than Panama. - Evidence from 38 episodes (1970-2017) for countries reaching Panama’s 2017 GDP per capita (US$21,000 constant year-2011, PPP-adjusted): - Average growth dropped from 5.3 percent to 2.9 percent ten years afterwards. - Median growth dropped from 4.7 percent in the year they reached the threshold to 3.1 percent ten years afterwards. - Growth accounting assumptions and implications: - Output elasticity with respect to capital: 0.4. - Output elasticity with respect to labor: 0.6. - Annual depreciation rate: 5 percent. - Initial capital stock in 2007 equals 300 percent of GDP. - Labor contribution projected to decline by about 0.3 percentage points compared to 2008-17 due to gradual decline in population growth. - Investment share projected to converge to about 40 percent of national income; capital contribution estimated about 1 percentage point per year lower than its average over the past decade. - To sustain staff’s baseline average growth of 5.5 percent, TFP contribution needs to increase by about 0.2 percentage points per year relative to the previous decade. - Key requirements to raise TFP: - substantial update in skills, training and quality of education; - relaxation of regulations to facilitate attraction of foreign talent; - continued improvements to the investment climate. ### Financial system size, structure, and international position - Financial system assets equivalent to 238 percent of GDP at end–2017. - Cross-border portfolio flows to Panama: US$50.7 billion at end–June 2017 (0.1 percent of world total). - Panama’s share of portfolio flows to 23 selected OFCs: 1 percent. - Banking center: - Assets of the international banking center: 194 percent of GDP at end–2017 (93 percent of the financial system’s total). - Number of banks: 88 (General license: 49; International license: 26; Representative offices: 13). - Direct economic contribution of the banking center: 6.5 percent of GDP in 2017; 2.5 percent of total employment in 2017. - Onshore banks: - Assets equivalent to 164 percent of GDP (78 percent of financial system total). - Of 49 onshore banks: 17 Panamanian owned; 30 foreign-owned. - Foreign banks account for 44 percent of banking total assets; 38 percent of total deposits; 31 percent of total loans. - Offshore banking: - Assets equivalent to 27 percent of GDP (14.2 percent of financial system total). - Offshore sector economic contribution (2015 estimates): about 3.5 percent of total employment of the banking center; 0.1 percent of overall local expenditure; about 0.1 percent of public revenues. - Non-bank sector: - Over 1,000 licensed entities; account for 7.2 percent of financial system’s assets (15.2 percent of GDP). - Aggregate counts and asset shares (selected Table 1 figures): - Banks: Number 88; Assets (US$ bn) 119.7; % of total assets 92.7; % of GDP 193.6 - Onshore banks: Number 49; Assets (US$ bn) 101.4; % of total assets 78.5; % of GDP 164.0 - Offshore banks: Number 26; Assets (US$ bn) 18.3; % of total assets 14.2; % of GDP 29.6 - TOTAL: Number 1105; Assets (US$ bn) 129; % of total assets 100.0; % of GDP 238.1 ### AML/CFT reforms, institutional framework, and shortcomings - Key reforms since 2015: - AML/CFT framework revamped in 2015 in line with FATF recommendations (prior to most recent revision). - Law 23 revisions: extended CDD to nonfinancial entities, STR requirements for nonfinancial entities, strengthened FIU (UAF) powers and resources, beneficiary identification for trusts, custody regime for bearer shares, mechanisms for freezing terrorist assets, and provisions for international cooperation. - Creation in 2015 of the National Commission Against Money Laundering (CNBC) and an intendency for supervision and regulation of non-financial institutions. - Technical compliance (GAFILAT 2018): - Of 40 FATF technical recommendations: 10 compliant; 22 largely compliant; 7 partially compliant; 1 non-compliant. - Strong compliance areas include: confiscation and provisional measures; financial institutions secrecy laws; politically exposed persons; correspondent banking relationships; new technologies; financial intelligence unit guidance and feedback; international instruments. - Not meeting the standard for: transparency and beneficial ownership of legal persons. - Effectiveness (GAFILAT 2018): - Panama’s AML/CFT system effective in only two areas: targeted financial sanctions related to terrorist financing and proliferation financing. - In all other areas GAFILAT deemed effectiveness insufficient, including: risk understanding; international cooperation; supervision; preventive measures (CDD); transparency of legal persons and legal arrangements; financial intelligence; money laundering investigations and prosecution; confiscation; terrorist financing investigations and prosecutions. - Timeline of FATF and related actions: - 2012 assessment found significant shortcomings; Panama referred to FATF’s ICRG. - 2014 IMF–led assessment; Panama entered FATF’s ICRG “grey list” in June 2014. - Authorities’ Action Plan implemented by mid-2015; FATF removed Panama from ICRG process in February 2016. - April–May 2016 events (Mossack Fonseca release; U.S. sanctions) highlighted persistent implementation deficiencies. - 2017 assessment under revised methodology again found Panama met threshold for ICRG under effectiveness-focused methodology. ### Trust, corporate services, bearer shares, and registry issues - Company formation scale and structure: - Close to 900,000 corporate vehicles created as of September 2018 (equivalent to one per Panamanian household). - Average of 25,000 new entities formed annually in the last three years. - Legal persons as of September 2018: Corporations ~78 percent; Trusts 13 percent; Private interest foundations 6 percent. - Dormancy and legacy entities: - More than half of legal entities incorporated are dormant. - Law No. 52 (October 2016, effective January 2017) requires annual franchise fee US$300 at registration and subsequent years (private interest foundations: US$350 at registration and US$400 thereafter). - Penalties: non-payment after 6-month grace period attracts a penalty of US$50 per year; suspension after three consecutive years in default; reactivation within two years with fine US$1,000 otherwise dissolution. - About 381,000 corporations (55 percent of total registered) are 3–10 years overdue in payment of annual fees. - Dissolutions averaged 13,000 a year in recent years. - Resident agents and registry: - No requirement for corporation to have a registered office, physical presence, or assets in Panama. - Corporations must designate a resident agent; any corporation without a resident agent for more than 90 days will have corporate rights suspended; Public Registry reported 28,645 such entities as of September 2018. - Resident agents must be lawyers admitted in Panama or law firms; resident agents are not subject to additional licensing beyond professional practice license. - Public Registry holds basic company information and documents, has free online access but is hardly up-to-date given large number of inactive entities. - Bearer shares custody regime: - Mandatory deposit or replacement by December 31, 2015; failure to comply considered loss of political and economic rights related to the shares. - Issuance of bearer shares prohibited except for corporations that adopted custody regime before December 31, 2015; GAFILAT (2018) recorded 2,282 corporations filed for custody of bearer shares as of March 31, 2017. ### Panama’s ML/FT vulnerability and cross-border exposures - Global context: - UNODC (2011) estimated criminal proceeds at 3.6 percent of global GDP (2.3-5.5 percent), or about US$2.1 trillion in 2009; of which about 2.7 percent of global GDP (2.1-4.0 percent), or US$1.6 trillion were laundered. - Estimated gross profit from cocaine sales: US$85 billion (North America US$35 billion; West and Central Europe US$26 billion). - Total cocaine-related flows into Central America estimated at US$2.1 billion (1.6 percent of GDP). - No publicly available study or estimate of criminal proceeds generated in or moving through Panama noted. - Cross-border positions (resident in Panama, as at September 2017): - Claims outstanding: Loans and deposits US$73.0 billion — 118.1 percent of GDP; Debt securities US$9.5 billion — 15.4 percent of GDP. - Liabilities outstanding: Loans and deposits US$58.7 billion — 95.0 percent of GDP; Debt securities US$0.23 billion — 0.4 percent of GDP. - By counterparty sector (Claims / % of GDP; Liabilities / % of GDP): Banks 11.3 — 18.3 ; 12.1 — 19.6; Non-banks 73.5 — 118.9 ; 53.6 — 86.7; Total positions 85.1 — 137.7 ; 65.9 — 106.6. - Financial linkages: - Banks located in other jurisdictions have claims on Panamanian borrowers of US$85 billion (137.7 percent of GDP) at end-September 2017. - Of total outstanding cross-border claims, 85 percent (118 percent of GDP) were loans and advances; main counterparty were non–bank financial institutions. - Banks located in Japan hold 42.5 percent of these claims. - Non–resident deposits as a share of banking system’s total deposits and total liabilities were 28 percent and 23 percent, respectively, at end–2017. - Trade openness and Free Zones: - Re-exports through the Colon Free Zone (CFZ) amounted to 15 percent of GDP at end–2017. - CFZ identified as higher risk for AML/CFT. ### Supervisory activity, STRs, training, and tax transparency - Supervisory inspections (total): 403 (2015); 444 (2016); 622 (2017). - SBP inspections overall increased by 36 percent (2016) and 23 percent (2017); inspections for trusts and other financial entities rose by 84 percent and 300 percent in 2016, respectively. - Staffing increases in 2017: Intendencia hired 40 new staff; UAF hired 35 new staff. - Training and awareness (2015–17): authorities reported 766 trainings attracting close to 42,000 participants. - Total participants: 8,712 (2015); 13,351 (2016); 19,847 (2017). - FIU Virtual Academy participants in 2017: 4,950. - Suspicious Transaction Reports (STRs) to UAF: - increased by 73 percent in 2015 to 1,734; - increased by 45 percent in 2017 to 2,897. - Main reporting sources: banks and remittance agents; low filing from free zones, lawyers and real estate. - Tax transparency and AEOI: - Panama signed over 30 bilateral tax treaties and tax information exchange agreements. - Met FATCA reporting requirements; first transmission September 2017. - Initiated AEOI with 31 jurisdictions under OECD CRS. - UAF response time to information requests improved from 250 days (2012) to 150 (recent). - Panama became the 87th member of the Inclusive Framework on BEPS in October 2017 and is implementing four Minimum Standards. ### Critical AML/CFT reform gaps and recommendations - Key gaps identified: - Lack of available, timely and up-to-date beneficial ownership information; only information on beneficial owners that control 25 percent or more is required by law. - Entities without physical presence in Panama are vulnerable to abuse. - Tax evasion treated as an administrative offence; tax crimes not included as predicate offences for money laundering. - Low registration and STR filing from DNFBPs; ambiguity in CDD obligations of resident agents; UAF products under-disseminated to prosecutors and law enforcement. - AML/CFT statistics are not systematic and comprehensive. - Priority actions and way forward (near-term and medium-term): - Expeditiously criminalize tax evasion and make tax crimes a predicate offense to money laundering. - Improve transparency of corporate vehicles: clarify resident agents’ role; keep Public Registry up to date; expedite dissolution of legacy entities; remove impediments to timely access to information. - Strengthen AML/CFT supervision: enhance understanding of AML/CFT risks, strengthen supervisory