## EXECUTIVE SUMMARY — Colombia FSAP (1colea2022003)

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### Background and Macrofinancial Context
- Colombia’s commodity exports amount to about half of total exports; the country has a large current account deficit.
- Foreign reserves remain adequate according to the IMF Assessing Reserve Adequacy (ARA) metric; Colombia has access to the Flexible Credit Line (FCL). The current FCL arrangement expires on April 30, 2022.
- GDP fell by 7 percent in 2020 and rebounded with economic growth of about 10.6 percent in 2021.
- Prior to the pandemic, unsecured lending (“Libre inversion”) growth was high and concentrated in the two largest financial conglomerates (FC).
- Household indebtedness rose only gradually to about 23 percent of GDP at end-2021.
- FX-denominated corporate debt is about 35 percent of private sector corporate debt.
- Banking Sector Gross Loans By Type - June 2021: 50.8%, 29.0%, 2.5%, 15.9%, 0.3%, 1.5%.

### Financial Stability Analysis — Vulnerabilities and Risk Profile
- The banking system entered the pandemic relatively strong; authorities implemented fiscal, monetary, and SFC measures, including release of countercyclical provisions and temporary grace periods, extensions, and loan modifications.
- The Program to Support Debtors (PAD) supported viable borrowers and was phased out at end-August 2021; loans under PAD represented 6.8 percent of total gross loans by the end of PAD.
- The financial system is dominated by large and complex financial conglomerates; the five largest conglomerates control 60 percent and 80 percent of financial system and banking sector assets, respectively.
- Cross-border presence: Colombian conglomerates operate in 14 countries; financial entities abroad rose from 46 to 288 between 2009 and 2020; corresponding exposures rose from US$11 billion to US$93 billion; about 83 percent of these assets are held in Central American countries.
- Main downside risks identified:
  - Uncontrolled COVID-19 local outbreaks and global resurgence (Overall Level of Concern: High; Likelihood: High; Expected Impact: High).
  - De-anchoring of U.S. inflation expectations and rise in global risk premia (Overall Level of Concern: Medium; Likelihood: High; Expected Impact: High).
  - Disorderly structural transformations and increasing fiscal pressures (varied concern and likelihood; expected impacts high in several cases).
- Main vulnerability to banks: credit risk—NPLs peaked later in 2020 but started declining in 2021; consumer portfolios and most affected sectors could reveal larger-than-expected credit risk under prolonged pandemic or slower growth.
- Funding profile and liquidity:
  - Almost 80 percent of funding comes from mainly unsecured domestic wholesale sources.
  - Retail demand deposits and term deposits comprise about 16 percent and 7 percent, respectively, of total funding.
  - NSFR and IRL increased during 2020 due to higher holdings of liquid assets.
  - No significant exposure to exchange rate risks indicated by the data.

### Stress Testing Results — Solvency and Liquidity
- Solvency stress test coverage and horizon:
  - Covered 12 banks comprising 94 percent of banking system assets; scenarios span mid-2021 through mid-2024.
  - Baseline scenario aligned with October 2021 WEO projections.
  - Adverse scenario features a protracted recession; the two-year cumulative shock to GDP under the adverse scenario corresponds to about 2.5 standard deviation relative to the baseline.
- Key stress-test metrics (before stress / baseline scenario / adverse scenario):
  - Tier 1 (year 1): 15.1% / 15.8% / 12.8%
  - Total CAR (year 2): 20.2% / 20.5% / 17.4%
  - Leverage ratio (year 1): 10.5% / 11.0% / 9.4%
  - Number of banks depleting buffers: 0 / 0 / 3
  - Number of undercapitalized banks: 0 / 0 / 2
  - Number of over-leveraged banks: 0 / 0 / 1
  - Maximum capital shortfall (in % of GDP): 0 / 0 / 0.01%
- Interpretation: the banking system is broadly resilient to severe but plausible shocks; pockets of vulnerability exist in a few banks, with DSIBs impacted somewhat less than non-DSIBs and domestically owned banks less impacted than foreign-owned banks.
- Liquidity stress tests:
  - Aggregate liquidity shortfall in a very extreme deposit run scenario is 1.7 percent of total assets of banks in the sample; individual bank shortfalls do not exceed 3 percent of total assets.
  - Cashflow-based combined shortfall is 1.6 percent of assets for banks in the sample under extreme conditions.
  - Cashflow Analysis (Number of Banks out of 12 with liquidity shortfall):
    - Up to 7 days: 0
    - Up to 15 days: 0
    - Up to 30 days: 2
    - Up to 90 days: 6
  - Liquidity shortfall (percent of banks' assets in sample): 0.0% (up to 7 days); 0.0% (up to 15 days); 0.2% (up to 30 days); 1.6% (up to 90 days).
  - If drawdown of 15% of credit lines in foreign entities is exercised in extreme funding shock, 1 non-DSIB covers liquidity shortfall, and cumulative shortfall decreases to 0.6 percent of banks' assets in sample.
- Recommendation: expand data collection on currency-denominated cashflows and cross-border exposures; consider readjusting regulatory parameters for IRL and NSFR to better align with Basel III.

### Interconnectedness and Contagion Analysis
- Methodology: three-stage network and contagion analysis using multi-layer network data and a balance-sheet based model (CoMap variant).
- Key simulation findings:
  - Systemic banks are the most contagious—bank failures can lead to three contagion failures in other banks and six failures in nonbank entities.
  - Cascade effects from single bank failures are limited; no bank-failure scenario alone led to second-round failures in other entities.
  - Cross-border exposures can lead to substantial losses, but simulations did not suggest entity failures from shocks through equity exposures in Central America or large holdings of foreign securities.
  - Stress scenarios from government default produced 16 entity failures; household default scenario produced 8 entity failures across multiple contagion rounds.
- Firm-level corporate/SME stress test results:
  - Under the adverse scenario, the share of firms with ICR<1 increases by about 3 percentage points.
  - The share of firms with a negative cash available ratio increases by 8 to 9 percentage points.
  - Adverse scenario increases the share of corporates with solvency ratio <5 percent by about 1.5 percentage points; for SMEs the increase is less than 1 percentage point.
- Recommendation: fill data gaps on exposures and risk metrics of ultimate subsidiaries to enable fully consolidated stress testing and establish early-warning indicators.

### Supervision, Regulation, and Institutional Framework
- Key legal and supervisory developments since last FSAP:
  - Approval of the Conglomerates Law (Law 1870 of 2017) giving the SFC supervisory and regulatory powers over holding companies of financial conglomerates.
  - Gradual implementation of Basel III requirements; convergence in capital, liquidity, and operational risk frameworks.
  - The SFC is an integrated supervisor and bank resolution authority; mandated resolution planning (Decree 923 of 2018; CE 027 of 2019).
- Basel Core Principles review findings and recommended enhancements:
  - SFC’s operational independence largely enhanced since 2015, but SFC, the Superintendent, and staff lack explicit legal protection for acts carried out in good-faith performance of official duties.
  - Recommendation to make large exposure and related-party limits more comprehensive and streamlined is in progress but not fully implemented.
  - Further improvement areas: guidance on concentration, transfer and country risks, related party transactions, internal capital assessment (ICAAP), interest rate risk in the banking book (IRRBB), additional safeguards for SFC independence, and adjustment/definition of parameters used in local liquidity ratios to better align with Basel III.
- Onsite supervision: maintain direct and intrusive supervision including adequate on-site inspections and avoid over-reliance on external/internal auditors.

### Macroprudential Framework and Toolkit
- Institutional arrangement:
  - Macroprudential policy is a shared competency of the SFC, the central bank (BR), and the MHCP; CCSSF is the main platform for information sharing but lacks a formal macroprudential mandate.
  - No single agency has been assigned a formal macroprudential mandate.
- Implementation schedule of selected Basel III measures:
  - Capital conservation buffer (1.5% of RWA) to be built up over four years: January 2021: 0.375%; January 2022: 0.75%; January 2023: 1.125%; January 2024: 1.5%.
  - Capital buffer for systemically important institutions (1% of RWA) phased in: January 2021: 0.25%; January 2022: 0.5%; January 2023: 0.75%; January 2024: 1%.
  - NSFR differentiated by group and fully phased-in in 2022:
    - Group 1: March 31, 2020: 80%; March 31, 2021: 90%; March 31, 2022: 100%.
    - Group 2: March 31, 2020: 60%; March 31, 2021: 70%; March 31, 2022: 80%.
- Recommended actions:
  - Prepare a macroprudential oversight strategy jointly drafted and signed by relevant institutions.
  - Strengthen BR’s role in macroprudential policy to harness macro-financial expertise and reduce blind spots.
  - Expand LTV and DSTI tools to cover leasing products and nonbank credit; expand DSTI to include nonmortgage debt.
  - Close data gaps on cross-border exposures and household indebtedness.
  - Consider applying short-term liquidity and NSFR requirements on a consolidated basis given large foreign exposures and simplify/alig n liquidity regulations by SFC and BR with Basel III standards.
  - Evaluate introducing a countercyclical capital buffer at a neutral positive rate to complement countercyclical provisions.

### Crisis Management, Resolution, and Safety Nets
- Progress and remaining issues:
  - Recovery and resolution planning (RRP) has begun for the four SIFIs; recovery planning is conducted annually and based on SFC stress tests. Results of the resolution planning exercise expected in April 2022.
  - Fogafin funds resolution measures; BR may provide emergency liquidity assistance (ELA) but has not recently.
- FSAP recommendations (selected):
  - Strengthen the operational independence of the Resolution Unit (GR) within the SFC; place responsibility for resolution planning with resolution authorities (GR) rather than institutions.
  - Streamline mandates and tasks between the resolution unit and the deposit insurer (Fogafin).
  - Strengthen resolution tools:
    - Give Fogafin flexibility to conduct purchase and assumption operations with only insured deposits.
    - Restrict Fogafin’s ability to be shareholder of restructured or bridge banks; consider ownership by MHCP or a bank holding company.
    - Consider establishing bail-in powers and require large financial institutions to hold sufficient loss-absorbing liabilities.
  - Limit Fogafin’s financing to resolution funding and establish a guaranteed backup liquidity facility for Fogafin; provide unambiguous access to a back-up liquidity facility.
  - Ensure the Resolution Unit has sufficient, full-time staff to oversee resolution planning and implementation.
  - Consider safeguards for Fogafin’s fund given its multiple mandates and absence of a formalized liquidity backstop.

