## EXECUTIVE SUMMARY

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---

### INTRODUCTION
- The COVID-19 pandemic caused a contraction in GDP of 6.8 percent in 2020, described as the largest recession on record in Colombia.
- Over five million jobs were temporarily affected; the unemployment rate exceeded 20 percent in 2020 and the participation rate dropped 11 percentage points in 2020. Growth rebounded to 10.6 percent in 2021.
- Banking-sector developments during 2020:
  - Nominal credit growth moderated from 7.7 percent in 2019 to 3.9 percent in 2020.
  - Consumer loans growth fell from 15.7 percent in 2019 to slightly above 2 percent in 2020.
  - Systemwide NPLs to total loans increased from 4.3 percent in 2019Q4 to 5 percent at end-2020; NPLs are expected to continue rising in the near term as support measures fade out.
- Main forward-looking risks for the financial sector:
  - (i) a prolonged pandemic with limited containment;
  - (ii) a sharp tightening of global financial conditions;
  - (iii) political and social uncertainty disrupting economic activity.
- Main vulnerabilities identified:
  - (i) fragilities in nonfinancial corporates exacerbated by COVID-19 disruptions;
  - (ii) rapidly growing consumer credit before the pandemic, with shortcomings in macroprudential regulation and data;
  - (iii) opaque domestic and international risk transmission channels.
- Purpose: assess strengths and weaknesses of Colombia’s macroprudential policy framework and provide policy recommendations.

### INSTITUTIONAL FRAMEWORK
- Institutional arrangement:
  - Macroprudential policy for the banking sector is a shared competency of the SFC, the Banco de la República (BR), and the Ministry of Finance (MHCP).
  - The Financial Sector Coordination and Monitoring Committee (CCSSF) (SFC, BR, MHCP, Fogafin) is the main platform for information sharing and cooperation but has no macroprudential mandate or formal powers.
  - Only the SFC has a statutory responsibility for financial stability, though the concept is not clearly defined in law.
- Recent toolkit and Basel III implementation:
  - The Net Stable Funding Ratio (NSFR) implementation will be finalized in 2022.
  - The capital conservation buffer (CCB) and a buffer for systemically important financial institutions (SIFI) will be fully phased in by 2024.
  - The CCB buffer was set at 1.5 percent and the SIFI buffer at 1 percent.
  - The NSFR requirement applies to Colombian intermediaries supervised by the SFC on an unconsolidated basis; the level depends on systemic importance. Institutions to which the SIFI buffer will apply were identified following the Basel III methodology.
- Strengths and vulnerabilities in willingness and ability to act:
  - Strengths: advanced systemic risk monitoring framework; proactive authorities; enhanced macroprudential toolkit in line with Basel III.
  - Vulnerabilities:
    - Informality of institutional arrangements: CCSSF lacks decision powers and formal mandate.
    - Central bank (BR) has a comparatively weak role in macroprudential decision making, which may create bias toward inaction or “blind spots.”
    - Partitioning of hard powers among various agencies, some without explicit financial stability mandates, is a considerable vulnerability.
    - Current process governing decisions on Loan to Value ratio (LTV), Debt Service to Income ratio (DSTI), and loan amortization limits poses a risk of these tools being used with insufficient regard for the financial stability objective.
- Data and coordination powers:
  - The BR and SFC have a Memorandum of Understanding (MoU) for data flow and a technical committee to discuss shared data.
  - The SFC supervises asset managers and insurers but no formal macroprudential oversight framework exists for those sectors.
  - The recently implemented Financial Conglomerates Law has given the SFC additional data-collection powers regarding financial conglomerates (FCs).

### OPERATIONAL FRAMEWORK AND RISK MONITORING
- Data gaps and monitoring needs:
  - Need for more granular data on Colombian banks’ foreign subsidiaries to identify risks from foreign exposures.
  - Closing data gaps on household indebtedness will improve assessment of risks from household credit.
  - Monitoring of interconnectedness within financial conglomerates needs enhancement; the SFC is working to improve analysis of interconnectedness risks.
- Institutional roles and information flows:
  - The URF can access information on regulated financial institutions through requests to the SFC.
  - During early 2020, the SFC intensified frequency and scope of reporting smoothly.
  - Despite MoUs and working groups with host-country supervisors, information from foreign subordinates of Colombian banks is insufficiently granular for financial stability risk assessment and macroprudential policy conduct.