capacity for DNFBPs, and further develop risk-based approaches. - Build UAF capacity: strengthen analysis, dissemination, and usefulness of financial intelligence; maintain consistent and comprehensive AML/CFT statistics. - Continue enhancing tax transparency and meet BEPS minimum standards. ### Financial conditions, Growth-at-Risk (GaR), and macro-financial vulnerabilities - Quantile regressions used to estimate conditional density of GDP growth; quantiles fitted: 0.10, 0.25, 0.50, 0.75, 0.90; horizons: 4, 8, 12 quarters. - Main empirical findings: - External financial conditions are the main driver of Panama’s short-term growth prospects. - Leverage is the most important link for Panama’s medium-term growth outlook. - Rising price of risk was, in the estimation period, associated with upside risks to growth due to correlation with investment boom; investment contributed on average 4 percentage points to annual growth over 2008-2016; large projects included US$5.3 billion (Panama Canal expansion) and US$5.5 billion (new mine). - Higher leverage has limited short-term effect but negatively affects medium-term growth, especially the left-hand tail. - GaR calibrations (mode consistent with forecasts): - Mode forecasts: 4.3 percent in 2018; 6.3 percent in 2019; 5.8 percent in 2020. - GaR (5 percent probability, current financial conditions): - 2018: GaR = 3.9 percent (outlook 4.3 percent). - 2019: GaR = 1.4 percent (outlook 6.3 percent). - 2020: GaR = 2.3 percent (outlook 5.8 percent). - SBP severe stress-test scenario: growth at end-2019 of 2.5 percent (broadly equivalent to GaR with 10 percent probability for 2019). - Policy implications: - Near-term risks from financial conditions lower than medium-term risks. - Need to develop macroprudential policy tools in Panama’s dollarized economy to mitigate medium-term leverage risks and build resilience. ### Interbank contagion and bank-network simulations (Espinosa-Vega & Sole method) - Method and parameters: - Loss given default for creditor banks: λ = 1. - Roll-over of funding from failed bank: ρ = 0.35 (banks roll over 65 percent of funding). - Fire-sale price parameter: δ = 1 (implying a 50 percent discount). - Insolvency thresholds: CAR<8 percent (high-sensitivity); CAR<4 percent (medium); CAR<0 (low). - Dynamic provisioning: DPR(t) = αL(t) + βmax{ΔL(t),0} - SP(t) with α = 1.5 percent; β = 5 percent; DPR capped at 2.5 percent of qualifying RWA and floored at 1.25 percent of qualifying RWA. - Data and scope: - Interbank deposit matrix includes 75 banks as of March 2018: 49 general license (19 resident-owned, 30 foreign-owned); 26 international license. - Contagion results (system-wide total capital losses, excluding original defaulting bank): - High-sensitivity: US$24.9 billion. - Medium-sensitivity: US$24.6 billion. - Low-sensitivity: US$24.5 billion. - Six simulations (high-sensitivity) generate losses greater than US$1.5 billion (about 1 percent of total consolidated banking system assets and 3.7 percent of 2017 GDP). - Largest single capital loss in high-sensitivity: US$2.8 billion or 7 percent of GDP. - Maximum contagious defaults: 7 (high-sensitivity); 3 (medium/low-sensitivity). - Systemic patterns: - Failure of foreign banks more likely to propagate contagion. - Onshore and offshore banking systems relatively isolated from each other due to limited interbank deposits between the two systems. - Implications: - Dynamic provisions act as additional capital buffer but draw-down is restricted and subject to SBP discretion. - Effectiveness of dynamic provisions depends on SBP’s timing of draw-down. - Banks with concentrated depositors are more risky for contagion. ### IMF Bank Contagion Model (foreign-to-Panama transmission) - Methodology: - Round 1: 10 percent loss in value of banks’ private and public sector assets in selected BIS-reporting countries. - Round 2: affected banks deleverage uniformly across domestic and external claims. - Round 3: reduction in lending produces funding shocks to Panama; iteration until no further deleveraging. - Exposures and impacts: - Panamanian banks’ downstream exposures (Panamanian lending to foreign clients): over 30 percent of GDP. - Panamanian banks’ upstream exposures (foreign banks’ claims on Panama): over 50 percent of GDP. - Selected simulation impacts on credit availability in Panama (% GDP) for a 10 percent asset loss in foreign banks: - USA — 10 — -5.2% - Canada — 10 — -6.1% - USA and Canada — 10 — -10.9% - Japan* — 10 — -13.4% - Selected European Countries (Greece, Ireland, Portugal, Italy, Spain, France, Germany, Netherlands, UK) — 10 — -14.9% - Interpretation: combined 10 percent loss in Canada and USA reduces credit in Panama by about 11 percent of GDP; Japanese asset losses would reduce credit availability by over 13 percent of GDP. - Conclusions: - Panama’s upstream exposures imply material credit risk from foreign banks’ deleveraging. - Strong supervision and macroprudential buffers are important. ### Liquidity, leverage, asset quality, and macro-financial feedbacks - Liquidity (selected bank liquid asset to deposit ratios, 2016Q2–2018Q1): - Bank Code 3 (GL): 2016Q2 11.2; 2018Q1 12.5. - Bank Code 1 (GL): 2016Q2 42.3; 2018Q1 23.9. - Bank Code 243 (GF): 2016Q2 10.4; 2018Q1 76.1. - Some banks recorded single-digit ratios in some quarters (e.g., Bank Code 206: 2016Q2 3.4; 2018Q1 5.3). - Leverage (Total Equity/Total Assets, 2016Q2–2018Q1): - Vulnerability classification: High vulnerability < 3 percent; Medium >3 and ≤7 percent; Low >7 percent. - Bank Code 3 (GL): 2016Q2 7.7; 2018Q1 7.7. - Bank Code 1 (GL): 2016Q2 7.0; 2018Q1 9.1. - Bank Code 117 (GF): 2016Q2 2.2; 2018Q1 7.1. - Bank Code 247 (GF): 2016Q2 20.2; 2018Q1 3.7. - Asset quality: - NPLs doubled since 2015 but remain relatively low: 1.8 percent of total loans as of June 2018 for the national banking system. - NPL upticks largest in commerce (including services), mortgages, construction and personal loans. - NPLs appear adequately provisioned; provisions strengthened following transition to IFRS9. - VAR evidence on feedbacks between NPLs and real economy: - Data sample: 2003Q3 to 2018Q1. - One standard deviation values: NPL = 0.58; credit growth = 3.8; real GDP growth = 3.1. - Impact of a 1 percentage point increase in the NPL ratio: - Credit growth declines by 1.5 percentage points. - Real GDP growth declines by 1.2 percentage points. - Panel VAR variance decompositions: - Shocks to the NPL ratio explain about 20 percent of variance in growth over a 4-quarter horizon and about 10 percent over an 8-quarter horizon. - Shocks to growth explain about 10 percent of variance in the NPL ratio over both 4- and 8-quarter horizons. - Policy-relevant conclusion: - Asset quality should be closely monitored to prevent systemic risks from the build-up of debt, particularly given risks from rising interest rates in Panama’s dollarized economy. - Effective supervision and strengthened provisions under IFRS9 are important to facilitate recognition of losses. *Source: IMF Country Report No. 19/12 (cr1912-panamasi).* ### 1. Growth Performance (1960-90) ________________________________________________________ 5 ### 1. Growth Performance (1960-90) ### Introduction - Panama has been one of the fastest-growing economies in the world in recent years; Real GDP growth averaged over 6½ percent over the last decade, compared with 2.4 percent for Latin America and the Caribbean and 5.4 percent for the group of emerging markets and developing economies. - The paper investigates the relevance of the “middle-income trap” for Panama and prospects for maintaining strong growth, arguing that continued productivity growth is critical and requires reforms to education quality, talent attraction, and the investment climate. ### Growth Performance: Convergence and Divergence (1960-1990) - Panama experienced episodes of both convergence and divergence over past decades (analysis based on WEO database). - 1960s: relatively strong convergence toward higher-income countries; only a limited number of countries outperformed Panama. - 1970s–1980s: performance weakened; by the 1990s Panama’s growth was significantly below most countries at its or higher income levels, amid political and economic instability. ### Becoming a Growth Tiger? (Post-1990 pivot described in adjacent sections) - The 1990s marked a turning point: growth accelerated after political stabilization. - Economic growth averaged over 5 percent in the 1990s, bringing Panama back to the rapidly-converging economies club. - The set of countries at comparable or higher income per capita that outperformed Panama shrank in the 2000s; in 2010-15 no country at comparable or higher income per capita achieved higher growth than Panama. ### Middle-Income Trap: Concept and Panama’s Position - “Middle-income trap” describes fast-growing economies that stagnate at some level and fail to reach high-income status. - Most countries remained in the same relative income per capita group between 1970 and 2015; a large share are concentrated in the middle group. - Within the middle group some countries (including Panama) narrowed the gap relative to the U.S. (green triangle subset), while others fell further behind (red triangle subset). ### Exit from the Middle-Income Trap: Panama’s Progress - Panama’s performance since 1990 has significantly reduced its distance from the upper bound of the middle-income bracket. - In comparisons between 1990 and 2015, no country (except Equatorial Guinea, driven by a natural resource boom) overtook Panama in narrowing the gap with the U.S. ### Evidence from Past Episodes - Analysis uses WEO data for country episodes that reached a level comparable to Panama’s 2017 GDP per capita (US$21,000 constant year-2011, PPP-adjusted). - Total of 38 episodes over 1970-2017 were analyzed, tracking the first 10 years after reaching the threshold and not reverting below it. - Average growth for these episodes dropped from 5.3 percent to 2.9 percent ten years afterwards. - Median growth dropped from 4.7 percent in the year they reached the threshold to 3.1 percent ten years afterwards. - Figure-based range shows variation across episodes (range, mean, median plotted over 10 years). ### Sustainability of Panama’s Growth (Growth Accounting) - Labor and capital contributions projected to moderate over the medium term: - Labor: With gradual decline in population growth, labor’s annual contribution projected to decline by about 0.3 percentage points compared to 2008-17. - Capital: Following an extraordinary investment cycle in 2008-17 (including Panama Canal expansion), the investment share in national income is projected to converge to about 40 percent; capital contribution is estimated to be about 1 percentage point per year lower than its average over the past decade. - Growth accounting assumptions: - Output elasticity with respect to capital: 0.4. - Output elasticity with respect to labor: 0.6. - Annual depreciation rate: 5 percent. - Initial capital stock in 2007 equals 300 percent of GDP. - To maintain staff’s baseline path average growth of 5.5 percent (about 1 percentage point below the last decade), TFP contribution needs to increase by about 0.2 percentage points per year relative to the previous decade. - Key requirements to raise TFP: - Substantial update in skills, training and quality of education. - Relaxation of regulations to facilitate attraction of foreign talent. - Continued improvements to the investment climate. - Caveat: the decade 2008-2017 was exceptional; if TFP estimates captured unidentified non-productivity factors, achieving the required productivity improvement may be more challenging. ### Concluding Remarks - Panama’s stellar post-1990 growth has brought it closer to high-income status, but maintaining high growth rates is likely to become more challenging at its current income level. - Continued productivity gains are critical to sustain high growth over the medium term. - Policy priorities highlighted: improving education quality, attracting foreign talent to knowledge-based sectors, and strengthening the investment environment. *Source: cr1912-panamasi - 1. Growth Performance (1960-90).