### Financial Development, Climate, and AML/CFT
- Financial development and climate:
  - Colombia launched a sovereign green bond and is adopting a green taxonomy for securities issuers.
  - Climate transition risk: sharp carbon tax scenario assessed — a one-time increase of US$70 per ton (from current US$5 per ton to meet US$75 per ton target) poses sizeable but potentially manageable risks; alternative increases of US$20, US$15, and US$10 per ton pose much lower risks.
  - Physical risk (floods): three flood scenarios produced average CAR declines between 0.3 and 1.1 percentage points; a severe flood coinciding with a recession yields an average CAR decline of 3.2 percentage points (losses mostly from the recession; about one quarter from floods). Three banks are substantially more vulnerable to floods.
  - Recommendation: adopt a risk-based supervisory approach for climate-related risks and continuously improve disclosures and data availability by nonfinancial corporates and financial institutions.
- AML/CFT:
  - Progress: revised ML/TF national risk assessment; Beneficial Ownership (BO) Register; SFC improvements in risk-based AML/CFT supervision.
  - BO Register timelines: expected fully operational by January 2022; existing companies have until September 2022 to submit BO information; new legal persons must submit BO information within the month of creation.
  - Remaining priorities:
    - Swiftly implement 2018 MER recommendations.
    - Enhance sanctioning practices to ensure sanctions are effective, proportionate, and dissuasive.
    - Strengthen PEP and BO requirements and bring remaining DNFBPs under the AML/CFT regime.
    - Address ML/TF risks associated with crypto assets and ensure virtual asset service providers are properly licensed, monitored, and supervised for AML/CFT compliance.

### Key Recommendations (selected with timing and paragraph references)
- Banking supervision:
  - Introduce legal amendments to strengthen SFC independence (specify Superintendent’s minimum term and removal reasons; provide explicit legal protections). Paragraph 29 — Timing: MT.
  - Develop guidance/regulations on concentration, transfer and country risks, related party transactions, internal capital assessment and IRRBB. Paragraph 31 — Timing: MT.
  - Establish consolidated requirements on related-party transactions. Paragraph 31 — Timing: ST.
  - Readjust or determine parameters for local LCR and NSFR; require local NSFR at consolidated level. Paragraph 33 — Timing: MT.
  - Maintain direct and intrusive supervision including adequate on-site inspections. Paragraph 34 — Timing: ST.
- Macroprudential oversight:
  - Strengthen central bank role in systemic risk monitoring and macroprudential decision-making. Paragraph 37 — Timing: ST.
  - Expand LTV and DSTI tools to cover leasing products and include non-mortgage debt in DSTI. Paragraph 39 — Timing: ST.
  - Close data gaps in cross-border exposures and household indebtedness. Paragraph 38 — Timing: I.
- Risk analysis and data:
  - Strengthen monitoring of cross-border exposures and conduct fully consolidated stress-testing by filling data gaps on exposures and risk metrics of ultimate subsidiaries. Paragraph 18 — Timing: ST.
  - Extend data collection to monitor liquidity risks by currency and collect more granular data on assets/liabilities generating cashflows (including cross-border). Paragraph 21 — Timing: ST.
  - Develop network analysis tools and improve data coverage to bolster EWS for domestic and cross-border contagion. Paragraph 23 — Timing: ST.
- Climate risks:
  - Adopt a risk-based supervisory approach for climate-related risks and improve disclosures and data availability. Paragraph 27 — Timing: MT.
- Resolution, crisis management and safety nets:
  - Strengthen operational independence of the Resolution Unit (GR). Paragraph 41.b — Timing: ST.
  - Make financial institutions responsible for recovery planning; make GR responsible for resolution planning. Paragraph 41.a — Timing: ST.
  - Streamline mandates of resolution unit and Fogafin. Paragraph 41.b — Timing: MT.
  - Strengthen resolution tools and Fogafin’s financing and access to a backup liquidity facility. Paragraphs 41.c, 41.b, 41.d — Timings: MT, ST, ST as applicable.
- AML/CFT:
  - Ensure swift implementation of the 2018 MER recommendations. Paragraph 42 — Timing: MT.
  - Enhance sanctioning practices for AML/CFT breaches. Paragraph 42 — Timing: MT.
  - Address ML/TF risks associated with crypto assets and ensure proper licensing, monitoring and supervision of virtual asset service providers. Paragraph 42 — Timing: ST.

### Selected Financial Statistics and Projections (highlights)
- Real GDP (percent change): 2020: -7.0; 2021: 10.6; 2022: 5.4; 2023: 3.3; 2024: 3.4; 2025: 3.4; 2026: 3.4; 2027: 3.4.
- Consumer prices (average): 2020: 2.5; 2021: 3.5; 2022: 6.5; 2023: 4.3.
- Consumer prices, end of period: 2020: 1.6; 2021: 5.6; 2022: 5.7.
- Central government balance (percent of GDP): 2020: -7.8; 2021: -8.2; projections include -6.3 (2022), -4.3 (2023).
- Public sector gross debt: 2020: 65.7; 2021: 64.6; projections include 62.1 (2022), 61.8 (2023).
- Current account (deficit -): 2020: -3.5; 2021: -5.8; projections include -5.2 (2022), -4.7 (2023).
- Financial soundness indicators:
  - Regulatory capital to risk-weighted assets: 2015: 16.9; 2016: 17.5; 2017: 18.6; 2018: 17.8; 2019: 16.9; 2020: 19.2; 2021: 22.0.
  - Regulatory Tier 1 capital to risk-weighted assets: 2019: 11.8; 2020: 14.4; 2021: 17.8.
  - Capital (net worth) to assets: 2015: 8.7; 2016: 8.7; 2017: 9.2; 2018: 9.4; 2019: 9.1; 2020: 9.9; 2021: 12.1.
- Banking sector key asset figures (billion, COP; Assets (% of GDP); Percent of total financial sector assets; No. of entities):
  - Credit institutions: 768,724; 76.2; 34.9; 46
    - Commercial banks: 701,990; 69.6; 31.9; 24
    - State-owned bank: 27,851; 2.8; 1.3; 1
    - Other: 38,883; 3.9; 1.8; 21
  - Pension funds (total): 383,761; 38.1; 17.4; 5
    - Pension funds: 325,138; 32.2; 14.8
    - Other retirement funds: 47,927; 4.8; 2.2
    - Prima media: 10,696; 1.1; 0.5
  - Mutual funds: 135,027; 13.4; 6.1; 279
    - Collective investment funds: 76,039; 7.5; 3.5
    - Private equity funds: 19,412; 1.9; 0.9
    - Other: 39,577; 3.9; 1.8
  - Insurance: 94,820; 9.4; 4.3; 45
    - Life: 58,358; 5.8; 2.7; 20
    - General: 33,137; 3.3; 1.5; 25
    - Other: 3,326; 0.3; 0.2
  - State-owned Financial Institutions: 88,120; 8.7; 4.0; 11
    - Other: 69,191; 6.9; 3.1
  - Trust services: 660,546; 65.5; 30.0; 23,680
    - Management and Payment: 179,000; 17.8; 8.1; 11,986
    - Social Security Resources: 88,000; 8.7; 4.0; 103
    - Real Estate Development: 76,000; 7.5; 3.5; 8,572
    - Secured Finance and Collateral Mgmt: 72,000; 7.1; 3.3; 3,010
    - Investment: 15,000; 1.5; 0.7; 404
    - Securities custody: 222,173; 22.0; 10.1
    - Other: 8,373; 0.8; 0.4
  - TOTAL FINANCIAL SYSTEM: 2,200,188; 218; 100

*Source: EXECUTIVE SUMMARY and selected chapters — Colombia FSAP (1colea2022003).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Background and Macrofinancial Context
- Colombia’s economy is well managed but vulnerable to shocks, with commodity exports amounting to about half of total exports and a large current account deficit.
- Foreign reserves remain adequate following the IMF Assessing Reserve Adequacy (ARA) metric; Colombia also has access to the Flexible Credit Line (FCL). The current FCL arrangement expires on April 30, 2022.
- The pandemic led to Colombia’s first recession in over 20 years: GDP fell by 7 percent in 2020.
- Activity rebounded strongly in 2021 with economic growth of about 10.6 percent.
- Prior to the pandemic, credit recovered after the 2014–16 oil price shock. Growth in unsecured lending (“Libre inversion”) was high and concentrated in the two largest financial conglomerates (FC).
- Household indebtedness rose only gradually to about 23 percent of GDP at end-2021, but shortcomings exist in data on consumer debt.
- FX-denominated corporate debt is about 35 percent of private sector corporate debt, increasing vulnerability to exchange-rate and global financial conditions shocks.
- Banking Sector Gross Loans By Type - June 2021: 50.8%, 29.0%, 2.5%, 15.9%, 0.3%, 1.5%.

### Financial Stability Analysis — Vulnerabilities and Risk Profile
- The banking system entered the COVID-19 pandemic from a position of relative strength; authorities implemented substantial fiscal and monetary responses and SFC measures (release of countercyclical provisions; temporary grace periods, extensions, and loan modifications).
- The Program to Support Debtors (PAD) supported viable borrowers and was phased out at end-August 2021.
- Pandemic-related policy actions prevented widespread systemic failures despite deterioration in repayment capacity and profitability in 2020.
- The financial system is dominated by large and complex financial conglomerates (FC) with increasing cross-border exposures; Colombian conglomerates are systemic players in several Central American countries.
- Cross-border information sharing and supervisory cooperation have improved, but further development of monitoring tools and early-warning systems (EWS) is recommended. Resolution planning for cross-border institutions should be strengthened.
- Consumer credit growth, particularly in unsecured segments, was rapid pre-pandemic and experienced high impairment during the pandemic. Lending to households is expected to grow strongly post-pandemic; closing data and oversight gaps on household indebtedness is necessary.

### Stress Testing Results — Solvency and Liquidity
- Bank solvency appears resilient to stress: a severe scenario combining global pandemic resurgence, tightening global financial conditions, political uncertainty, and fiscal deterioration shows the banking system overall would stay above regulatory minima, supported by well-capitalized banks and strong profit buffers.
- Liquidity stress tests indicate some vulnerability under very severe pressures: liquidity shortfalls are relatively small in an extreme funding shock at the system level, but some banks with heavier reliance on wholesale unsecured funding and lower holdings of liquid assets would face liquidity risk in very extreme scenarios.

### Supervision, Regulation, and Institutional Framework
- Important steps taken since the last FSAP include approval of the Conglomerates Law (2017) giving the SFC supervisory and regulatory powers over holding companies of financial conglomerates, and gradual implementation of Basel III requirements.
- The Basel Core Principles (BCP) review shows significant improvements but identifies areas for enhancement:
  - The SFC’s operational independence has been largely enhanced since 2015, but SFC and staff lack explicit legal protection for acts carried out in good-faith performance of official duties.
  - The recommendation to make large exposure and related-party limits more comprehensive and streamlined has not been fully implemented but appears in progress.
  - Areas for further improvement: guidance on concentration, transfer and country risks, related party transactions, internal capital assessment, interest rate risk in the banking book (IRRBB), additional safeguards for SFC independence, and adjustment/definition of parameters used in local liquidity ratios to better align with Basel III.