### SYSTEMIC RISKS AND MACROPRUDENTIAL POLICY STANCE
- Credit quality and cross-border exposures:
  - High pre-pandemic capitalization and profitability helped Colombian banks weather the shock so far.
  - The pandemic led to deterioration in credit quality; NPLs rose and are expected to continue rising as support measures fade.
  - Credit risks are building in foreign portfolios, which account for a large share of profits of internationally active Colombian banks.
  - Close monitoring of foreign exposures and increased granularity of data on subsidiaries’ portfolios are recommended.
- Interconnectedness:
  - Interconnectedness risks within financial conglomerates, including cross-border networks, warrant intensified monitoring.
- Macroprudential toolkit enhancements suggested:
  - Expand LTV and DSTI tools to cover leasing products and nonbank credit; expand DSTI to include nonmortgage debt to limit leakage and address risks from rapid growth in overall indebtedness.
  - Consider applying short-term liquidity and NSFR requirements on a consolidated basis given large foreign exposures of some banks.
  - Consider better aligning liquidity regulations by the SFC and the BR with Basel III standards.

### KEY RECOMMENDATIONS (excerpted and preserved)
- Institutional Framework
  - Ensure that the financial stability objective is included in statutory acts or prepare a joint macroprudential oversight strategy. — MHCP, SFC, BR — MT
  - Strengthen the central bank’s role in systemic risk monitoring and of the Banco de la República (BR) and the Superintendency of Financial Institutions in macroprudential decision making. — MHCP, SFC, BR — ST
  - Assign the powers over borrower-based tools, the systemic risk buffer, leverage ratio, and the capital conservation buffer to the BR and the SFC. — MHCP — ST
- Operational Framework for Risk Monitoring and Analysis
  - Formalize the BR’s role as the institution responsible for the systemic risk assessment. — MHCP, SFC, BR — ST
  - Close data gaps in the areas of cross-border exposures and household indebtedness. — SFC — I
- Systemic Risks and Macroprudential Policy Stance
  - Expand LTV and DSTI tools to cover leasing products and nonbank credit, and the DSTI tool to include nonmortgage debt. — MHCP — ST
  - Consider better aligning the liquidity toolkit with Basel III standards. Apply the IRL and the NSFR requirements at both unconsolidated and consolidated bases. — SFC, BR — ST
  - Intensify monitoring of credit risks of cross-border exposures and of interconnectedness risks within financial conglomerates. — SFC — I

- Timing notation preserved: I: Immediate (within 1 year); ST: Short term (within 1–2 years); MT: Medium Term (within 3–5 years).

---

### INSTITUTIONAL POWERS AND DIVISION OF THE MACROPRUDENTIAL TOOLKIT
- Powers are split among the SFC, the BR, the MHCP (via the URF), and the government.
- SFC responsibilities:
  - Sets countercyclical provisions.
  - Sets the Liquidity Risk Indicator requirement (IRL).
  - Sets the NSFR.
- MHCP (via URF) responsibilities:
  - Powers over the leverage ratio.
  - Capital conservation buffer.
  - Capital buffer for systemically important institutions (SIFI buffer).
- BR responsibilities:
  - Controls IRL requirements accounting for currency mismatches.
  - Net open FX position limits.
  - A macroprudential reserve requirement.
  - Credit growth limits.
- Governmental role:
  - Borrower-based limits (LTV, DSTI, and amortization period limits) can be changed via a decree at the request of a group of ministries and require the signature of the President of The Republic of Colombia.
  - The process for changing borrower-based limits is complex and poses risks:
    - Changes can be requested by ministries not involved in financial sector oversight and with objectives other than financial stability.
    - Proposals need MHCP approval, but approval or consultation with the SFC or the BR is not required.

### COORDINATION AND COOPERATION ARRANGEMENTS
- CCSSF:
  - Serves as the main platform for information sharing and policy coordination (no voting arrangements).
  - Meetings occur at a minimum quarterly frequency.
  - Agenda preparation and technical analysis led by a Technical Subcommittee consisting of technical staff from each institution.
  - Secretariat (staffed by the MHCP) proposes the agenda to the Technical Subcommittee; all members participate actively in work program and agenda setting.
- Other coordination bodies include:
  - SFC’s Advisory Board.
  - URF Steering Committee.
  - BR’s Board of Directors.
- Data-sharing:
  - SFC collects most data relevant for macroprudential policy and is obliged to share with URF and BR as needed.
  - BR does not seem to have full access to consolidated supervisory data necessary for systemic risk analysis.

### RISKS FROM INFORMAL ARRANGEMENTS AND MULTIPLICITY OF FUNCTIONS
- Lack of formal macroprudential oversight arrangements:
  - Both SFC and BR conduct their own systemic risk monitoring and analysis, often using assessments to inform internal policy decisions rather than producing a unified view.
  - BR’s analytical influence is mainly via publications and comments on drafts; future regulatory agendas of SFC and MHCP are not coordinated with BR.
  - Informality poses coordination risk where one agency’s macroprudential tools could undermine another institution’s explicit or implicit financial stability mandate.