* ### 1. Panama is an attractive international financial and business services center. Its ### 1. Panama is an attractive international financial and business services center. Its ### Overview: comparative strengths and risks - Comparative strengths: - modern international financial center - a dollarized system - a logistic hub (air and sea) - a low-rate and territorial tax regime - a friendly legal framework for company formation - a stable macroeconomic environment - a strategic geographic location - Business model: built on banking, logistics and trade activities; has propelled the economy into one of the most vibrant in Latin America. - Vulnerabilities: - Connectivity and nature of products and services offered leave Panama vulnerable to money laundering (ML), including related to corruption, drug trafficking and other predicate crimes, such as tax crimes committed abroad. ### Recent AML/CFT and tax-transparency reforms - Timeline and intent: - AML/CFT framework revamped in 2015 in line with recommendations from the Financial Action Task Force (FATF) (but prior to the most recent revision of the international standards). - Reforms include a risk–based approach for AML supervision, appropriate mitigating mechanisms, and measures to facilitate international cooperation. - Aim: prevent misuse of products and services offered by financial, non-financial and professional business entities as instruments for money laundering and financing of terrorism. - Assessment: - Together with advances on tax transparency, Panama’s technical compliance is now closer to international standards. - Nonetheless, a few significant gaps remain in the AML/CFT framework and more needs to be done to assure effective implementation. ### Purpose and structure of the paper - Key questions the paper seeks to answer: - (i) to what extent is Panama exposed to the risks of money laundering?; - (ii) where is Panama in its efforts to tackle ML/FT risks in compliance with global standards?; - (iii) how does Panama compare with peers?; - (iv) where does Panama want to go from here? - Document structure (as described): - Section B: overview of the financial system and corporate services sector - Section C: Panama’s vulnerability to ML risks - Section D: compliance with global standards, comparing Panama’s progress with peers - Section E: areas where further progress is needed - Section F: priority actions and the way forward - Section G: conclusion ### Financial system — key facts and figures - Size and international position: - Financial system assets equivalent to 238 percent of GDP at end–2017. - Cross-border portfolio flows to Panama amounted US$50.7 billion at end–June 2017, representing 0.1 percent of world total. - Panama’s share of portfolio flows to 23 selected Offshore Financial Centers (OFCs) amounted to 1 percent. - Compared to large LACs, Panama accounted for 5 percent of similar flows; Mexico and Brazil accounted for 35.6 and 35.2 percent, respectively. - Banking center: - Assets of the international banking center amounted to 194 percent of GDP at end–2017, representing 93 percent of the financial system’s total. - Number of banks: 88 - General banking license: 49 (including two state-owned banks) - International license: 26 - Representative offices of foreign banks: 13 - Direct economic contribution of the banking center: - 6.5 percent of GDP in 2017 - 2.5 percent of total employment in 2017 - Onshore (general-license) banks: - Assets equivalent to 164 percent of GDP (78 percent of financial system total). - Of 49 onshore banks: - 17 are Panamanian owned - 30 are foreign-owned - Foreign banks account for: - 44 percent of banking total assets - 38 percent of total deposits - 31 percent of total loans - Panamanian licensed banks must have a physical presence in Panama and may conduct banking with both residents and non–residents. - Offshore banking: - Assets equivalent to 27 percent of GDP (14.2 percent of financial system total). - Offshore activities extend beyond offshore banks; onshore banks may conduct offshore operations. - Sector has limited connections with rest of financial system, limiting contagion risks from abroad. - Economic contribution of offshore sector (2015 estimates): - about 3.5 percent of total employment of the banking center - 0.1 percent of overall local expenditure - about 0.1 percent of public revenues - Correspondent banking relationships (CBR): - Since removal from FATF grey list in February 2016, 72 new CBRs established (authorities’ data), bringing total to 458 as of December 2017. - All banks have CBRs, including smaller Panamanian banks affected by recent global CBR withdrawals. - Non-bank sector: - Over 1,000 licensed entities (securities, insurance, cooperatives, savings and loans, development banks, finance companies, trust, leasing companies, etc.). - Account for 7.2 percent of financial system’s assets (15.2 percent of GDP). - Large number of entities poses a major challenge for regulation and supervision. ### Financial system structure (selected table highlights) - Aggregate counts and asset shares (from Table 1): - Banks: Number 88; Assets (US$ bn) 119.7; % of total assets 92.7; % of GDP 193.6 - Onshore banks: Number 49; Assets (US$ bn) 101.4; % of total assets 78.5; % of GDP 164.0 - State-owned banks: Number 2; Assets (US$ bn) 13.6; % of total assets 10.5; % of GDP 22.0 - Panamanian banks: Number 17; Assets (US$ bn) 41.9; % of total assets 32.5; % of GDP 67.8 - Foreign banks: Number 30; Assets (US$ bn) 45.9; % of total assets 35.5; % of GDP 74.2 - Offshore banks: Number 26; Assets (US$ bn) 18.3; % of total assets 14.2; % of GDP 29.6 - Representative licences: Number 13; Assets ... (table shows ellipses) - Securities: Number 382; Assets (US$ bn) 1.0; % of total assets 0.7; % of GDP 1.6 - Insurers: Number 88; Assets (US$ bn) 3.2; % of total assets 2.4; % of GDP 5.1 - Development banks: Number 2; Assets (US$ bn) 0.6; % of total assets 0.5; % of GDP 1.0 - Credit unions: Number 188; Assets (US$ bn) 1.8; % of total assets 1.4; % of GDP 3.0 - Other (includes financing, leasing and factoring companies, and two other small sectors): Number 357; Assets (US$ bn) 2.8; % of total assets 2.2; % of GDP 4.6 - TOTAL: Number 1105; Assets (US$ bn) 129; % of total assets 100.0; % of GDP 238.1 ### AML/CFT oversight and institutional framework - Fragmentation of oversight: - Five main supervisors: Superintendence of Banks of Panama (SBP); Superintendence of Insurance and Re-insurance (SSRP); Superintendence of the Securities Market (SMV); Intendency of Supervision and Regulation of Non-Financial Institutions (created in 2015); Panamanian Autonomous Cooperative Institute (IPACOOP). - Other relevant bodies: The Gaming Board, the Ministry of Commerce and Industry, the Administrator of the Colon Free Zone, and the National Mortgage Bank (Banco Hipotecario Nacional, BHN). - Coordination mechanism: - Creation in 2015 of the National Commission Against Money Laundering (CNBC: National Commission Against Money Laundering, Financing of Terrorism and Financing of Proliferation of Weapons of Mass Destruction), integrated by high level government officials, to establish AML/CFT policies and inter-institutional coordination. - DNFBP supervision: - Since 2015, Panama has a supervisor for all types of designated non-financial business and professions (DNFBPs) recognized by FATF. - Current regulations apply to casinos, real estate agents, dealers in precious metals, dealers in precious stones, pawn shops, notaries, lawyers and company service providers, other independent legal professionals and accountants. ### Trust and corporate services sector — scale and structure - Scale of company formation: - Panama is among the world’s top three providers of company formation services. - Close to 900 thousand corporate vehicles created as of September 2018 (equivalent to one per Panamanian household). - An average of 25,000 new entities formed annually in the last three years (data presented in New Registered Legal Persons and Arrangements table). - Types of legal persons and shares (as of September 2018): - Corporations (Sociedad Anónima): about 78 percent of registered entities. - Trusts: 13 percent of registered entities. - Private interest foundations: 6 percent of registered entities. - Dormancy and legacy entities: - More than half of legal entities incorporated are dormant. - Law No. 52 (passed October 2016, effective January 2017) requires annual franchise fee US$300 upon registration and in subsequent years (private interest foundations: US$350 at registration and US$400 thereafter). - Penalties and suspension: Non-payment after 6-month grace period attracts a penalty of US$50 dollars per year; suspension of corporate rights after three consecutive years in default; reactivation within two years with a fine of US$1,000, otherwise dissolution. - Available data indicates about 381,000 corporations (55 percent of total registered) are 3–10 years overdue in payment of annual fees. - Dissolutions averaged 13,000 a year in recent years. - Legacy entities often have no activities, physical presence, or contact with resident agent and Panamanian authorities. - Physical presence and resident agents: - No requirement for a corporation to have a registered office, any other form of physical presence, or assets in Panama. - Corporations must designate a resident agent, who will be registered at Panama’s Public Registry. Any corporation without a resident agent for more than 90 days will have its corporate rights suspended; Public Registry reported 28,645 such entities as of September 2018. - Resident agents must be lawyers admitted into practice in Panama, or a law firm; resident agents are not subject to any additional licensing requirement beyond professional practice license. - Resident agents notarize and file company documents at the Public Registry, make annual franchise payments on behalf of clients, render nominee services (acting as directors and shareholders or engaging third parties), and can serve as custodian for bearer shares subject to SBP approval. - Estimated legal profession: about 10,000 individual lawyers and law firms in Panama; around 4,200 registered at the Public Registry as of March 2017 (around 3,900 individual lawyers and some 300 law firms). - Panama had 72 trust company providers, of which 39 were banks or their subsidiaries. - Company information and Public Registry: - Company information on beneficial owners is required to be kept by the company itself and by its resident agent. - Entities operating outside Panama are required to keep accounting records at the office of the resident agent, or at any other national location, which must be disclosed to the resident agent. - Public Registry holds basic company information and documents (names and domicile of subscribers, share ownership, articles of incorporation, names and addresses of directors, domicile of the corporation, name and address of resident agent) and must be updated when changes occur. - Information on founders of private interest foundations and beneficiaries is not required in the foundation’s charter and should be known by the resident agent. - Public Registry has free online access but is hardly up-to-date given the large number of inactive entities. - Strengthening of AML/CFT compliance since 2015 increased the importance of financial institutions and DNFBPs as information sources where they maintain relationships with entities. ### Bearer shares and custody regime - Custody regime introduced in 2013: - Mandatory deposit of bearer share certificates with an authorized local or foreign custodian together with identity information, or replacement with registered share certificates by December 31, 2015. - Failure to comply by deadline considered a loss of political and economic rights related to the shares. - Issuance of bearer shares is prohibited except for corporations that adopted the custody regime before December 31, 2015 deadline; any new bearer shares must be registered 20 days after issuance. - GAFILAT (2018) recorded that 2,282 corporations filed for custody of bearer shares as of March 31, 2017. *Prepared by Joel Okwuokei with assistance from colleagues from the LEG Department, including Kathleen Kao, Richard Berkhout, and Francisco Figueroa.