### Macroprudential Framework
- The institutional framework has been effective for macroprudential policy to date; systemic risk monitoring is advanced and the macroprudential toolkit has been enhanced in line with Basel III recommendations.
- Recommended actions:
  - Prepare a macroprudential oversight strategy jointly drafted and signed by relevant institutions.
  - Strengthen the central bank’s role in macroprudential policy to harness macro-financial expertise.
  - Expand Loan-to-Value (LTV) and Debt-Service-to-Income (DSTI) tools to cover leasing products and nonbank credit; expand DSTI to include nonmortgage debt.
  - Close data gaps on cross-border exposures and household indebtedness.

### Crisis Management, Resolution, and Safety Nets
- Authorities undertook wide-ranging reforms, but some crisis management and safety net features need improvement.
- FSAP recommendations include:
  - Strengthen the operational independence of the Resolution Unit (GR) within the SFC.
  - Review responsibility for developing recovery and resolution plans; expand content of recovery plans and assign GR responsibility for resolution planning.
  - Streamline mandates and tasks between the resolution unit and the deposit insurer (Fogafin).
  - Strengthen resolution tools by: (i) giving Fogafin flexibility to conduct purchase and assumption operations with only insured deposits; (ii) restricting Fogafin’s ability to be shareholder of restructured or bridge banks; (iii) consider establishing bail-in powers.
  - Limit Fogafin’s financing to resolution funding and establish a guaranteed backup liquidity facility for Fogafin; provide unambiguous access to a back-up liquidity facility.
  - Strengthen safeguards for Fogafin’s fund.

### Financial Development, Climate, and AML/CFT
- Colombia has advanced reforms to mobilize capital for sustainable projects and manage climate-related risks: successful sovereign green bond launch and upcoming adoption of a green taxonomy for securities issuers.
- Recommendation: adopt a risk-based approach in supervision for climate-related risks and continuously improve disclosures by nonfinancial corporates and financial institutions and data availability.
- AML/CFT: progress noted, but efforts should continue to enhance effectiveness:
  - Swiftly implement 2018 MER recommendations.
  - Enhance sanctioning practices so sanctions are effective, proportionate, and dissuasive.
  - Address ML/TF risks associated with crypto assets and ensure virtual asset service providers are properly licensed, monitored, and supervised for AML/CFT compliance.

### Key Recommendations (selected from Table 1) with Timing
- Banking supervision
  - Introduce legal amendments to strengthen SFC independence (specify Superintendent’s minimum term and removal reasons; provide explicit legal protections). Paragraph 29 — Timing: MT.
  - Develop guidance/regulations on concentration, transfer and country risks, related party transactions, internal capital assessment and IRRBB. Paragraph 31 — Timing: MT.
  - Establish consolidated requirements on related-party transactions. Paragraph 31 — Timing: ST.
  - Readjust or determine parameters for local LCR and NSFR; require local NSFR at consolidated level. Paragraph 33 — Timing: MT.
  - Maintain direct and intrusive supervision including adequate on-site inspections. Paragraph 34 — Timing: ST.
- Macroprudential Oversight
  - Strengthen central bank role in systemic risk monitoring and macroprudential decision-making. Paragraph 37 — Timing: ST.
  - Expand LTV and DSTI tools to cover leasing products and include non-mortgage debt in DSTI. Paragraph 39 — Timing: ST.
  - Close data gaps in cross-border exposures and household indebtedness. Paragraph 38 — Timing: I.
- Risk Analysis
  - Strengthen monitoring of cross-border exposures and conduct fully consolidated stress-testing by filling data gaps on exposures and risk metrics of ultimate subsidiaries. Paragraph 18 — Timing: ST.
  - Extend data collection to monitor liquidity risks by currency and collect more granular data on assets/liabilities generating cashflows (including cross-border). Paragraph 21 — Timing: ST.
  - Develop network analysis tools and improve data coverage to bolster EWS for domestic and cross-border contagion. Paragraph 23 — Timing: ST.
- Climate risks and opportunities
  - Adopt a risk-based supervisory approach for climate-related risks and improve disclosures and data availability. Paragraph 27 — Timing: MT.
- Resolution, Crisis Management and Safety Nets
  - Strengthen operational independence of the Resolution Unit (GR). Paragraph 41.b — Timing: ST.
  - Make financial institutions responsible for recovery planning; make GR responsible for resolution planning. Paragraph 41.a — Timing: ST.
  - Streamline mandates of resolution unit and Fogafin. Paragraph 41.b — Timing: MT.
  - Strengthen resolution tools and Fogafin’s financing and access to a backup liquidity facility. Paragraphs 41.c, 41.b, 41.d — Timings: MT, ST, ST as applicable.
- AML/CFT
  - Ensure swift implementation of the 2018 MER recommendations. Paragraph 42 — Timing: MT.
  - Enhance sanctioning practices for AML/CFT breaches. Paragraph 42 — Timing: MT.
  - Address ML/TF risks associated with crypto assets and ensure proper licensing, monitoring and supervision of virtual asset service providers. Paragraph 42 — Timing: ST.

*Source: EXECUTIVE SUMMARY — Colombia FSAP (selected content).*

### 4.      The authorities mounted a strong response to help banks deal with the crisis and avoid

### 4.      The authorities mounted a strong response to help banks deal with the crisis and avoid

### Authorities’ crisis response and borrower support
- The SFC allowed the release of countercyclical provisions built up in the past.
- Banks were allowed to provide temporary grace periods, extensions, and other loan modifications on a case-by-case basis, without affecting the debtor’s credit rating or leading to a reclassification of the loan as nonperforming, but provisioning rules were not relaxed.
- The SFC launched the Program to Support Debtors (PAD) to support viable borrowers, which was phased out at end-August 2021.
- The PAD triaged borrowers according to the degree to which they had been affected by the crisis, with higher provisioning for those debtors severely affected by the pandemic.
- The transition of loans under the PAD to the ordinary regulation is expected to be relatively smooth; by the end of the PAD, loans under this program represented only 6.8 percent of total gross loans.
- Two additional regulatory provisions were introduced to account for: (i) accrued but not collected interest from grace periods granted during the first wave of measures; and (ii) the expected losses that may arise from a further deterioration in economic outlook, resembling the IFRS9 forward-looking estimates.

### Impact on nonbank financial institutions
- Collective investment funds (CIFs) faced significant investor withdrawals of COP 24.6 trillion during March 2020, resulting in 32 percent decline in total assets.
- Extraordinary liquidity support by the Central Bank (BR) alleviated fire sale pressure on CIFs, leading to an increase in retail deposits at banks, and CIFs’ Assets Under Management (AUM) returned to pre-pandemic levels by end-2020.
- Insurance companies experienced a sharp increase in claims on life insurance products, cutting profitability in 2020.

### Financial system structure and key statistics (At end-2020)
- The financial system is large and complex; credit institutions’ assets are equivalent to about 76 percent of GDP.
- The share of pension funds and trusts has increased considerably since the last FSAP.
- Financial conglomerates play a central role, with the five largest conglomerates controlling 60 percent and 80 percent of financial system and banking sector assets, respectively.
- Limited development of domestic capital markets (with market capitalization of about 40 percent of GDP) contributes to asset concentration in bank securities.

Key asset figures (billion, COP; Assets (% of GDP); Percent of total financial sector assets; No. of entities)
- Credit institutions: 768,724; 76.2; 34.9; 46
  - Commercial banks: 701,990; 69.6; 31.9; 24
  - State-owned bank: 27,851; 2.8; 1.3; 1
  - Other: 38,883; 3.9; 1.8; 21
- Pension funds (total): 383,761; 38.1; 17.4; 5
  - Pension funds: 325,138; 32.2; 14.8
  - Other retirement funds: 47,927; 4.8; 2.2
  - Prima media: 10,696; 1.1; 0.5
- Mutual funds: 135,027; 13.4; 6.1; 279
  - Collective investment funds: 76,039; 7.5; 3.5
  - Private equity funds: 19,412; 1.9; 0.9
  - Other: 39,577; 3.9; 1.8
- Insurance: 94,820; 9.4; 4.3; 45
  - Life: 58,358; 5.8; 2.7; 20
  - General: 33,137; 3.3; 1.5; 25
  - Other: 3,326; 0.3; 0.2
- State-owned Financial Institutions: 88,120; 8.7; 4.0; 11
  - Other: 69,191; 6.9; 3.1
- Trust services: 660,546; 65.5; 30.0; 23,680
  - Management and Payment: 179,000; 17.8; 8.1; 11,986
  - Social Security Resources: 88,000; 8.7; 4.0; 103
  - Real Estate Development: 76,000; 7.5; 3.5; 8,572
  - Secured Finance and Collateral Mgmt: 72,000; 7.1; 3.3; 3,010
  - Investment: 15,000; 1.5; 0.7; 404
  - Securities custody: 222,173; 22.0; 10.1
  - Other: 8,373; 0.8; 0.4
- TOTAL FINANCIAL SYSTEM: 2,200,188; 218; 100

### Cross-border exposures of conglomerates
- Colombian conglomerates are present in 14 countries across banking, insurance, and asset management services and have become systemic players in selected Central American markets.
- Financial entities abroad increased in number from 46 to 288 between 2009 and 2020.
- Corresponding exposures rose from US$11 billion to US$93 billion during the same period and more than doubled since the last FSAP.
- About 83 percent of these assets are held in Central American countries.
- Specific entities can be highly exposed to Panama, Costa Rica, El Salvador, and Guatemala.

### Vulnerabilities and risks
- The financial system was impacted by the Covid-related economic contraction in 2020, but appears resilient; banking sector soundness indicators showed improvement toward pre-pandemic levels as of June 2021.
- Banks entered 2021 with markedly higher capital ratios compared to pre-pandemic levels due to convergence to Basel III and strengthening of regulatory capital through subordinated debt and retained earnings.
- Downside risks include: (i) uncontrolled COVID-19 local outbreaks and global resurgence of the pandemic; (ii) de-anchoring of U.S. inflation expectations and rise in global risk premia; (iii) disorderly structural transformations triggered by COVID-19; and (iv) increasing fiscal pressures.
- Main vulnerability to banks stems from credit risk. NPLs peaked later in 2020 but started declining in 2021; potential prolonged pandemic or slower growth could reveal larger-than-expected credit risk, especially in consumer portfolios and the most affected sectors.
- Corporate sector: pandemic worsened repayment capacity and profitability indicators in 2020; firms accumulated more cash, raising cash available ratio; leverage indicators showed a slight decline; debt share of firms with interest coverage ratio (ICR) of less than 1 increased across most sectors.

### Funding, liquidity, and concentration risks
- Almost 80 percent of funding comes from mainly unsecured domestic wholesale (nonfinancial corporates and financial institutions) sources.
- Wholesale funding is dominated by demand deposits, followed by term deposits; retail demand and term deposits comprise about 16 percent and 7 percent, respectively, of total funding.
- NSFR and IRL increased during 2020, mainly due to higher holdings of liquid assets by banks.
- Liquidity benefited from substantial support from the BR, reallocation of funds to the banking system (flight-to-safety), and slower loan growth.
- No significant exposure to exchange rate risks indicated by the data.

### Solvency risk analysis (stress-testing)
- Stress test covered 12 banks comprising 94 percent of banking system assets; scenarios span mid-2021 through mid-2024.
- Baseline scenario aligned with October 2021 WEO projections.
- Adverse scenario features a protracted recession and incorporates global and Colombia-specific macrofinancial risks; the two-year cumulative shock to GDP under the adverse scenario corresponds to about 2.5 standard deviation relative to the baseline.
- Summary of key stress-test metrics (before stress / baseline scenario / adverse scenario):
  - Tier 1 (year 1): 15.1% / 15.8% / 12.8%
  - Total CAR (year 2): 20.2% / 20.5% / 17.4%
  - Leverage ratio (year 1): 10.5% / 11.0% / 9.4%
  - Number of banks depleting buffers: 0 / 0 / 3
  - Number of undercapitalized banks: 0 / 0 / 2
  - Number of over-leveraged banks: 0 / 0 / 1
  - Maximum capital shortfall (in % of GDP): 0 / 0 / 0.01%
- Results indicate the banking system is broadly resilient to severe but plausible shocks, with pockets of vulnerabilities in a few banks.
- DSIBs are impacted somewhat less than non-DSIBs; domestically owned banks less impacted than foreign-owned banks.
- Sensitivity tests show some banks vulnerable to default of their largest nonfinancial corporate exposures.
- Overall maximum capital shortfall for the banking system from an adverse shock is negligible.
- Recommendation: fill data gaps on exposures and risk metrics of ultimate subsidiaries to enable fully consolidated stress testing and establish early-warning indicators.

### Liquidity risk analysis (LCR and cashflow tests)
- LCR-based stress tests included adverse scenarios imposing more severe run-off rates for demand deposits (simulating retail and wholesale runs).
- Wholesale and combined adverse scenarios reveal weaknesses under very large deposit withdrawals; DSIBs more affected due to relatively lower liquid assets.
- Even in the very extreme scenario, aggregate liquidity shortfall is 1.7 percent of total assets of banks in the sample; individual bank shortfalls do not exceed 3 percent of total assets.
- Cashflow-based analysis finds combined shortfall of 1.6 percent of assets for banks in the sample under extreme conditions; manageable given BR’s ability to provide liquidity.
- Results of the Cashflow Analysis (Number of Banks out of 12 with liquidity shortfall):
  - Up to 7 days: 0
  - Up to 15 days: 0
  - Up to 30 days: 2
  - Up to 90 days: 6
  - Total: 0 / 0 / 2 / 6
  - DSIBs: 0 / 0 / 2 / 3
  - Non-SIBs: 0 / 0 / 0 / 3
- Liquidity shortfall (percent of banks' assets in sample): 0.0% (up to 7 days); 0.0% (up to 15 days); 0.2% (up to 30 days); 1.6% (up to 90 days).
- If drawdown of 15% of credit lines in foreign entities is exercised in extreme funding shock, 1 non-DSIB covers liquidity shortfall, and cumulative shortfall decreases to 0.6 percent of banks' assets in sample.
- Recommendation: expand data collection on currency-denominated cashflows and cross-border exposures; consider readjusting regulatory parameters for IRL and NSFR to align further with Basel III.

### Interconnectedness and contagion risk analysis
- A three-stage network and contagion analysis was conducted: mapping at sectoral and entity levels across 10 sectors; identifying conglomerates and foreign counterparts; contagion evaluation using multi-layer network data and a balance-sheet based model (CoMap variant).
- Key findings from contagion simulations:
  - Systemic banks are the most contagious in the system—overall, bank failures can lead to three contagion failures in other banks, and six failures in nonbank entities.
  - Cascade effects from bank failures are limited; no bank-failure scenario by itself led to second-round failures in other entities.
  - Cross-border exposures can lead to substantial losses, but model simulations did not suggest entity failures from shocks through equity exposures in Central America or large holdings of foreign securities.
  - Stress scenarios stemming from household and government risk produce the most contagion: government default scenario produced 16 entity failures; household default scenario produced 8 entity failures across multiple contagion rounds.

*Source: IMF staff analysis and SFC data as presented in the provided chapter.*

### 23.      Although the system is resilient, the financial network’s evolving complexity calls for

### 1colea2022003 - 23.      Although the system is resilient, the financial network’s evolving complexity calls for

### Monitoring, contagion channels, and data gaps
- The financial network’s evolving complexity calls for further development of monitoring tools.
- Some contagion channels might be currently small but have the potential to grow rapidly.
- Suggested data coverage and methodology improvements:
  - Incorporate individual trusts and securities firms in contagion risk analysis.
  - Advance identification of foreign creditors on Colombian claims to monitor cross-border funding risks.
  - Gather further data on the composition of conglomerate subsidiary operations in Central America.
- Visualization notes (figure description):
  - Edges indicate exposures linking entities (including short-term debt, long-term debt, equities, and derivatives), with their color corresponding to the creditor’s associated conglomerates.
  - Thickness of edges indicates total exposure size relative to total assets of creditor.
  - Bubble-size indicates weighted in-degree measure of the node in the network.
  - Labels identify entity types.
  - Figure A shows banks only with non-conglomerate banks shown in black. Figure B shows all entity types.

*Source: SFC, and IMF staff calculations.*

### Firm-level analysis: corporates and SMEs
- Under an adverse scenario, the share of firms with lower repayment capacity (ICR<1) and the share with potential borrowing needs increase.
- For both corporates and SMEs:
  - The share of firms with an ICR<1 increases by about 3 percentage points.
  - The share of firms with a negative cash available ratio increases by 8 to 9 percentage points (Figure 11).
- Solvency effects:
  - The adverse scenario increases the share of corporate firms with a solvency ratio of less than 5 percent by about 1.5 percentage points.
  - For SMEs, the share with solvency ratio of less than 5 percent increases by less than 1 percentage point.
- Monitoring recommendations:
  - Continue monitoring the nonfinancial corporate sector, especially the services sector, to identify potential pockets of vulnerability.
  - Broaden the ongoing early warnings (“Alerta Temprana”) to increase the number of firms in the sample.
  - Share (part of) the information from the early warnings with other supervisory institutions to complement monitoring efforts.
- Data and methodology notes:
  - The analysis uses information from Supersociedades: end-December financial and income statements of corporates and SMEs for the period 2016–2020 in 21 industries.
  - The adverse scenario used for this analysis is the same as the one used for the bank solvency stress test.

### Climate risks
- Transition risk (carbon tax scenarios):
  - Transition risks concentrated in agriculture, manufacturing, electricity, wholesale and retail trade, and transportation sectors.
  - First scenario: a sharp US$70 per ton increase in tax (from the current US$5 per ton level) to meet the US$75 per ton target — risks for the banking system are sizeable, but potentially manageable.
  - Alternative scenarios considered with lower increases: US$20, US$15, and US$10 per ton carbon — risks are much lower in those cases.
  - Policy implication: gradual increases to meet the US$75 per ton target may be preferable to a one-time sharp increase.
- Physical risk (riverine floods stress test):
  - Three flood scenarios: one based on the 2010 and 2011 La Niña floods, and two more severe floods with return periods of once in 500 years.
  - For those three scenarios, Colombian banks experienced an average decline in the CAR between 0.3 and 1.1 percentage points.
  - A fourth scenario—severe flood coinciding with a recession—finds an average decline in the CAR of 3.2 percentage points, with losses mostly attributed to the recession and a quarter of the losses caused by floods.
  - Three banks are substantially more vulnerable to flood hazards due to high exposures in rural areas or relatively large sovereign exposures.
  - Findings underscore differences in climate-related vulnerabilities across banks and the importance of risk-based supervision.
  - Recommendation: continuously improve information disclosures (both by nonfinancial corporates and by financial institutions) and data availability.

### Banking supervision: legal and operational framework
- Improvements since 2012/2015:
  - Significant improvements to legal framework and supervisory process since the last Basel Core Principles (BCP) review in 2012.
  - The SFC is an integrated supervisor covering banks, finance companies, insurance, securities, and other financial intermediaries, and is also the bank resolution authority.
  - The Conglomerates Law strengthened consolidated supervision by adding holding companies as supervised entities and defining scope of supervision of financial conglomerates.
- Operational independence:
  - SFC’s operational independence largely enhanced since 2015 via a new decree on appointment and dismissal of the Superintendent; the decree was partly censured in 2020.
  - Recommendation: the law should (i) specify that the Superintendent is appointed for a minimum term and removed during the term only for specified reasons; and (ii) explicitly provide statutory legal protections to the SFC, the Superintendent, and staff for actions/omissions made in good faith while discharging duties.
- Supervisory powers and actions:
  - Since 2015, SFC can increase prudential requirements for individual banks and banking groups based on risk profile.
  - In the last three years, SFC ordered an increase of capital to two supervised entities to achieve a CAR of 12 percent.
  - Recommendation: publish clear guidance on what supervisory actions might be considered or what bank actions are expected when predetermined guidance triggers or thresholds are reached.
- Related-party transactions and country/transfer risk:
  - Regulations define related parties and apply lending limits but do not establish a consolidated body of requirements on related-party transactions; framework was judged deficient at last BCP assessment and has not been amended.
  - URF is working on a decree to consolidate exposures with subsidiaries, ensure homogenous treatment of groups of related parties, consolidate various limits, and reduce exemptions.
  - A country risk regulation has been drafted to include transfer risk provisioning; currently deficiencies exist in the supervisory framework.
  - Banks have important exposures in Central America, exposing them to transfer and contagion risks; detailed guidance, surveillance, and provisioning guidelines are warranted.
- Basel III convergence:
  - Since 2012, progress converging regulations on capital adequacy, liquidity, and operational risks toward Basel III.
  - Definition of capital and risk coverage, including operational risk, are broadly aligned with Basel III; short- and long-term liquidity ratios determined based on LCR and NSFR standards.
  - Several regulatory parameters used in computing those ratios are not totally aligned with Basel III or are not determined yet, reducing comparability between subsidiaries of financial conglomerates.
  - Recommendation: further align local LCR and NSFR ratios with international standards and require NSFR to be calculated at a consolidated level.
- Onsite supervision:
  - SFC should maintain direct and intrusive supervision, keep adequate levels of onsite inspections, and avoid over-reliance on external/internal auditors.