* ### 20. It is difficult to quantify the amount of criminal proceeds generated from money ### cr1912-panamasi - 20. It is difficult to quantify the amount of criminal proceeds generated from money ### Global estimates of criminal proceeds and money laundering - UNODC (2011) estimated criminal proceeds likely amounted to 3.6 percent of global GDP (2.3-5.5 percent), or about US$2.1 trillion in 2009. - Of the total amount, about 2.7 percent of global GDP (2.1-4.0 percent), or US$1.6 trillion were estimated by UNODC to have been laundered worldwide. - Illegal drug trade accounted for a fifth of all crimes and half of all proceeds of transnational crime, per UNODC. - Estimated gross profit from cocaine sales: US$85 billion. - North America: US$35 billion. - West and Central Europe: US$26 billion. - Total cocaine-related flows into Central America were estimated at US$2.1 billion (equivalent to 1.6% of GDP), with strongest flows coming from: - North America: close to US$1 billion. - South America: US$0.9 billion. - The paper notes no publicly available study or estimate of criminal proceeds generated in or moving through Panama. ### Panama: key institutional counts (sectoral coverage and supervisors) - Banks: 88 — Superintendency of Banks (SBP) - Savings and Loans Associations: 4 — Banco Hipotecario Nacional (BHN) - Financial Cooperatives: 276 — Panamamian Autonomous Institute of Cooperatives (IPACOOP) - Brokerage Houses: 30 — Superintendency of Securities Markets (SMV) - Investment companies: 11 — Ministry of Commerce and Industry (MCI) - Finance Companies: 137 — Superintendency of of Insurance and Reinsurance (SSRP) - Leasing Companies: 105 — Ministry of Commerce and Industry (MCI) - Remittance and Exchange Houses: 28 — Ministry of Commerce and Industry (MCI) - Insurer and Reinsurers: 46 — Superintendency of Insurance and Reinsurance (SSRP) - Insurance Brokers: 400 — Superintendency of Insurance and Reinsurance (SSRP) - Insurance Agents: 1550 — Superintendency of Insurance and Reinsurance (SSRP) - Trust Service Providers: 72 — Superintendency of Banks (SBP) - Full Casinos: 12 — Gaming Board - Internet Casinos: 1 — Gaming Board - Slot Machine Businesses: 40 — Gaming Board - Hippodrome, Bingos and Others: 23 — Gaming Board - National Lottery: 1 — Self-regulated - Companies in the Colon Free Zone: 1900 — Administration of the Free Zone - Companies in the Processing Free Zone: 84 — Ministry of Commerce and Industry (MICI) - Lawyers and company service Providers: 10000 — Intendency for the regulation and supervision of non-financial entities - Accountants: 11888 — Ministry of Commerce and Industry (MICI) - Notaries: 59 — Intendency for the regulation and supervision of non-financial entities - Real Estate Agents and Promoters: 284 — Ministry of Commerce and Industry (MICI) ### Panama’s vulnerability to ML/FT: key risk factors and exposures - Country-specific risk factors emphasized: - Level and type of proceeds-generating crime. - Extent of exposure to cross-border flows of criminal or illicit assets. - Existence of active terrorist groups. - Relative size of the economy; size, integration and composition of the financial sector; importance of financial products; volume of domestic and offshore business; extent of informality. - Financial linkages and cross-border exposure: - Banks located in other jurisdictions have claims on Panamanian borrowers of US$85 billion (137.7 percent of GDP) at end-September 2017. - Of total outstanding cross-border claims, 85 percent (equivalent to 118 percent of GDP) were loans and advances; main counterparty were non–bank financial institutions. - Banks located in Japan hold 42.5 percent of these claims. - Non–resident deposits as a share of banking system’s total deposits and total liabilities were 28 percent and 23 percent, respectively, at end–2017, primarily from LACs including Venezuela, Ecuador, Costa Rica, and Colombia. - Domestic assets and liabilities of offshore banks are about 1.8 percent and 0.4 percent of their total assets and liabilities, respectively. - Authorities identified banks as a higher risk sector for AML/CFT. - Trade openness and Free Zones: - Re-exports through the Colon Free Zone (CFZ) amounted to 15 percent of GDP at end–2017. - CFZ can be an originator or transshipment point for goods purchased with proceeds of drug trafficking and other criminal activities. - Authorities identified free trade zones as a higher risk for AML/CFT. ### Cross-border positions (resident in Panama, as at September 2017) - Claims outstanding (US$ Billion) and % of GDP: - Loans and deposits: 73.0 — 118.1 - Debt securities: 9.5 — 15.4 - Other: 2.6 — 4.2 - Unallocated: 0.0 — 0.0 - Liabilities outstanding (US$ Billion) and % of GDP: - Loans and deposits: 58.7 — 95.0 - Debt securities: 0.23 — 0.4 - Other: 1.35 — 2.2 - Unallocated: 5.62 — 9.1 - By sector of counterparty (Claims / % of GDP; Liabilities / % of GDP): - Banks: 11.3 — 18.3 ; 12.1 — 19.6 - of which: intragroup: 3.6 — 5.8 ; 0.94 — 1.5 - Non-banks: 73.5 — 118.9 ; 53.6 — 86.7 - of which: non-bank financial: 10.4 — 16.8 ; 21.7 — 35.1 - of which: non-financial: 59.7 — 96.6 ; 28.8 — 46.6 - Unallocated: 0.18 — 0.3 ; 0.21 — 0.3 - Total positions: 85.1 — 137.7 ; 65.9 — 106.6 ### Regulatory and supervisory weaknesses identified - GAFILAT found effectiveness low in preventing misuse of foreign and domestic legal entities and legal arrangements (e.g., companies, trusts) incorporated or used in Panama. - Lack of available, timely and up-to-date beneficial ownership information creates anonymity risks for corporate structures, trusts and foundations. - Entities without physical presence in Panama are particularly vulnerable to abuse. - High-profile incidents in the first half of 2016 highlighted vulnerability of the corporate services sector and potential AML/CFT effectiveness gaps. - Tax regime features and implications: - Tax code offers benefits (e.g., low rates and other tax incentives); territoriality principle exempts income earned by Panamanian entities abroad from tax. - Panama treats tax evasion as an administrative, rather than a criminal offence (authorities’ study, CNBC, 2017b). - Non-inclusion of tax crimes as predicate offence for money laundering in the legal framework exposes Panama to misuse by tax evaders from other jurisdictions. ### Criminal activity, trafficking routes, and sectoral vulnerabilities - Panama is a route for drug traffickers; Central America is a major drug route (UNODC, 2015). - Panama’s connectivity provides opportunity for traffickers to transit cocaine cargoes from Colombia, Venezuela and Ecuador. - Dollarized economy increases attractiveness to criminal groups involved in money laundering and drug trafficking. - Authorities’ national risk assessment (January 2017) identified main threats: - External: transnational organized crimes. - Domestic: drug trafficking, corruption, financial crime, smuggling, copyright crimes. - Sectors most vulnerable for ML: free trade zones, real estate and construction. - Despite global financial linkages, authorities believe banking sector risks are mitigated by robust regulation and supervision. - GAFILAT (2018) noted tax offenses were not covered in the NRA, indicating a gap in Panama’s risk understanding and mitigation. ### Compliance with international AML/CFT and tax transparency standards; FATF actions and reforms - Panama recognizes the importance of safeguarding financial integrity to maintain access to global financial markets and financial stability. - Assessments timeline and outcomes: - 2012 assessment (2004 FATF methodology) found significant shortcomings; Panama was referred to FATF’s ICRG. - 2014 IMF–led assessment published February 2014 found shortcomings; Panama entered FATF’s ICRG “grey list” in June 2014. - Authorities agreed to an Action Plan to upgrade AML/CFT framework by mid-2015. - Following implementation of the Action Plan and new legislation, FATF removed Panama from the ICRG process in February 2016. - April 2016 “Mossack Fonseca documents” release and May 2016 U.S. sanctions (Foreign Narcotics Kingpin Designation Act) highlighted persistent implementation deficiencies. - 2017 assessment used revised 2012 FATF recommendations and 2013 methodology; Panama again met threshold for FATF’s ICRG process under effectiveness-focused methodology. - Legal and institutional reforms: - AML/CFT Law 23 revised to reflect FATF recommendations; aimed to prevent misuse of financial, non-financial and professional business entities and extended coverage to previously uncovered activities and professions. - Law enhanced Customer Due Diligence (CDD) requirements, and powers and resources of the Financial Intelligence Unit (Unidad de Análisis Financiero, UAF) to ensure operational independence. - New high level national AML/CFT coordinating body created in 2015 to establish and coordinate national AML risk strategies and oversee implementation of the national action plan. - Assessment remarks: - Under the new FATF methodology, focus shifted to assessing effectiveness across 11 effectiveness outcomes; technical compliance ratings under the new methodology are comparatively favorable for Panama, though effectiveness gaps remain. *Source: IMF staff and referenced UNODC/GAFILAT findings as presented in the provided chapter content.* ### 32. The recent assessment by GAFILAT, published in January 2018, confirmed the ### 32. The recent assessment by GAFILAT, published in January 2018, confirmed the ### Key reforms by Law 23 to the legal framework since 2015 - Objective: address shortcomings identified in the 2014 assessment report. - Nonfinancial entities - Extended and deepened the scope of covered entities for customer due diligence (CDD) by including nonfinancial entities in addition to all financial institutions. - Introduced suspicious transaction reporting (STR) requirements for all nonfinancial entities. - Established an intendancy for supervision and regulation of nonfinancial entities. - Adjusted the legal framework to grant the financial intelligence unit (FIU) access to information maintained by all nonfinancial entities and resident agents and a heightened role in AML/CFT matters. - Identification of beneficial ownership - Amended the legal provisions to ensure identification of beneficial owners of all customers (natural and legal) in trust companies and associated services. - Introduced mandatory identification of all parties to a trust client and covered them by the CDD obligations. - Restricted the existence of bearer shares by creating a legal obligation for delivery of all bearer shares to be delivered to a custodian, to identify shareholder(s) or their replacement with nominal share certificates. - Obliged all resident agents to gather and maintain information on beneficial ownership. - Criminalize ML/TF - Extended the scope of covered entities for customer due diligence (CDD) by including nonfinancial entities in addition to all financial institutions. - Added crimes as predicate offenses to ML under the previous FATF standard: piracy, forgery, forgery of money, smuggling, etc. - Freezing of terrorist assets - Established immediate mechanisms to freeze terrorist assets in accordance with UN guidelines without prior judicial review. - Adopted procedure to freeze terrorist assets for cases initiated under other jurisdictions. - Strengthen the FIU - Enhanced financial and human resources in line with its expanded responsibilities for new reporting entities. - Set the FIU as the central agency that receives STRs; strengthened STR quality by providing feedback to reporting entities and coordination with other supervisors. - International cooperation - Set explicit legal provision to regulate the principles and procedures for international legal cooperation in the absence of a treaty. - Fostered the signing of MoUs with foreign FIUs, under the Egmont Group framework. *Source: IMF Country Report No. 16/337; and the Panamanian authorities.