### Macroprudential framework and toolkit
- Institutional arrangement:
  - Macroprudential policy is a shared competency of the SFC, the central bank (BR), and the MHCP, with SFC and MHCP playing dominant roles.
  - The Financial Sector Coordination and Monitoring Committee (CCSSF) is the main platform for information sharing and cooperation but does not have a macroprudential mandate or formal powers.
  - No agency has been assigned a formal macroprudential mandate; powers are split among CCSSF members as part of their own functions.
  - SFC supervises asset managers and insurance companies, but there is no formal macroprudential oversight framework for those institutions.
- Systemic risk monitoring:
  - The systemic risk monitoring framework is advanced; authorities have been proactive in containing financial stability risks and enhancing the macroprudential toolkit in line with Basel III recommendations.
  - Lack of formal arrangements contributes to some duplication (both SFC and BR perform systemic risk assessments), but the current framework has been effective so far.
- Implementation schedule of Basel III measures (as presented):
  - Capital conservation buffer:
    - The capital conservation buffer of 1.5% of RWA must be built up over four years as follows: January 2021: 0.375%, January 2022: 0.75%, January 2023: 1.125%, January 2024: 1.5%.
  - Capital buffer for systemically important institutions:
    - The capital buffer of 1% of RWA will be implemented over four years as follows: January 2021: 0.25%, January 2022: 0.5%, January 2023: 0.75%, January 2024: 1%.
  - Net Stable Funding Ratio (NSFR):
    - The NSFR requirement is differentiated by systemic importance (Group 1 and 2) and will be fully phased-in in 2022:
      - Group 1: March 31, 2020: 80%, March 31, 2021: 90%, March 31, 2022: 100%.
      - Group 2: March 31, 2020: 60%, March 31, 2021: 70%, March 31, 2022: 80%.
- Recommendations to strengthen framework and toolkit:
  - Prepare a macroprudential oversight strategy jointly drafted and signed by all relevant institutions.
  - Strengthen BR’s role in macroprudential policy to limit “blind spots” in systemic risk monitoring.
  - Give more powers and a more prominent decision-making role to SFC and BR on LTV, DSTI, and loan-amortization limits.
  - Enhance monitoring and close data gaps: close gaps in household indebtedness data; increase granularity of data on portfolios of Colombian FCs’ foreign subsidiaries; intensify monitoring of contagion risks within financial conglomerates and their cross-border networks.
  - Further enhance macroprudential toolkit:
    - Expand LTV and DSTI tools to cover leasing products, and expand DSTI to include non-mortgage debt.
    - Consider applying short-term liquidity and NSFR requirements on a consolidated basis given large foreign exposures.
    - Simplify and better align liquidity regulations by SFC and BR with Basel III standards.
    - Evaluate introducing a countercyclical capital buffer at a neutral positive rate to complement countercyclical provisions.

### Crisis management, resolution, and safety nets
- Improvements since 2015:
  - Bank resolution and crisis management framework significantly strengthened.
  - Recovery and resolution planning (RRP) has begun by the four SIFIs; recovery planning is conducted annually and is based on stress tests designed by the SFC.
  - Results of the resolution planning exercise are expected in April 2022; consideration being given to expanding RRPs to other banks.
  - Funding of resolution measures is Fogafin’s responsibility. The BR may provide emergency liquidity assistance (ELA) funding but has not done so in recent years.
- FSAP recommendations (summarized):
  a. RRP framework development:
    - Continue developing RRP framework; expand and apply proportionally to all financial institutions.
    - Recovery plans should be the responsibility of financial institutions and include scenario-based exercises with a range of severe but plausible firm-specific scenarios (idiosyncratic and system-wide stress).
    - Resolution plans should be the responsibility of resolution authorities rather than institutions themselves.
  b. Strengthen resolution processes:
    - Increase operational independence between supervisory and resolution authorities by separating decision-making for supervisory and resolution actions.
    - Place responsibility for development of resolution strategy in a single resolution agency.
    - Curtail Fogafin’s power to provide open bank assistance for liquidity support; liquidity support is best provided by the BR under its ELA framework.
  c. Adjust resolution tools:
    - Give Fogafin more flexibility in purchase and assumption powers to allow transfer of only insured deposits.
    - Fogafin should not be the shareholder of restructured or bridge banks; ownership could be held by the MHCP or through a bank holding company.
    - Consider developing a framework for bail-in powers as a resolution tool, combined with requiring large financial institutions hold sufficient loss-absorbing liabilities and a methodology for determining appropriate levels of loss-absorbing securities that limits exposure to securities eligible for bail-in.
    - Ensure the Resolution Unit has sufficient, full-time staff to oversee resolution planning and implementation.
  d. Strengthen Fogafin’s safeguards:
    - Fogafin’s mandate mixes responsibilities of deposit insurer, central bank, and resolution agent; consider safeguards given absence of a formalized liquidity backstop for Fogafin.
    - Consider a back-up liquidity facility to be activated if the fund is depleted.
    - Protect Fogafin’s financial position by establishing additional safeguards given its multiple mandates and responsibilities.

*Source: 1colea2022003 - PDF chapter/section.*

### 42.      Since the last FSAP, Colombia has made significant progress in aligning its AML/CFT

### 1colea2022003 - 42.      Since the last FSAP, Colombia has made significant progress in aligning its AML/CFT

### AML/CFT framework: progress and remaining priorities
- Significant progress in aligning the AML/CFT framework with the revised Financial Action Task Force standard.
- Recent measures:
  - Revised ML/TF national risk assessment.
  - Improvements to the legal and regulatory framework, including entity transparency via the Beneficial Ownership (BO) Register.
  - SFC improvements in risk-based AML/CFT supervision, including consolidated supervision and cross-border activities for banks.
- Remaining priorities and recommendations:
  - Enhance sanctioning practices to ensure effective, proportionate, and dissuasive sanctions are more consistently applied in AML/CFT breaches.
  - Ensure the SFC’s risk-based framework and methodology remain current with developments and new risks from cross-border financial institutions’ subsidiaries and affiliates.
  - Accelerate BO Register regulation and implementation, while ensuring the framework permits obtaining BO information for complex corporate structures, including when there is foreign ownership or control.
  - Address remaining technical deficiencies identified in the 2018 Mutual Evaluation Report, particularly by:
    - Strengthening Politically Exposed Persons (PEP) requirements.
    - Strengthening Beneficial Ownership (BO) requirements.
    - Bringing the remaining Designated Nonfinancial Business and Professions under the AML/CFT regime.
  - Address ML/TF risks associated with crypto assets and ensure virtual asset service providers are properly licensed and monitored/supervised for AML/CFT compliance.

### Beneficial Ownership (BO) Register specifics and timelines
- The authorities expect that the BO register will be fully operational by January 2022.
- Existing companies will have until September 2022 to submit BO information.
- New legal persons will have the obligation to submit BO information within the month of creation.

### Financial development inputs (World Bank coverage during FSAP)
- World Bank team covered areas relevant for Colombia’s financial development, with recommendations on:
  - Improving the institutional and regulatory framework for competition in the financial sector.
  - Increasing clarity in authorities’ mandates and coordination for effective oversight of the national payments system.
  - Reviewing state-owned financial institutions and broader state interventions to foster inclusion and competition.
  - Addressing shortcomings in the personal insolvency system.
  - A selection of insurance core principles, including close supervision of margins and capitals of insurance companies during their transition to IFRS 17 and Solvency II.

### Authorities’ views and responses to FSAP findings
- General stance:
  - Authorities highly supported the FSAP mission and valued engagement during the pandemic period.
  - They highlighted the financial system’s resilience during extraordinary economic uncertainty and the financial sector’s solid initial position and strong and well-coordinated policy response to the pandemic shock.
  - Noted that the banking system remained well capitalized, profitable, and liquid.
  - Expected a smooth transition to pre-pandemic regulation and return of credit risk in banks’ portfolios to normal levels as temporary support measures were phased out and the economy rebounded.
  - Welcomed recognition of significant progress since the last FSAP and valued the FSAP’s recommendations to further improve financial stability and oversight frameworks.
  - Emphasized institutional architecture, independence, and technical soundness enabling adequate implementation of international standards in financial supervision and regulation.
- Views on analytical work:
  - Appreciated the comprehensive risk analysis and additional analytical tools.
  - Noted the FSAP’s solvency analysis was based on an extremely severe adverse scenario and acknowledged pandemic-related stress-testing challenges.
  - Observed that liquidity stress tests used standard methodology and did not reflect some financial system characteristics.
  - Valued interconnectedness and contagion analysis, especially cross-border insights; intended to incorporate FSAP methodology into the SFC’s interconnectedness analytical tool under development.
  - Welcomed generally positive corporate stress test results.
- Views on supervision and recommendations:
  - Welcomed recognition of enhancements in financial sector supervision and largely agreed with key recommendations.
  - Highlighted adoption of the Conglomerates Law as a major achievement, enhancing the SFC’s ability to supervise financial conglomerates.
  - Noted progress on BCP-related recommendations, including enacting regulation on country and transfer risks and implementing Basel III capital and liquidity requirements.
  - Agreed with FSAP findings on macroprudential data gaps and deemed current institutional set-up and coordination for macroprudential monitoring appropriate, while noting complementary actions to strengthen them.
- Views on safety net and resolution:
  - Appreciated safety net assessment but differed on some recommendations: FSAP recommended clearer delineation of roles among SFC, the GR (as part of the SFC), Fogafin, and the CIR; authorities consider current arrangements to work well and be clear.
  - Agreed that resolution planning for cross-border institutions needed further strengthening and noted that progress depends considerably on coordinated work with Central American jurisdictions.

*Source: 1colea2022003 - 42.*

### 48.      The authorities were pleased with the FSAP’s recognition of Colombia’s efforts in

### 1colea2022003 - 48.      The authorities were pleased with the FSAP’s recognition of Colombia’s efforts in

### FSAP recognition and authorities' response
- The authorities were pleased with the FSAP’s recognition of Colombia’s efforts in climate risk assessment and capacity-building measures.
- They noted that they were dedicated to further aligning their frameworks with international best practices.

### Macroeconomic context and recent dynamics (highlights from Figure 1 and Table 2)
- After a record GDP contraction in 2020, the economy rebounded strongly in 2021.
- Employment: "Most of the jobs loss at the peak of the pandemic have been recovered."
- Exchange rate: "The peso weakened significantly in 2021..."
- Sovereign bond yields: yields have been on an upward path in 2021.
- Inflation: "Headline inflation increased steadily, breaching the upper-bound of the target range."
- Government balances: "Government deficits widened in 2021..."
- Key summary projections and indicators (selected from Table 2, projections unless otherwise indicated):
  - Population (million), 2021. Projection: 51.0
  - Unemployment rate, 2021 (SA, percent): 13.7
  - Urban population (percent of total), 2020: 81.4
  - GDP per capita (US$), 2021: 6,157
  - GDP, in billion of Col$: 1,176,695
  - GDP, in billion of US$: 314
  - Real GDP (percent change): 2020: -7.0; 2021: 10.6; 2022: 5.4; 2023: 3.3; 2024: 3.4; 2025: 3.4; 2026: 3.4; 2027: 3.4
  - Potential GDP (percent): 2020: -2.0; 2021: 5.0; 2022: 4.4; 2023: 3.2; 2024: 3.3; 2025: 3.3; 2026: 3.4; 2027: 3.4
  - Output Gap: 2020: -6.2; 2021: -1.2; 2022: -0.2; 2023: -0.1; 2024: 0.0
  - Consumer prices (average): 2020: 2.5; 2021: 3.5; 2022: 6.5; 2023: 4.3; 2024: 3.0; 2025: 3.0; 2026: 3.0
  - Consumer prices, end of period (eop): 2020: 1.6; 2021: 5.6; 2022: 5.7; 2023: 3.5; 2024: 3.0; 2025: 3.0; 2026: 3.0
  - Exports (f.o.b.) percent change: 2020: -20.5; 2021: 31.6; 2022: 18.8; 2023: 4.9
  - Imports (f.o.b.) percent change: 2020: -18.5; 2021: 37.5; 2022: 10.7; 2023: 3.8
  - Broad money: 2020: 10.3; 2021: 12.3; later years shown as 10.3, 8.2, 7.8, 7.6, 7.5, 7.5
  - Credit to the private sector: 2020: -0.8; 2021: 11.5; later years 10.6, 8.2, 7.9, 7.8, 7.6, 7.5
  - Policy rate, eop: 2020: 1.8; 2021: 3.0
  - Central government balance (percent of GDP): 2020: -7.8; 2021: -8.2; projections include -6.3, -4.3, -3.6, -2.6, -2.5, -2.5
  - Consolidated public sector (CPS) balance: 2020: -6.9; 2021: -7.2; projections include -4.9, -3.2, -1.7, -1.1, -1.2, -1.2
  - Public sector gross debt: 2020: 65.7; 2021: 64.6; projections include 62.1, 61.8, 60.3, 59.4, 57.7, 56.3
  - Current account (deficit -): 2020: -3.5; 2021: -5.8; projections include -5.2, -4.7, -4.5, -4.3, -4.2, -4.1
  - External debt: 2020: 65.6; 2021: 60.4; projections include 59.2, 59.8, 60.6, 60.2, 59.8

### Macrofinancial developments (Figure 2 highlights)
- Sovereign bond yields: upward trend since May (10-year dollar- and Col$-denominated bond yields shown).
- Stock market: "the stock market had registered some recovery 2021H2."
- Real credit growth: commercial, consumer, total show increases; mortgage credit growth remained dynamic with continued real house price growth.
- Housing prices: real housing (existing) prices show positive y/y changes through 2021.

### Financial conglomerates and interlinkages (Figure 3)
- Conglomerate shares in the financial system and banking sector presented.
- Network map of cross-sectoral interlinkages with legend: CI: Credit institutions; HH: Households; NFC: Nonfinancial corporates; INS: Insurance firms; PEN: Pension funds; INV: Investment funds; GOV: Government; TRUST: Trust companies; SEC: Securities firms; OTH: Others.

### Selected banking indicators (Figures 4 and 5; Table 3)
- Profitability and solvency:
  - ROAA: 2020: 1.0; 2021: 2.3
  - ROAE: 2020: 5.9; 2021: 13.5
- Capital adequacy and exposures:
  - Share of sovereign exposures (percent of total assets) shown over time.
  - Capital Adequacy Ratio: end-of-period values show increases; regulatory capital to risk-weighted assets: 2015: 16.9; 2016: 17.5; 2017: 18.6; 2018: 17.8; 2019: 16.9; 2020: 19.2; 2021: 22.0
  - Regulatory Tier 1 capital to risk-weighted assets: 2019: 11.8; 2020: 14.4; 2021: 17.8
- Asset quality and distribution:
  - Provisions to nonperforming loans: 2015: 155.5; 2016: 153.5; 2017: 134.7; 2018: 137.1; 2019: 142.3; 2020: 152.4; 2021: 157.6
  - Gross loans to assets: 2015: 66.4; 2016: 68.3; 2017: 68.1; 2018: 69.9; 2019: 69.9; 2020: 67.0; 2021: 65.8
- Liquidity:
  - Liquid assets to total assets: 2015: 18.9; 2016: 18.0; 2017: 18.6; 2018: 18.7; 2019: 17.2; 2020: 19.9; 2021: 20.0
  - Liquid assets to short-term liabilities: 2015: 39.9; 2016: 39.9; 2017: 42.6; 2018: 39.3; 2019: 36.6; 2020: 37.9; 2021: 36.1
  - Deposit to loan ratio: 2015: 93.3; 2016: 92.6; 2017: 92.7; 2018: 89.9; 2019: 89.4; 2020: 98.4; 2021: 96.7
- Currency composition:
  - Foreign-currency-denominated loans to total loans: 2015: 8.3; 2016: 6.9; 2017: 6.1; 2018: 6.0; 2019: 5.2; 2020: 4.6; 2021: 5.2
  - Foreign-currency-denominated liabilities to total liabilities: 2015: 14.1; 2016: 11.9; 2017: 11.9; 2018: 12.1; 2019: 11.8; 2020: 11.4; 2021: 11.5

### Liquidity metrics for top banks (Figure 5)
- Top 12 banks: sources of funding by bank type (2021M3, in percent of total funding) and deposits by counterparty (2021M3, in percent).
- Top 12 banks: Liquidity Coverage Index (IRL) and Net Stable Funding Ratio presented.
- Note: IRL is a national implementation of BASEL III Liquidity Coverage Ratio focusing on the short-term liquidity risks.

### Firms’ financial ratios and corporate sector (Figure 6)
- Firms increased liquidity positions in 2020, pushing up their cash available ratio.
- Cash-to-Total Assets Ratio (median): corporates and SMEs rose from 2016–2020.
- Cash Available Ratio increased for corporates and SMEs (excluding short-term debt).
- Debt-to-Assets Ratio: slight decline of leverage in 2020 for corporates; similar levels for SMEs.
- ICR (interest coverage ratio): While still above 1, ICR declined in 2020.
- Debt share increased; profitability measures declined in 2020.
- ROA (median): shown for corporates and SMEs, declining trend in 2020.

### FSAP macro projections and scenarios (Figures 7 and Table 5)
- FSAP presents Baseline and Adverse scenarios with projections for macro variables.
- Selected values from Table 5 (FSAP Macro Projections—Baseline and Adverse Scenarios; percent):
  - Real GDP growth (T0 to T3):
    - Baseline: T0: 1.2; T1: 5.0; T2: 3.6; T3: 3.3
    - Adverse: T1: -1.2; T2: -1.3; T3: 4.0
  - Nominal GDP growth:
    - Baseline: T0: 4.2; T1: 6.3; T2: 8.1; T3: 6.1
    - Adverse: T1: -1.1; T2: -0.4; T3: 3.7
  - Inflation rate:
    - Baseline: T0: 2.0; T1: 4.1; T2: 3.0; T3: 3.0
    - Adverse: T1: 3.8; T2: 2.0; T3: 1.8
  - Unemployment rate:
    - Baseline: T0: 15.5; T1: 14.2; T2: 13.4; T3: 12.8
    - Adverse: T1: 16.9; T2: 18.2; T3: 17.8
  - Interbank lending rate:
    - Baseline: T0: 1.8; T1: 2.5; T2: 3.9; T3: 4.4
    - Adverse: T1: 3.4; T2: 4.3; T3: 4.6
  - 1-year government bond yield:
    - Baseline: T0: 2.3; T1: 3.8; T2: 4.7; T3: 5.0
    - Adverse: T1: 4.2; T2: 4.8; T3: 4.7
  - 10-year government bond yield:
    - Baseline: T0: 6.5; T1: 7.8; T2: 7.6; T3: 7.2
    - Adverse: T1: 9.0; T2: 10.1; T3: 8.7
  - Housing price (index):
    - Baseline: T0: 100.0; T1: 105.1; T2: 108.9; T3: 112.5
    - Adverse: T1: 88.2; T2: 80.2; T3: 78.8
  - Equity price (index):
    - Baseline: T0: 100.0; T1: 106.3; T2: 114.9; T3: 121.9
    - Adverse: T1: 83.0; T2: 79.0; T3: 87.7
  - Energy commodity prices (index):
    - Baseline: T0: 100.0; T1: 143.0; T2: 124.9; T3: 115.3
    - Adverse: T1: 112.9; T2: 60.6; T3: 68.3
  - Non-energy commodity prices (index):
    - Baseline: T0: 100.0; T1: 110.3; T2: 107.7; T3: 107.2
    - Adverse: T1: 100.9; T2: 79.5; T3: 81.9

### Solvency stress test results (Figures 8 and 9)
- Main results presented for Total CAR and Tier 1 across full sample, DSIBs, and non-DSIBs.
- Detailed solvency stress test elements include:
  - Net profit (before stress), loss provisions (Credit Risk), interest rate risk, market risk, other comprehensive income, dividends, Basel III capital adjustments, change in risk weighted assets.
  - Net income components and contributions to change in capitalization ratio shown across periods Jun-22 Baseline/Adverse, Jun-23, Jun-24.
  - Banks’ Total CAR and T1 distributions under Adverse scenario across 2021–2024 buckets (<9, <11.5, <14, <16.5, <19, >=19 and <6, <8.5, <11, <13.5, <16, >=16).

### Cross-border exposures and contagion channels (Figure 10)
- Banks’ cross-border exposures and other financial institutions’ cross-border exposures mapped (December 2020 data).
- Network map notes: edges indicate exposures including short-term debt, long-term debt, equities, and derivatives; bubble size indicates weighted in-degree; ROW denotes Rest of the World.

### Corporate stress test results (Figure 11)
- ICR<1: Corporates and SMEs — share of firms (percent) tracked across 2016–2020 and T1–T3; Adverse scenario raises shares with specific plotted trajectories.
- Cash available <0: Corporates and SMEs — share of firms (percent) tracked, with higher shares under Adverse scenario.
- Solvency: Equity-to-Total Assets (median) for Corporates and SMEs tracked 2016–2020; Adverse scenario results for share of firms with Solvency Ratio <5 percent presented (T0, T1, T2).