* ### Technical compliance with FATF recommendations (GAFILAT 2018) and main strengths/weaknesses - Overall technical compliance ratings (of 40 FATF technical recommendations): - 10 complaint ratings - 22 largely compliant ratings - 7 partially compliant ratings - 1 non-compliant rating - Areas where Panama’s compliance is strongest: - confiscation and provisional measures - financial institutions secrecy laws - politically exposed persons - correspondent banking relationships - new technologies - internal controls and foreign branches and subsidiaries - tipping off and confidentiality - financial intelligence unit, guidance and feedback - international instruments - Not meeting the standard for: - transparency and beneficial ownership of legal persons ### Effectiveness of the AML/CFT framework (GAFILAT findings) - Under the current FATF methodology, effectiveness is the core of the assessment. - GAFILAT assessment: Panama’s AML/CFT system is effective in only two areas: - targeted financial sanctions related to terrorist financing - targeted financial sanctions related to proliferation financing - In all other areas, GAFILAT deems Panama’s effectiveness to be insufficient, including: - Panama’s risk understanding - international compliance - supervision - preventive measures (CDD) - transparency of legal persons and legal arrangements - financial intelligence - money laundering investigations and prosecution - confiscation - terrorist financing investigations and prosecutions ### Steps taken to improve effectiveness and supervisory activity - Renewed focus on AML/CFT supervision since 2015, facilitated by a new intendency and improved supervisory capacity. - Onsite inspections conducted by the five main supervisory entities: - Total onsite inspections increased by 10 percent, and 40 percent in 2016 and 2017, respectively. - Overall number of SBP’s inspections: - increased by 36 percent and 23 percent in 2016 and 2017, respectively. - number for trusts and other financial entities rising by 84 percent and 300 percent in 2016, respectively. - Staffing increases in 2017: - Intendency for regulation and supervision of non-financial entities hired 40 new staff. - UAF hired 35 new staff. - Supervision improvements: - stepped up both offsite and onsite through implementation of risk-based models and tools. - GAFILAT deemed measures insufficient for effectiveness in 2018, but noted these could be useful components of a longer-term effort. ### Supervision—number of supervisions conducted (selected figures) - By supervisory entity (number of supervisions conducted): - Intendencia: 31 (2015), 35 (2016), 69 (2017) - IPACOOP: 202 (2015), 211 (2016), 295 (2017) - SSRR: 71 (2015), 78 (2016), 122 (2017) - SBP: 73 (2015), 102 (2016), 116 (2017) - SMV: 26 (2015), 18 (2016), 20 (2017) - Total: 403 (2015), 444 (2016), 622 (2017) - SBP supervision by entity (number of supervisions conducted): - Banks: 60 (2015), 68 (2016), 86 (2017) - Trusts: 13 (2015), 24 (2016), 31 (2017) - Others 1/: 61 (2015), 81 (2016), 16 (2017) - Total: 79 (2015), 108 (2016), 133 (2017) - 1/ includes finance, leasing and factoring companies ### AML/CFT awareness, training, and STRs - Training and awareness: - Authorities reported 766 trainings, workshops and seminars on AML/CFT issues during 2015–17, attracting close to 42,000 participants. - Detailed training counts and participants (selected figures) - Number of Trainings (by institution, 2015/2016/2017): - Intendencia: 86, 92, 69 - IPACOOP: 26, 26, 73 - SSRR: 3, 12, 9 - SBP: 7, 13, 43 - SMV: 6, 4, 9 - Judicary: 3, 6, 4 - FIU: 48, 43, 184 - Total: 179, 196, 391 - Number of Participants (by institution, 2015/2016/2017): - Intendencia: 3,877, 7,432, 3,921 - IPACOOP: 961, 756, 2,173 - SSRR: 232, 1,278, 431 - SBP: 384, 1,084, 1,961 - SMV: 578, 490, 575 - Judicary: 64, 161, 100 - FIU: 2,616, 2,150, 5,736 - FIU Virtual Academy: 0, 0, 4,950 - Total participants: 8,712 (2015), 13,351 (2016), 19,847 (2017) - Suspicious Transaction Reports (STRs) - STR received by the UAF: - increased by 73 percent in 2015 to 1,734 - increased by 45 percent in 2017 to 2,897 - Main reporting sources: mainly from banks and remittance agents. - Low filing from sectors assessed as high risk: free zones, lawyers and real estate. - Observations: - Authorities view resistance in these sectors due to fear of losing clients. - Banks may be filing for clients in the free zones. - GAFILAT (2018) indicates more STRs should be coming from the banking sector given its size and risk. ### Tax transparency, AEOI, and BEPS - Tax transparency initiatives and legal changes: - National Assembly passed legislation in the past three years to establish the legal basis for AEOI, enhance the revenue administration’s powers, and require all companies and foundations registered in Panama to keep accounting records. - With IMF assistance, the authorities reorganized EOI unit under the Directorate of General Income (DGI), and increased staffing for effective information exchange. - Panama has signed over 30 bilateral tax treaties and tax information exchange agreements. - Ratified the OECD’s Multilateral Convention on Tax Matters. - Met FATCA information reporting requirements, with first transmission of information taking place in September 2017. - Initiated automatic exchange of tax information (AEOI) with 31 jurisdictions under the OECD’s Common Reporting Standards (CRS). - Response time to information requests (UAF): - improved from 250 days (2012) to 150 (recent). - Global Forum: - Advanced Panama’s rating to “provisionally largely compliant in mid-2017” under its Fast Track Review process. - Must demonstrate compliance with the enhanced GF standard in the ongoing comprehensive assessment started September (year implied by context). - BEPS (Base Erosion and Profit Shifting) - Panama is a member of the Inclusive framework on BEPS (became the 87th member in October 2017). - Implementing four Minimum Standards subject to peer review: - (i) countering harmful tax practices (Action 5) - (ii) preventing treaty abuse (Action 6) - (iii) implementing country-by-country (CbC) reporting (Action 13) - (iv) making dispute resolution mechanisms more effective (Action 14) - Recent efforts have centered on implementing Action 5 shortcomings through legislative amendments. ### Panama in international context - Technical compliance vs. effectiveness: - Panama ranks above the median on technical compliance with FATF recommendations among a select group of offshore centers and regional peers, but is among the low performers in effectiveness. - In assessments from late 2016 to early 2018: - Panama was rated ‘Compliant’ in one-quarter of the 40 recommendations (same as median of group). - Rated ‘Largely Compliant’ in 22 recommendations (better than median). - Effectiveness lag likely because recent legal revisions have not been sufficiently tested since the technical framework was strengthened in 2015. - Global Forum comparisons: - Panama’s performance on tax transparency needs strengthening relative to other jurisdictions. - Global Forum provisionally upgraded Panama’s overall rating from ‘Non-compliant’ to ‘Largely Compliant’ under its Fast Track Review Process in mid–2017. - The Fast Track upgrade did not substitute for a full peer review; a comprehensive assessment was initiated in September (year referenced in text). ### Critical areas for further reform (GAFILAT recommendations and observations) - Criminalization of tax evasion - Panama’s tax to GDP ratio is relatively low, at around 10 percent of GDP. - A 2017 study by the authorities indicates Panama is one of the few jurisdictions where tax evasion is an administrative, rather than a criminal offence. - Non-inclusion of tax crimes as underlying ML offences significantly hampers domestic AML/CFT efforts and information sharing with foreign counterparts. - Legislative status: pending legislation, in second debate before the National Assembly, to criminalize tax evasion and to bring tax crimes in the scope of money laundering offences. - Transparency of legal persons and arrangements - Existing regulations do not sufficiently guarantee adequate, timely, accurate and up-to-date beneficial ownership information. - Only information on beneficial owners that control 25 percent or more of an entity are required to be kept by law. - Access to ownership information is difficult when resident agents have lost contact or entities lack physical presence in Panama. - Large number of dormant entities - Often have cut-off relationships with the resident agent and ceased paying yearly corporate fee. - Resident agent is primary source of information on activity and beneficial owners at relationship inception, as required by CDD under Law 23. - Concerns about timeliness and reliability of information in the Public Registry; not always up-to-date. - Note: All dormant entities identified by the Tax Authority (Dirección General de Ingreso) have a side notation in the public registry as evidence of default under Panamanian Law. - Customer due diligence (CDD) obligations of resident agents - Law is not clear on scope of CDD for resident agents, partly due to perceived tension between a special law (Law No. 2) and the AML law (Law No. 23). - Law No. 2 appears limited: requires resident agents to conduct due diligence for entities with an ongoing professional relationship but does not obligate verification of accuracy of client-provided information regarding company activity, nor strictly require identification of the final beneficial owner. - Financial intelligence - Registrations of DNFBPs in the UAF online platform are relatively low, contributing to low filing of STRs. - Compared to financial institutions, DNFBPs lag in implementing compliance measures due to low risk awareness and recent oversight. - Timeline allowed by law to report STR is 15 days after detection; legislative proposal pending to require STR be reported “Promptly”. - UAF processes appear less oriented towards producing usable financial intelligence; low dissemination of available products to prosecutors and law enforcement. - AML/CFT statistics - Information compiled are not systematic, comprehensive and readily available through the UAF. - Reflects weaknesses in the national statistical system and coordination gaps between the UAF and some data generating authorities. *Source: IMF Country Report No. 19/12 (cr1912-panamasi).