### Risk Assessment Matrix (Table 4) — main risks, likelihood, and impacts
- Uncontrolled COVID-19 local outbreaks and global resurgence of the pandemic
  - Overall Level of Concern: High
  - Likelihood of Realization in the Next 1–3 Years: High
  - Expected Impact on Financial Stability if Realized: High
  - Key channels: renewed containment, limited policy space, capital outflows, depreciation, inflation, worsening household and corporate vulnerabilities, banks’ asset quality deterioration.
- De-anchoring of inflation expectations in the U.S. and/or advanced European economies
  - Overall Level of Concern: Medium
  - Likelihood: High
  - Expected Impact: High
  - Key channels: abrupt central bank tightening, sharp tightening of global financial conditions, asset market selloffs, bankruptcies, sovereign defaults, contagion to EMDEs.
- Widespread social discontent and political instability, including from the region
  - Overall Level of Concern: Medium
  - Likelihood: Medium
  - Expected Impact: Medium
  - Key channels: disruption to economic activity, weaker policymaking, capital flow reversals, exchange rate depreciation, banking stress.
- Disorderly transformations (structural change risks)
  - Overall Level of Concern: Medium
  - Likelihood: High
  - Expected Impact: High
  - Key channels: labor market rigidities, debt overhangs, inadequate bankruptcy frameworks, surge in NPLs, erosion of bank capital, corporate credit spreads widening.
- Increasing fiscal pressures and/or loss of fiscal credibility
  - Overall Level of Concern: High
  - Likelihood: Medium
  - Expected Impact: High
  - Key channels: sovereign bond sell-off, higher funding costs, valuation losses for banks and pension funds, stress in public finances spilling into financial system.
- Build-up of climate-related risks
  - Overall Level of Concern: Medium/Low
  - Likelihood: Medium
  - Expected Impact: Medium
  - Key channels: carbon pricing/taxes and transition policy measures affecting corporate profits and balance sheets, higher NPLs for banks from impaired corporate borrowers.

### Financial soundness indicators (Table 3, selected)
- Regulatory capital to risk-weighted assets: 2015: 16.9; 2016: 17.5; 2017: 18.6; 2018: 17.8; 2019: 16.9; 2020: 19.2; 2021: 22.0
- Regulatory Tier 1 capital to risk-weighted assets: 2019: 11.8; 2020: 14.4; 2021: 17.8
- Capital (net worth) to assets: 2015: 8.7; 2016: 8.7; 2017: 9.2; 2018: 9.4; 2019: 9.1; 2020: 9.9; 2021: 12.1
- NPL treatment: NPL ratios for consumer, commercial, and microcredit segments reflect 30 days or more past due and for mortgages 120 days or more past due.

*Sources: Departamento Administrativo Nacional de Estadísticas (DANE); Banco de la República; Ministerio de Hacienda y Crédito Público; Superintendencia Financiera (SFC); Colombian authorities; UNDP Human Development Report; World Development Indicators; World Economic Outlook; Bloomberg; and IMF staff estimates.*

### Appendix I. Implementation of 2012 FSAP Recommendations

### Appendix I. Implementation of 2012 FSAP Recommendations

### Independence of SFC
- Recommendation: Include the requirement to appoint the superintendent for a fixed term or to require a public explanation of the reasons for dismissal.
- Priority: High
- Horizon: ST
- Status: In progress
- Comments/Details:
  - Decree 1817 of 2015 introduced a Term fixed at four (4) years; however, this Decree was partly censured in 2020.
  - New law to reinstate a fixed term of four (4) years is scheduled for Parliament discussion in June 2022.

### Legal protection
- Recommendation: Amend legal framework to clarify that liability for failure to perform the regulatory mandate in good faith should be defined as equivalent to acting in bad faith; and that the judicial authorities can limit circumstances in which private parties can sue.
- Priority: Medium
- Horizon: MT
- Status: Not completed
- Comments/Details:
  - The 2016 Budget Law authorized Superintendencies to bear the costs of legal processes brought against the superintendents for acts performed in the course of their duties.
  - The legal framework still needs completion with provisions that reduce the probability of the SFC staff to be involved in lengthy and unpredictable legal proceedings while discharging duties in good faith.

### Holding Companies of Financial Conglomerates
- Recommendation: Approve law that gives SFC supervisory and regulatory powers over the holding company of a financial conglomerate.
- Priority: High
- Horizon: MT
- Status: Completed
- Comments/Details:
  - Law 1870 of 2017.
  - Decrees 246, 774 and 1486 of 2018.
  - Administrative Acts of the SFC - External Circulars (CE) 30 of 2020, 12 and 13 of 2019, and 14 of 2018.

### Adoption of International Financial Reporting Standards (IFRS)
- Recommendation: Continue implementation of IFRS.
- Priority: Medium
- Horizon: MT
- Status: Completed
- Comments/Details:
  - Decree 1074 of 2015.
  - IFRS 17 adoption in study.
  - IFRS 9 is in the process of adoption on an individual basis.

### Standards for external auditors
- Recommendation: Publish timetable to comply with international auditing standards.
- Priority: Medium
- Horizon: MT
- Status: Completed
- Comments/Details:
  - Decree 302 of 2015. Effective January 1, 2016.

### Bank regulation
- Recommendation: Adopt Basel II, Pillar 2 supervisory framework. Formulate guidelines to undertake ICAAP reviews both at individual and conglomerate level.
- Priority: High
- Horizon: MT
- Status: In progress
- Comments/Details:
  - Decrees 2392 of 2015 (banks) and 1486 of 2018 (conglomerates).
  - Decree 2392 of 2015 (Article 2.1.1.1.1.15 Decree 2555/2010), through which banks are required to have an internal capital planning process.
  - E-GU-MIS-007 of 2021 issued by the SFC as the supervision guideline regarding Capital, Profitability, and Liquidity, which includes criteria and elements to assess the risk appetite, stress testing, and Capital Self-Assessment Program (ICAAP) of a supervised institution and a financial conglomerate.
  - Final regulation on ICAAP is scheduled for December 2022.
- Recommendation: Simplify large exposure limits by reducing number of separate limits as well as the range of exceptions; ensure that limit on related party lending cover all such exposures.
- Priority: High
- Horizon: MT
- Status: In progress
- Comments/Details:
  - The technical study was published in Q4 2020, the draft decree was discussed in Q4 2021 by the Council of the URF and the final regulation is expected to be issued later in 2022.

### Bank resolution framework
- Recommendation: Reform legal framework to shorten period of possession and limit reliance on options inconsistent with accepted resolution principles.
- Priority: Medium
- Horizon: MT
- Status: Completed
- Comments/Details:
  - Article 115 of the EOSF establishes a maximum term of two months.
  - Law 1870 of 2017 and Decree 521 of 2018 regulate new mechanisms: Purchase of assets and assumption of liabilities (CAAP) and Bridge Bank.
  - Decree 923 of 2018 established mandatory resolution plans and the Intersectoral Resolution Commission (CIR).
  - CE 027 of 2019 introduced the requirements of the resolution plan.

### Macroprudential policy
- Recommendation: Adopt more formal structure of CCSSF through adoption of action plan to manage a systemic crisis.
- Priority: Medium
- Horizon: MT
- Status: Completed
- Comments/Details:
  - Decree 1954 of 2014.
  - The CCSSF has: (i) a Crisis Protocol that aims to coordinate interaction and information sharing between its members during an individual and/or systemic crisis; and (ii) an External Communications Protocol in times of crisis, that develops an orderly and articulated communications strategy between authorities.

### Money markets
- Recommendation: Phase out the financial transactions tax faster than currently planned.
- Priority: Medium
- Horizon: MT
- Status: Not completed
- Comments/Details:
  - Financial transaction tax remains part of the tax regime.
  - Government has developed simplified deposit products aimed to boost digital transactions in Colombia; these products and regular deposit products are exempt of the transaction tax up to a monthly limit of withdrawals: COP$2.36 million for simplified products and COP$12.71 million for savings account.
  - Exemptions aim to allow financial inclusion process to overcome this cost.

- Recommendation: Expand issuance of ST government securities.
- Priority: Medium
- Horizon: MT
- Status: Completed
- Comments/Details:
  - In 2015 short term TES were included again in the Colombian Financial Plan, and auctions were reintroduced in the annual calendar, gaining gradual liquidity in the secondary market.
  - Every maturity is launched with an original tenor of 364 days, and it is sold over the course of 13 auctions, approximately, in order to gain a critical amount ($3.6 trillion COP on average).

- Recommendation: Narrow the range of counterparties in open market ops.
- Priority: Medium
- Horizon: MT
- Status: Completed
- Comments/Details:
  - In 2015, the BR narrowed the range of counterparties. Only broker-dealers (in their own position) who are market dealers and credit establishments could access the open market operations. With COVID, counterparties were broadened temporarily.

### Liquidity Management
- Recommendation: Tighten liquidity standards for broker-dealers and other NBFIs.
- Priority: High
- Horizon: MT
- Status: Completed
- Comments/Details:
  - CE010 of 2014 with its annexes, and CE003 of 2015 with its annexes, introduced the liquidity requirements for Broker-dealers and Open-Ended Investment Funds.

- Recommendation: Adopt more rigorous stress testing of broker-dealers and other NBFIs.
- Priority: High
- Horizon: MT
- Status: Completed
- Comments/Details:
  - Number 5.2.2.1 of Chapter VI and number 5.2.2.1 Chapter XXI of the CBCF requires NBFIs to perform its own liquidity risk and market risk stress testing exercises, which are evaluated in the different supervision exercises.
  - The SFC performs on a regular basis stress testing exercises that covers both market and liquidity risk of NBFIs.

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### Appendix II. Banking Sector Stress Testing Matrix (STEM)

### Banking Sector: Solvency Risk (Top-down by FSAP Team)

1. Institutional perimeter
- Institutions included: The top 12 commercial and retail banks.
- Market share: Nearly 93.8 percent of total assets in the banking system.
- Data and baseline date:
  - Cut-off date: June 2021.
  - SFC bank-by-bank supervisory data including credit risk-sensitive exposures, market risk-sensitive exposures, and interest rate sensitive assets and liabilities as well as historical information on nonperforming loans by portfolio, and details of lending and funding rates.
  - Other market and publicly available data.
  - Scope of consolidation: banking activities on an individual basis.

2. Channels of risk propagation
- Methodology:
  - FSAP team satellite models and methodologies.
  - Balance-sheet approach with quasi-static balance sheet assumption.
  - All banks follow the standardized approach.
- Satellite models for macrofinancial linkages:
  - FSAP team’s own model for credit losses from bank lending portfolios. NPL models for each loan segment (commercial, consumer, and mortgage) with bank-specific fixed effects.
  - Models for funding costs with bank-specific fixed effects.
- Stress test horizon: Three years (mid-2021-mid-2024).

3. Tail shocks
- Scenario analysis:
  - Macrofinancial scenario analysis.
  - Baseline scenario based on the projections of October 2021 WEO.
  - The adverse stress scenario is designed as a deviation from baseline forecasts, triggered by a series of global and domestic shocks, capturing the key risks in the RAM.
- Sensitivity analysis:
  - Single-factor sensitivity test for concentrations risk, where the banks’ top single, five and ten largest exposures are assumed to fail simultaneously.

4. Risks and buffers
- Risks/factors assessed (How each element is derived, assumptions):
  - Credit losses from lending: modeled NPLs for three different portfolios (commercial, consumer and mortgage) at a single geography level. Estimated panel regression coefficients with fixed effects using the Bayesian Model Averaging (BMA) approach subject to sign constraints. Provisioning ratios for the NPLs were calculated based on the historical data for each portfolio segment. Specific procyclical and countercyclical provisions were treated uniformly due to data limitations; countercyclical provisions were not treated as additional buffer.
  - Market risk: losses due to changes in market variables: risk-free interest rates, exchange rate and equity prices, making no allowance for macro hedges. For sovereign and corporate debt securities (under AFS or HFT), a modified-duration formula was used to revalue exposure as function of their residual duration and the relevant bond yield assumptions under the scenarios. Foreign exchange risk and equity based on respective net open positions and the paths of equity index and exchange rate under the scenarios.
  - Non-interest income: impact of funding and lending interest rate shocks on net interest income estimated by measuring the gap between interest sensitive assets and liabilities using time-to-repricing buckets. Effective interest rates estimated using satellite models and pass-through assumptions.
  - Other P&L components: Net fee and commission income, other non-interest income and non-interest expenses projected in line with the growth of each bank’s balance sheet. Extraordinary income and losses were assumed not to incur during the projection period.
  - Banks’ indirect exposures through subsidiaries: shocked by 50 percent and 25 percent in the first and second years, respectively, of the adverse scenario.
  - Income tax: calibrated as the median of historical tax expense ratios per bank.
  - Counterparty concentration risk: losses from simultaneous failure of top 1, 5 and 10 largest single-counterparty exposures.
- Behavioral adjustments:
  - Quasi-static balance sheet assumption: balance sheet grows proportionally with nominal GDP under baseline and adverse scenarios, with a lower zero-bound (no ex-ante deleveraging allowed).
  - Dividends can only be paid out by banks that remain adequately capitalized and have positive profits.
  - New business repricing assumes maturing instruments replaced by identical new instruments at reference and margin rates implied by the scenario and pass-through assumptions.

5. Regulatory and market-based standards and parameters
- Calibration of risk parameters: Based on credit models estimated by IMF staff. NPL ratios projected using panel regression techniques.
- Regulatory/accounting and market-based standards:
  - The hurdle rate based on the current capital adequacy framework accounting for the phase-in of several components during the projection period.
  - A minimum total capital adequacy ratio (CAR) of 9 percent applies.
  - Tier 1 (T1) hurdle rate: 4.9 percent (in 2021) gradually increased to 6 percent by January 2024 until full convergence.
  - Minimum leverage ratio (tier 1 capital to total assets) of 3 percent applies throughout.
  - Capital conservation buffer (CCoB) and systemically important bank buffer (DSIB) phased in gradually to reach 1.5 and 1 percent of risk-weighted assets by January 2024.
  - Capital projection path incorporates gradual phase-out of eligible additional tier 2 instruments.

6. Reporting format for results
- Output presentation:
  - Capital ratio decline of the banking system.
  - Number of banks and the percentage of banking assets (or GDP) in the system that fall below a hurdle rate.
  - Decomposition of the reduction in capital ratio in terms of drivers (credit risk, market risk, interest rate risk, etc.).

### Banking Sector: Liquidity Risk (Top-down by FSAP Team)

1. Institutional perimeter
- Institutions included: The top 12 commercial and retail banks.
- Market share: 93.8 percent of total assets in the banking system.
- Debt and baseline date:
  - Baseline date: June 2021. Data for December 2019, June 2020 and December 2020 used for comparison.
  - Source: Data compiled based on national reporting templates 458, 531 and 238 (regulatory returns monitoring the LCR and the NSFR), additional off-balance sheet data capturing balance of credit/liquidity facilities, and reporting template 474 covering the biggest depositors.
  - Scope of consolidation: individual bank basis.

2. Channels of risk propagation
- Methodology:
  - Exercise based on LCR-based and NSFR-based tests, and cash-flow analysis.
  - LCR-based test in line with IRL—the SFC’s implementation of Basel’s LCR—on individual basis and for all currencies combined. May be complemented by CB’s liquidity metric (IEI) focusing on exchange rate risk.
  - Scenarios used to produce stressed LCR exploring retail and wholesale funding shocks, complemented by large depositors’ concentration analysis.
  - Cash-flow analysis based on data corrected by the SFC for IRL for the period up-to 90 days on individual basis and for all currencies combined; scenarios of run-off and roll-over rates, liquid assets haircuts implemented.
  - NSFR requirements gradually implemented with 100 percent limit for banks with assets greater than 2 percent of total system assets and 80 percent limit for other institutions with credit portfolio as primary activity by March 31, 2022. NSFR-based test relies on national regulatory parameters, on individual basis and for all currencies combined, with the hurdle at 100 percent.

3. Risks and buffers
- Risks: Funding liquidity; Market liquidity; Depositor concentration risk (withdrawal of largest depositors).
- Buffer: The counterbalancing capacity, including liquidity obtained from markets and/or regular central bank facilities (excluding the central bank’s emergency liquidity assistance (ELA) or other temporary measures). Expected cash inflows included in cash-flow and LCR analyses.

4. Tail shocks
- Scenario analysis: Stress scenarios on liability outflows reflecting retail outflows, wholesale funding outflows, and large depositors’ withdrawals, and scenarios on liquid assets shock.

5. Regulatory and market-based standards and parameters
- Regulatory standards:
  - LCR per Basel III—the hurdle at 100 percent.
  - NSFR per Basel III—the hurdle at 100 percent.
  - Cash-flow analysis—a non-negative net cash balance reflecting net funding outflows and counterbalancing capacity.
- Calibration of risk parameters: Run-off rates, roll-over rates, and asset haircuts calibrated based on historical events, empirical evidence, and IMF expert judgment.

6. Reporting format for results
- Output presentation:
  - Distribution of liquidity positions by groups of banks and aggregated (system wide).
  - Number of institutions with LCR/NSFR below 100 percent and/or negative net cash balance.
  - Amount of liquidity shortfalls.

### Banking Sector: Interconnectedness Analysis and Contagion Risk (Top-down by FSAP Team)

1. Institutional perimeter
- Institutions included:
  - Active nodes: All 25 banks (DSIBs and non-DSIBs); Top 5 pension funds; Top 5 insurance companies; Top 5 investment funds.
  - Passive nodes: Residual pension funds aggregated; Residual insurance companies aggregated; Residual investment funds aggregated; Other financial sectors aggregated: trusts, securities firms and other financial intermediaries; Nonfinancial corporates aggregated at industry level (20 industries); Other aggregated sectors: government (Colombia), households (Colombia), top five countries aggregated at country level, rest of the world foreign counterparts.
- Market share: Active nodes account for 100 percent of total assets in the banking system.
- Data and baseline date:
  - Date: December 2020.
  - Source: supervisory data on bilateral linkages within the banking system and with other entities to construct a large-exposures matrix, and solvency and liquidity related reports to calibrate model parameters.
  - Scope of consolidation: active nodes on individual basis. Sector residuals and nonfinancial entities aggregated at sector level. Exposures among members of a conglomerate are mapped in the network.

2. Channels of risk propagation
- Methodology: Application of CoMap framework (Covi, Gorpe and Kok, 2019), with extensions to model contagion through nonbank financial entities.
- Risks/factors assessed:
  - Credit default channel: impact of an entity defaulting on obligations to other entities; exposure-specific loss-given default rates reflect risk mitigation and collateralization.
  - Funding shock and liquidity dynamics: impact of funding withdrawal or non-rolling over by a failed entity; use of surplus high-quality liquid assets as collateral, then deleveraging by selling marketable securities at discount incurring haircut losses.
  - Cascading defaults due to insolvency and/or illiquidity failures.

3. Tail shocks
- Scenario analysis: Idiosyncratic shocks—hypothetical failure of each entity as a potential trigger event. Exercise comprises as many simulations as there are nodes in the network.

4. Reporting format for results
- Output presentation:
  - Number of cascade defaults and amplification effects.
  - Contagion losses induced (contagion index) and experienced (vulnerability index) by each node.
  - Decomposition of losses by entity types.

### Nonfinancial Corporate Stress Test (Top-down by FSAP Team)

1. Institutional perimeter
- Institutions included:
  - 26,066 firms in cut-off year: 3,346 corporates and 22,720 SMEs.
  - Covers 21 industries.
- Market share: Represent around 80 percent of GDP.
- Data and baseline date:
  - Cut-off date: December 2020.
  - Source: firm-level time-series balance sheet and income statement data from the Superintendency of Companies (SS, Supersociedades).
  - Scope of consolidation: individual reporting basis (unconsolidated).

2. Channels of risk propagation
- Methodology:
  - Following methodology developed by Tressel and Ding (2021).
  - Assessment of (i) the ability to service debt (ICR); (ii) external borrowing needs based on cash balance (cash available); and (iii) solvency position.
- Models:
  - Dynamic regressions for return on assets (ROA) and leverage.
  - Probit models for cash balance (cash available) and ICR.
- Stress test horizon: Three years (mid-2021-mid-2024).

3. Tail shocks
- Scenario analysis:
  - Macrofinancial scenario analysis using the same scenarios as the bank solvency stress-test.
  - Baseline scenario based on the projections of October 2021 WEO.
  - Adverse stress scenario designed as a deviation from baseline forecasts, triggered by a series of global and domestic shocks, capturing the key risks in the RAM.

4. Reporting format for results
- Output presentation:
  - Share of firms with lower repayment capacity (ICR<1).
  - Share of firms with potential borrowing needs (Cash Available<0).

*Source: Appendix I. Implementation of 2012 FSAP Recommendations; Appendix II. Banking Sector Stress Testing Matrix (STEM). 1colea2022003.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1colea2022003.pdf_