* ### 42. Weak implementation undermines the strength of Panama’ AML/CFT framework. The ### 42. Weak implementation undermines the strength of Panama’ AML/CFT framework. ### Effectiveness and assessment findings - Low and moderate ratings on the effectiveness of the AML/CFT framework indicate that financial integrity objectives are not being met. - GAFILAT found that Panama has not demonstrated sufficient results in important areas including the understanding of risk, transparency of legal persons, and financial intelligence. - The intendency for DNFBPs was only created in 2015 and available resources are inadequate. ### Oversight gaps - Oversight is inadequate, particularly for DNFBPs, complicated by the very large number of entities and professionals that operate in this sector. - Further developing risk-based tools is critical to prioritize efforts given limited resources and the high number of financial and non-financial intermediaries. ### Priority actions and way forward - Further reinforce the AML/CFT framework in line with the GAFILAT assessment and FATF recommendations: - Near-term priority: correct shortfalls in the AML/CFT regime, build on the recent favorable technical assessment by GAFILAT and demonstrate sufficient progress in effectively implementing the legal framework. - Avoid public listing by FATF/OECD and the potential consequences. - Authorities should expeditiously criminalize tax evasion and make tax crimes a predicate offense to money laundering in line with FATF recommendations. - Improve transparency of corporate vehicles: - Clarify the role of resident agents. - Keep the public registry up to date. - Expedite the dissolution of legacy entities. - Remove any impediments to timely access to information. - Take measures to remove any appearance of secrecy in the law. - Strengthen AML/CFT supervision: - Enhance the understanding of AML/CFT risks to which Panama is exposed, particularly in highly vulnerable sectors. - Strengthen supervisory capacity for AML/CFT oversight, particularly for DNFBPs. - Further develop risk-based approaches to AML/CFT supervision to effectively channel available resources to critical areas. - Build a strong financial intelligence knowledge and capabilities: - Continuously educate reporting entities of their AML/CFT compliance obligations. - Strengthen the capacity of the UAF to gather, analyze and disseminate intelligence products useful for prosecution and investigation of money laundering offences. - Maintain consistent and comprehensive AML/CFT statistics, including through enhanced coordination among competent authorities. - Enhance information exchange: - Continue efforts to further enhance tax transparency and information exchange towards a successful ongoing assessment by the Global Forum. - Advance the implementation of the minimum standards on Base Erosion and Profit Shifting (BEPS) at a faster pace. ### Concluding remarks and near-term imperatives - Panama is an important provider of international financial and business services, with a business model founded on banking, logistics and trade activities. - The nature of products and services offered leaves the country vulnerable to money laundering, including from corruption, drug trafficking and other predicate crimes, such tax crimes committed abroad. - Authorities have made progress in strengthening financial integrity and tax transparency, including a revamp of the AML/CFT framework in 2015 and creation of a new intendency in 2015; enhancements to tax information exchange have been facilitated (including under FATCA and OECD’s Common Reporting Standards). - Nonetheless, efforts must continue to improve the effectiveness of the AML/CFT framework, enhance tax transparency and solidify Panama’s competitive position. - The authorities should demonstrate good progress in fully aligning its AML/CFT framework with international standards before the next FATF plenary in February next year to avoid being listed as non-cooperative jurisdiction by mid–2019. - Specifically, authorities should expeditiously criminalize tax evasion in line with FATF recommendations and take concrete steps to improve the transparency of corporate vehicles; continue strengthening the effectiveness of their framework and AML/CFT supervision, especially for DNFBPs; and advance implementation of BEPS minimum standards. *International Monetary Fund — Panama: staff assessment excerpt* ### 5. Financial conditions contain important information about the probability distribution ### 5. Financial conditions contain important information about the probability distribution of future growth outcomes ### Methodology: conditional density via quantile regressions - Conditional density forecast of future GDP growth in Panama is estimated using quantile regressions following the approach in IMF (2017). - Quantile regression specification (as presented): Q(y_{t+h}, q) = β_y^q y_t + β_p^q p_t + β_l^q l_t + β_ff^q ext_fin_t + β_fd^q ext_dem_t + ε_{t,h} - q indicates the quantile level and h the forecast horizon (in quarters). - Regression details: - Quantiles fitted: 0.10, 0.25, 0.50, 0.75, 0.90. - Forecast horizons considered: 4, 8 and 12 quarters. - Included explanatory variables (estimated through corresponding FCIs): price of risk (p_t), leverage (l_t), external financial conditions (ext_fin_t), and external demand (ext_dem_t). - Purpose: investigate relative significance of each financial-condition dimension for signaling risks to near- and medium-term growth. ### Key empirical findings from the quantile regressions - Horizon dependence: - External financial conditions are the main driver of Panama’s short-term growth prospects. - Leverage is the most important link between financial conditions and Panama’s medium-term growth outlook. - Price of risk: - Regression results suggest a rising price of risk is (surprisingly) consistent with upside risks to the growth outlook over both the near- and medium-term for the estimation period. - This contrasts with typical findings (e.g., IMF (2017)) where rising funding costs and falling asset prices are important signals of severe recession at horizons up to four quarters. - Interpretation/limitations: - Estimation period restricted to start in 2004; during much of this period the price of risk was positively correlated with real GDP growth. - Positive correlation may reflect a decoupling of Panama’s cycle from the rest of the world if domestic price of risk was driven by external financial conditions, and/or the impact of a large investment boom (including Panama Canal expansion and a new mine). - Investment contributed on average 4 percentage points to Panama’s annual economic growth over 2008-2016 with a substantial share related to large scale infrastructure projects: U.S. $5.3 billion over 2007-16 (Panama Canal expansion) and U.S. $5.5 billion (new mine). - A higher price of risk may have reflected higher demand for capital during the investment boom; historical negative correlation between rising price of risk and growth observed prior to recent investment period. - Leverage: - Short-term: small effect on growth; relatively neutral/slight positive effect consistent with demand-side effects of leverage. - Medium/long-term: higher leverage negatively affects growth, especially the left-hand tail of the growth distribution, due to build-up of balance sheet vulnerabilities. - Policy implication: macroprudential policy can mitigate medium-term risks from excessive leverage, particularly important in Panama’s dollarized economy and regional financial center context. - Highlight: term structure of GaR from financial conditions — near-term accommodative conditions support activity; medium-term build-up of vulnerabilities increases GaR. - External conditions: - Tighter external financial conditions have a marked negative effect on the entire distribution of the near-term growth outlook; this negative impact is larger than the effects of other financial-risk dimensions. - Weaker external demand also has a strong negative effect on the near-term growth outlook. - These effects dissipate as the forecast horizon lengthens. - Consistent with Panama being a highly open economy with a business model reliant on international financial, business and transportation services. ### Growth-at-Risk (GaR) density forecasts and scenarios - Calibration: - Distributions for growth are calibrated so that the mode is consistent with the forecast: 4.3 percent in 2018, 6.3 percent in 2019 and 5.8 percent in 2020. - Conditional distributions are derived using a t-skew fitted curve approach based on quantile regression information. - GaR (severely adverse scenario with 5 percent probability) forecasts given current financial conditions: - 2018: GaR = 3.9 percent compared to the outlook of 4.3 percent. - 2019: GaR = 1.4 percent compared to the outlook of 6.3 percent. - 2020: GaR = 2.3 percent compared to the outlook of 5.8 percent. - Notes on 2018 calibration: - Assumption that the mode of the growth density forecast is 4.6 percent accounts for an estimated 1 percentage point reduction in growth for 2018 from an abrupt stoppage in construction activity during the strike; using the conditional mean from quantile regressions would give a mode of 5.6 percent. - Comparison with SBP stress-test scenarios: - SBP severe scenario assumes growth at end-2019 of 2.5 percent, broadly equivalent to a GaR scenario with 10 percent probability for 2019. - A more severe scenario consistent with a 5 percent probability would be appropriate to evaluate tail risks. - Caution: stress tests assume a relationship between activity and asset quality estimated over a limited period (broadly since 2000) when activity remained robust and NPLs low. ### Aggregate interpretation and policy implications - Aggregate message: - Conditional information from price of risk, leverage and external financial conditions imply lower risks to growth from financial conditions in the near-term relative to the medium-term. - Still broadly accommodative financial conditions should continue to support near-term growth. - Prolonged accommodative conditions can contribute to build-up of financial vulnerabilities that put financial stability and medium-term growth at risk. - Specific vulnerabilities to monitor: - Turning of the leverage cycle. - Ongoing tightening of external financial conditions (especially relevant in Panama’s dollarized economy with no central bank). - Rapid deterioration in external financial conditions could significantly worsen near-term outlook; further tightening of leverage would likely have the largest medium-term growth impact. - Policy recommendations / required actions: - Remain vigilant and build resilience to emerging financial risks. - Develop macroprudential policy framework and tools to provide policy flexibility to address macro-financial risks in the context of Panama’s dollarized economy and regional financial center. - Emphasize crisis preparedness and crisis management given limited monetary policy tools under dollarization. ### Interbank and banking-sector context (selected quantitative facts relevant to risk transmission) - Interbank deposits (as of March 2018): - Interbank deposits account for about 4 percent of Panamanian-owned onshore banks’ assets and about 9 percent of foreign-owned onshore banks’ assets. - Offshore banking sector: about 30 percent of assets held in deposits in other banks. - Interbank exposures as a share of equity: - Onshore: interbank deposits account for about 115 percent of Panamanian-owned banks’ total equity and 76 percent of foreign banks’ equity. - Offshore: exposure to interbank deposits about 165 percent of equity. - Concentration and external linkages: - Over 80 percent of banks’ interbank deposits are held in foreign banks. - Panamanian-owned onshore banks hold over 70 percent of their interbank deposits in foreign banks. - Foreign-owned offshore banks hold about 80 percent of their interbank deposits in foreign banks. - Panamanian banking system holds deposits in 128 banks abroad, with the ten banks with the largest exposures holding about over 50 percent of Panamanian banks’ deposits abroad. - Banking-system soundness (aggregate). - Banks generally maintain capital buffers in excess of the regulatory minimum of 8 percent of risk-weighted assets, with significant dispersion across banks. - Non-performing loans remain low but have been rising; provisioning coverage varies across banks. - Profitability and liquidity: system profitable and liquidity sufficient on aggregate, with wide dispersion across banks. *Source: IMF staff calculations and analysis in the chapter "5. Financial conditions contain important information about the probability distribution of future growth outcomes" from the provided IMF document.* ### 5. The network-based approach of Espinosa-Vega and Sole (2010) is used to assess ### The network-based approach of Espinosa-Vega and Sole (2010) is used to assess ### Methodology: network contagion simulation - Sequentially simulates the failure of each bank in the Panamanian banking system and traces domino effects through both credit and funding channels. - Credit channel: creditors lose a fraction λ of their deposits when a counterparty fails. - Funding channel: borrowers can replace only a fraction (1-ρ) of funding from the failed bank and must restore balance-sheet identity by selling assets at a fire-sale price of $1/(1+δ) per dollar. - The model simulates multiple contagion rounds until no further bank failures occur. - The model design excludes the possibility of banks raising new capital. ### Key modeling assumptions and parameter values - Loss given default for creditor banks: λ = 1. - Roll-over of funding from failed bank: banks roll over 65 percent (i.e., ρ = 0.35). - Fire-sale asset price: δ = 1 (implying a 50 percent discount). - Insolvency thresholds considered: - High-sensitivity: banks default when CAR falls below 8 percent (CAR<8 percent). - Medium-sensitivity: banks default when CAR falls below 4 percent (CAR<4 percent). - Low-sensitivity: banks default only when capital is fully depleted (CAR<0). - Dynamic provisioning framework (Regulation No. 004-2013) parameters: - DPR(t) = αL(t) + βmax{ΔL(t),0} - SP(t), where α = 1.5 percent, β = 5 percent, L(t) = risk-weighted assets for loans classified under the normal category, SP(t) = variation in the balance of specific reserves. - DPR capped at 2.5 percent of qualifying risk-weighted assets and floored at 1.25 percent of risk-weighted assets. - Draw-down of the dynamic provision buffer is restricted and subject to the discretion of the SBP (Article 37 of Regulation No. 004-2013). ### Data inputs - Interbank contagion analysis based on data as of March 2018. - Interbank exposures derived from banks’ weekly liquidity reports to the SBP (deposits in other depository institutions, both in Panama and abroad). - Interbank deposit matrix includes 75 banks operating in Panama: - 49 banks with general banking licenses (onshore): 19 resident-owned, 30 foreign-owned. - 26 banks with international banking licenses (offshore). - Regulatory capital and risk-weighted assets available only for banks where SBP is supervisor of origin; for other banks: - Risk-weighted assets estimated by multiplying unweighted assets by the average ratio of RWA to unweighted assets of banks under SBP supervision. - Regulatory capital estimated similarly; banks for which these assumptions would leave CAR below 8 percent were set at the median CAR of the other banks. - Dataset excludes foreign banks’ deposits in Panama (only banks with Panamanian operations are required to report). ### Classification of bank capital losses - Buffer losses: reduction in capital above the 8 percent regulatory minimum. - Injection required to restore CAR: amount needed to restore CAR to 8 percent of risk-weighted assets. - Excess losses: additional losses for banks with capital below the solvency thresholds assumed in the three scenarios (for defaulting banks, if remaining capital is positive it is classified as excess loss). ### Results: contagion magnitudes and patterns - System-wide total capital losses (excluding the original defaulting bank): - High-sensitivity scenario: US$24.9 billion. - Medium-sensitivity scenario: US$24.6 billion. - Low-sensitivity scenario: US$24.5 billion. - Six simulations (in the high-sensitivity scenario) generate losses greater than US$1.5 billion, equivalent to about 1 percent of total consolidated banking system assets and 3.7 percent of 2017 GDP. - Maximum contagious defaults: - High-sensitivity scenario: up to 7 contagious defaults in the worst simulation. - Medium- and low-sensitivity scenarios: maximum of 3 contagious defaults. - The largest single capital loss in the high-sensitivity scenario is US$2.8 billion or 7 percent of GDP (caused by the failure of a Panamanian-owned bank). - In many cases the losses generated by bank failures are largely absorbed by banks’ existing capital buffers, including in scenarios excluding dynamic provisions. - Total capital losses are broadly similar across sensitivity scenarios because the most vulnerable banks (those that fail after many other failures) tend to be the least contagious, so the set of affected banks is broadly comparable across scenarios. - Excluding dynamic provisions produces broadly comparable estimated capital losses to scenarios including dynamic provisions. ### Systemic patterns and segmentation - Failure of foreign banks is more likely to result in contagion to banks in the Panamanian system; foreign banks feature among institutions causing the largest number of contagious defaults (except one local Panamanian bank that caused 7 additional failures in the high-sensitivity scenario). - Banks operating in the Panamanian banking system (3 Panamanian-owned, one offshore, and two foreign-owned banks) account for the largest capital losses for the banking system. - The onshore banking system remains relatively isolated from the offshore banking system due to little interbank deposits between the two systems: - The impact of an offshore bank failure has little effect on onshore banks; effects of offshore bank defaults are concentrated on other offshore banks (or potentially foreign banks abroad). ### Implications for supervision and buffers - Dynamic provisions act as an additional capital buffer included in capital but cannot be used to meet the minimum 8 percent regulatory requirement; draw-down is restricted and subject to SBP discretion. - The effectiveness of dynamic provisions in stemming interbank contagion depends on the SBP’s ability to determine the appropriate commencement of the draw-down phase. - Banks may become insolvent before capital is fully depleted if bankruptcy filings or early supervisory intervention occur; hence the three insolvency sensitivity thresholds capture different supervisory and market responses observed in past crises. - Banks that receive large deposits from comparatively few banks tend to be riskier for contagion than banks that receive small deposits from many banks. ### Key statistics and exact figures (preserved) - λ = 1 - ρ = 0.35 (banks roll over 65 percent of funding) - δ = 1 (fire-sale price $1/(1+δ) implying a 50 percent discount) - Dynamic provision formula and parameters: DPR(t) = αL(t) + βmax{ΔL(t),0} - SP(t); α = 1.5 percent; β = 5 percent; DPR capped at 2.5 percent; floor 1.25 percent of RWA. - Data as of March 2018. - Total banks in dataset: 75 (49 general license, 26 international license). - General license banks: 19 owned by residents, 30 foreign-owned. - Total capital losses: - High-sensitivity: US$24.9 billion. - Medium-sensitivity: US$24.6 billion. - Low-sensitivity: US$24.5 billion. - Number of simulations with losses > US$1.5 billion in high-sensitivity: 6. - Losses > US$1.5 billion equals about 1 percent of total consolidated banking system assets and 3.7 percent of 2017 GDP. - Largest single capital loss: US$2.8 billion or 7 percent of GDP. - Maximum contagious defaults observed: 7 (high-sensitivity), 3 (medium/low-sensitivity). *Source: IMF staff analysis; interbank contagion analysis based on data as of March 2018.* ### 16. The IMF Bank Contagion Model is also used to assess the potential propagation of ### 16. The IMF Bank Contagion Model is also used to assess the potential propagation of financial shocks from foreign banks to Panama ### Methodology - Model scope: simulates several rounds of asset and funding shocks based on Panamanian banks’ identified upstream exposures. - Round 1: assumes a 10 percent loss in the value of banks’ private and public sector assets in selected BIS-reporting countries; computes foreign bank losses that partially or fully deplete capital. - Round 2: banks with insufficient capital restore capital ratios by uniformly deleveraging across both domestic and external claims. - Round 3: resulting reduction in lending to other banks (including those in Panama) produces funding shocks and further deleveraging; iteration continues until no further deleveraging is required. - Purpose: provides an indication of potential impact on credit availability in Panama from foreign banks’ deleveraging versus impact on banks’ capital positions. ### Results — Exposures - Panamanian banks’ downstream exposures (Panamanian lending to foreign clients): amount to over 30 percent of GDP. - Downstream exposures concentrated primarily to the United States and to neighboring economies in Central and South America. - Panamanian banks’ upstream exposures (foreign banks’ claims on Panama / Panama’s foreign borrowing): are over 50 percent of GDP. - Interpretation: potential funding risks from Panamanians’ foreign borrowing are larger than credit risks from Panamanian banks’ lending to foreign clients. - Exposures capture the upper bound of rollover risks to Panama from the loss of credit by BIS-reporting banks to Panamanian borrowers. - Panama’s largest upstream exposures are to a handful of Asian countries, the most important of which is Japan, the United States and Canada and several European economies. ### Results — Impact on credit availability (selected simulations) - All simulations are based on 2017Q4 data and assume uniform deleveraging across domestic and external claims. - Table 4: Reduction in foreign banks' credit due to impact of the shock on their balance sheet (Impact on Credit Availability in Panama (% GDP)): - USA — 10 — -5.2% - Canada — 10 — -6.1% - USA and Canada — 10 — -10.9% - UK* — 10 — -1.7% - Germany* — 10 — -3.8% - France — 10 — -3.5% - Spain — 10 — -2.4% - Italy — 10 — -1.2% - Portugal* — 10 — -0.1% - Switzerland* — 10 — -0.1% - Netherlands — 10 — -1.9% - Japan* — 10 — -13.4% - Selected European Countries 3/ — 10 — -14.9% - 3/ Greece, Ireland, Portugal, Italy, Spain, France, Germany, Netherlands, and the UK - Example interpretation: a combined 10 percent loss on assets of BIS-reporting banks in Canada and the United States would reduce credit in Panama by about 11 percent of GDP. - Based on identified upstream exposures, the most sizeable impact on foreign credit availability for Panamanian borrowers would stem from losses on Japanese assets, which would reduce credit availability in Panama by over 13 percent of GDP. - Note: calculations do not account for local stable funding for foreign banks from deposits in Panama, which would provide some cushion. ### Conclusions and policy implications - Both interbank exposures within the Panamanian banking sector and Panama’s connections with foreign banking systems through credit and funding channels are important potential sources of systemic risk. - On balance, network analysis results suggest systemic risks from interconnections are moderate: - Banks maintain relatively important interbank connections (primarily through deposits). - Banks’ existing capital buffers appear broadly sufficient to absorb contagion from the failure of individual banks in the system without the need for sizeable capital injections. - Caveat: economic or financial shocks that simultaneously affect all banks are beyond the scope of this analysis and would heighten systemic risks. - Panamanian exposures to foreign banking systems are significant; credit provision in Panama would be materially affected by foreign banks’ deleveraging. - Policy recommendation highlighted: - Importance of strong supervision and regulation to mitigate associated risks, including by continuing to build banks’ ex-ante capital buffers through macroprudential policy. ### Annex highlights (selected) - Interbank and cross-border deposit tables show granular shares (percent of total interbank deposits) by bank code and bank type as of March 31, 2018. - Heatmaps and bank-level indicators reported (periods 2016Q2 to 2018Q1) include: - Capital Adequacy (CAR) — capital in percent of risk-weighted assets (bank-level series by quarter). - Asset Quality — non-performing loans in percent of total loans (bank-level series by quarter). - Provisioning Coverage of NPLs — (NPL Ratio Less Provisions to Total Loans) (bank-level series by quarter). - Earnings — Return on Assets (ROA) (bank-level series by quarter). *Source: IMF, Research Department Macro-Financial Division Bank Contagion Module based on BIS, ECB, IFS, and Fitchconnect data; simulations based on 2017Q4 data.* ### Annex Table 5: Liquidity ### Annex Table 5: Liquidity ### Definitions and scope - Table presents Liquid asset to Deposit Ratio by bank for quarters 2016Q2 through 2018Q1. - 1/ Legal liquidity index not available on a bank-by-bank basis. - Vulnerability classification (pooled distribution): - High vulnerability banks (in red): bottom 10th percentile. - Medium-vulnerability banks (in yellow): bottom 50th percentile (excluding bottom 10th percentile). - Low vulnerability banks (in green): top 50th percentile. - Heat map is shown only for general license banks and excludes international (offshore) license banks. - GL stands for "General license, local" and GF for "General license, foreign". - Bank ordering is based on banks’ asset size. ### Selected bank observations (Liquid asset to Deposit Ratio, by quarter) - Bank Code 3 (GL): 2016Q2 11.2; 2016Q3 11.2; 2016Q4 10.9; 2017Q1 10.5; 2017Q2 9.5; 2017Q3 12.5; 2017Q4 13.0; 2018Q1 12.5 - Bank Code 1 (GL): 2016Q2 42.3; 2016Q3 36.7; 2016Q4 41.5; 2017Q1 34.1; 2017Q2 38.8; 2017Q3 35.2; 2017Q4 32.5; 2018Q1 23.9 - Bank Code 182 (GF): 2016Q2 14.0; 2016Q3 14.0; 2016Q4 13.9; 2017Q1 11.5; 2017Q2 12.3; 2017Q3 16.6; 2017Q4 11.2; 2018Q1 10.1 - Bank Code 243 (GF): 2016Q2 10.4; 2016Q3 18.9; 2016Q4 40.7; 2017Q1 39.5; 2017Q2 35.1; 2017Q3 45.2; 2017Q4 109.7; 2018Q1 76.1 - Bank Code 247 (GF): 2016Q2 79.9; 2016Q3 62.5; 2016Q4 58.3; 2017Q1 53.0; 2017Q2 36.4; 2017Q3 25.1; 2017Q4 44.6; 2018Q1 70.7 - Bank Code 186 (GF): 2016Q2 70.2; 2016Q3 68.1; 2016Q4 59.6; 2017Q1 46.7; 2017Q2 36.0; 2017Q3 37.2; 2017Q4 37.8; 2018Q1 35.6 ### Key implications from the liquidity table - The table shows substantial heterogeneity across banks in liquid asset to deposit ratios over 2016Q2–2018Q1. - Some banks exhibit very high ratios in selected quarters (e.g., Bank Code 243 and Bank Code 247), while others record single-digit ratios in some quarters (e.g., Bank Code 206: 2016Q2 3.4; 2016Q3 4.1; 2016Q4 8.1; 2017Q4 3.1; 2018Q1 5.3). - Heat-map exclusions mean liquidity vulnerability visualizations apply only to GL banks; offshore banks are excluded from heat-map risk shading. ### Annex Table 6: Leverage ### Definitions and scope - Table presents Total Equity/Total Assets (leverage ratio) by bank for 2016Q2 through 2018Q1. - Vulnerability classification: - High vulnerability (red): leverage ratio < 3 percent (the regulatory requirement). - Medium vulnerability (yellow): leverage ratio >3 and 7 percent. - Heat map is shown only for general license banks and excludes international (offshore) license banks. - GL stands for "General license, local" and GF for "General license, foreign". - Bank ordering is based on banks’ asset size. ### Selected bank observations (Total Equity/Total Assets, by quarter) - Bank Code 3 (GL): 2016Q2 7.7; 2016Q3 7.8; 2016Q4 7.5; 2017Q1 7.5; 2017Q2 7.9; 2017Q3 7.9; 2017Q4 7.5; 2018Q1 7.7 - Bank Code 1 (GL): 2016Q2 7.0; 2016Q3 8.2; 2016Q4 7.3; 2017Q1 8.4; 2017Q2 8.4; 2017Q3 8.3; 2017Q4 8.9; 2018Q1 9.1 - Bank Code 117 (GF): 2016Q2 2.2; 2016Q3 2.5; 2016Q4 2.5; 2017Q1 3.7; 2017Q2 5.8; 2017Q3 7.3; 2017Q4 6.4; 2018Q1 7.1 - Bank Code 255 (GF): 2016Q2 37.5; 2016Q3 17.4; 2016Q4 15.4; 2017Q1 15.4; 2017Q2 14.6; 2017Q3 12.2; 2017Q4 11.5; 2018Q1 14.8 - Bank Code 247 (GF): 2016Q2 20.2; 2016Q3 20.7; 2016Q4 17.9; 2017Q1 16.7; 2017Q2 22.3; 2017Q3 23.7; 2017Q4 23.0; 2018Q1 3.7 - Bank Code 186 (GF): 2016Q2 30.5; 2016Q3 31.6; 2016Q4 32.7; 2017Q1 34.1; 2017Q2 35.0; 2017Q3 36.2; 2017Q4 36.7; 2018Q1 38.2 ### Key implications from the leverage table - Most banks listed have leverage ratios above the 3 percent regulatory requirement, with many banks consistently in the >7 percent range. - A small number of banks have leverage ratios near or below the medium-vulnerability threshold in earlier quarters (e.g., Bank Code 117 with 2.2 in 2016Q2), but many show improvements over the sample period. - There is wide heterogeneity across institutions in leverage trends across 2016Q2–2018Q1. ### Asset Quality and Macro-Financial Implications ### Recent developments in asset quality - "Panamanian bank asset quality remains sound. While bank asset quality has deteriorated, with the level of NPLs doubling since 2015, NPLs remain relatively low compared to regional peers at 1.8 percent of total loans as of June 2018 for the national banking system and appear adequately provisioned." - Deterioration has been widespread across: official banks, private Panamanian banks, foreign banks operating in the onshore banking system, and offshore banks. - By sector, the largest upticks in NPLs are in: commerce (which includes services), mortgages, construction and personal loans — and these sectors account for the bulk of the stock of NPLs. ### Macro-financial feedback channels described - High levels of NPLs typically reduce the supply of credit by: - Reducing bank profitability. - Tying up capital because of higher risk weights on impaired assets. - Raising banks’ funding costs because of lower expected revenue streams and investors’ heightened risk perceptions. - Reduced credit supply can contribute to weaker economic activity, which in turn can further increase NPLs (a potential adverse macro-financial feedback loop). ### Empirical correlations noted - "The NPL ratio in Panama is negatively correlated with growth in credit to the private sector." - "Growth in credit to the private sector is positively correlated with economic activity, suggesting that high NPLs are associated with subdued growth and rising unemployment." ### Policy-relevant conclusion - "Asset quality should be closely monitored to prevent the emergence of systemic risks from the build-up of debt in recent years, particularly in the context of rising interest rates." *Source: cr1912-panamasi - Annex Table 5: Liquidity; cr1912-panamasi - Annex Table 6: Leverage; Selected Issues Paper excerpt on Asset Quality (Panama).* ### 4. Feedback effects between asset quality in the banking sector and the real economy are ### 4. Feedback effects between asset quality in the banking sector and the real economy are ### Methodology - A vector-autoregression (VAR) model is estimated with all variables treated as endogenous. The model includes: - the NPL ratio, - growth in credit to the private sector (year-over-year), - real GDP growth (year-over-year), - total (headline) consumer price inflation (year-over-year), - the commercial interest rate. - Impulse responses are orthogonalized using the Cholesky decomposition. The variables are ordered: the NPL ratio, real GDP growth, inflation, and the commercial interest rate. - Unit root tests confirm that all variables are stationary in order I(0). - Data sample: 2003Q3 to 2018Q1 (quarterly frequency). The limited sample period reduces cyclical variability and constrains empirical assessment. - One standard deviation values reported in the impulse response analysis: - One standard deviation in the NPL ratio = 0.58. - One standard deviation in credit growth = 3.8. - One standard deviation in real GDP growth = 3.1. ### Empirical correlations (contemporaneous and lagged) - Contemporaneous correlations (selected): - NPL — Credit: -0.2349* - NPL — GDP: -0.0672 - NPL — CPI: -0.2326* - NPL — Interest rate: 0.1994 - Lagged correlations (t-1) (selected): - NPL (t-1) — NPL: 0.9513* - Credit (t-1) — Credit: 0.8721* - GDP (t-1) — GDP: 0.7714* - CPI (t-1) — CPI: 0.9178* - Interest rate (t-1) — Interest rate: 0.7256* - Simple correlations indicate asset quality is persistent and: - negatively correlated with credit growth, economic growth, and inflation, - positively correlated with interest rates. - Note: The negative correlation with economic activity and positive correlation with interest rates is not statistically significant. ### VAR impulse-response findings (impact of an NPL shock) - A deterioration in bank asset quality (positive shock to the NPL ratio) has statistically significant negative impacts on: - growth in credit to the private sector, - real GDP growth, - inflation. - Magnitudes (peak impacts from a 1 percentage point increase in the NPL ratio): - Credit growth declines by 1.5 percentage points. - Real GDP growth declines by 1.2 percentage points. - Persistence: - Negative implications for credit growth persist for longer than a year. - Panel VAR variance decompositions: - Shocks to the NPL ratio explain about 20 percent of the variance in growth over a 4-quarter horizon. - Shocks to the NPL ratio explain about 10 percent of the variance in growth over an 8-quarter horizon. - Shocks to growth explain about 10 percent of the variance in the NPL ratio over both 4- and 8-quarter horizons. ### Variance decomposition (quarterly frequency, in percent) - 4-quarter horizon (as presented): - NPL: 0.9, 0.0, 0.1, 0.0, 0.0 - Credit: 0.2, 0.4, 0.3, 0.1, 0.0 - GDP: 0.2, 0.0, 0.8, 0.0, 0.0 - CPI: 0.1, 0.0, 0.4, 0.5, 0.1 - Interest rate: 0.1, 0.1, 0.1, 0.1, 0.7 - 8-quarter horizon (as presented): - NPL: 0.8, 0.0, 0.1, 0.0, 0.0 - Credit: 0.2, 0.3, 0.4, 0.1, 0.1 - GDP: 0.1, 0.0, 0.7, 0.1, 0.1 - CPI: 0.1, 0.1, 0.5, 0.4, 0.1 - Interest rate: 0.1, 0.1, 0.1, 0.1, 0.6 ### Annex results: shocks to credit growth and real GDP growth - Impact of a 1 standard deviation increase in private sector credit growth (one standard deviation = 3.8) shows: - a positive response of real GDP growth, - modest responses of inflation and interest rates, - a small response of NPLs. - Impact of a 1 standard deviation increase in real GDP growth (one standard deviation = 3.1) shows: - a decline in NPLs, - a positive response of private sector credit growth, - a positive response of inflation, - a modest response of interest rates. ### Conclusions and policy implications - Bank asset quality should be closely monitored to prevent systemic risks from the recent build-up of debt. - Current status: - NPLs remain low and are well-provisioned. - Provisions have been strengthened following the transition to IFRS9. - Risks: - Rising global interest rates are likely to put further pressure on interest rates in Panama’s dollarized economy, which could increase pressure on asset quality. - Policy recommendations: - Effective supervision is critical to help prevent further deterioration of asset quality. - The strengthened provisions under IFRS9 will help facilitate recognition of losses. *Source: IMF staff calculations and author analyses as presented in the provided content.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1912-panamasi.pdf_