### ACCOUNTABILITY AND COMMUNICATION
- SFC accountability:
  - SFC is the only institution with explicit financial stability mandate.
  - Obliged to publish an annual report on activities and frequently updates parliament on regulatory agenda and financial sector.
  - Publishes reports on supervised industries, focused on aggregate and institution-level data rather than comprehensive systemic risk analysis.
- Communication channels:
  - CCSSF publishes a statement after each meeting; secretariat prepares minutes (not public).
  - BR publishes a semiannual Financial Stability Report (FSR) and topical reports; semiannual Report to Congress explains BR policy actions.
- Concerns:
  - BR and MHCP lack statutory responsibility for financial stability, which might lead to bias for inaction.
  - BR does not have formal powers to propose actions to SFC or MHCP and is not required to be consulted on new regulatory initiatives.

### RECOMMENDATIONS (INSTITUTIONAL)
- Include a financial stability objective in statutory acts or prepare a joint macroprudential oversight strategy:
  - Jointly drafted and signed by all relevant institutions.
  - Could establish a shared definition of financial stability and define key medium-term priorities (e.g., macroprudential toolkit and closing data gaps).
- Strengthen BR’s role in macroprudential policy:
  - Assign BR a clearly defined role to provide systemic risk analysis and to propose policy actions to other institutions on a comply-or-explain basis.
- Increase powers of SFC and BR in decision making:
  - Ideally transfer powers over systemic risk buffer and leverage ratio to SFC and BR.
  - Powers over LTV, DSTI, and mortgage amortization period limits should be in hands of institutions involved in financial system oversight.
  - These changes would reduce multiplicity of functions and risks of agencies undermining each other’s mandates.
- Improve macroprudential publications and communication:
  - Strengthen FSR’s role by centering it on assessment of risks to financial stability.
  - Provide aggregate statements and charts showing change in overall risk since previous assessment.
  - Contextualize descriptions of regulatory changes with developments in financial vulnerabilities.

---

### OPERATIONAL FRAMEWORK, RISK MONITORING PRACTICES, AND DATA LIMITATIONS
- Macroprudential effectiveness depends on:
  - Comprehensive monitoring and assessment of systemic risk.
  - Ability to translate risk assessments into policy actions.
  - Access to good quality data.
  - Use of different econometric and modelling methods.
  - Mapping systemic risk into policy actions with cost-benefit analysis and frequent ex post evaluation.
- Monitoring practices and gaps:
  - Both SFC and BR conduct continuous systemic risk monitoring; assessments mostly inform their own decisions and do not guarantee unified view.
  - Monitoring frameworks are well structured and relatively advanced:
    - Several indicators of vulnerabilities for aggregate credit developments and borrower segments are computed and assessed regularly (many derived from in-house bank surveys and micro-level data).
    - Annual assessment of overall trends in the nonbank financial sector; specific nonbank sectors monitored at higher frequency.
    - Structural risk monitoring includes data on bilateral exposures, intragroup and related-party exposures; indicators of systemic importance using BCBS methodology.
    - SFC working on enhancements to interconnectedness risk monitoring of financial conglomerates.
    - Ex post assessments of macroprudential policy effectiveness are conducted and usually published in thematic reports and analytical paper series (e.g., by BR), although not on a regular basis.
- Use of international approaches and scope for better calibration:
  - Approaches recommended by international bodies (e.g., BCBS) often used to inform calibration.
  - Institutions also analyze international experiences and academic literature.
  - Scope exists to support calibration (LTV, DSTI limits, capital buffers) with more advanced technical analysis.
  - Ongoing internal review of BR’s financial stability policy framework aims to better align analytical frameworks with macroprudential decisions.
- Data and information limitations:
  - Financial Conglomerates Law allows SFC to enhance monitoring of conglomerates, including exposures and interconnections.
  - Remaining data gaps:
    - Granular data on activities of foreign subordinates (e.g., detailed credit risk profiles by portfolio segment) of Colombian banks on a regular basis could be improved.
    - Lending through foreign entities is equivalent to 33 percent of total domestic credit outstanding.
    - Foreign entities account for as much as 50 percent of total profits for some Colombian banks.
    - Current data does not allow precise calculation and detailed analysis of total household debt-to-income and total debt-service-to-income ratios.
    - Data on mortgage loans by borrower type (first-time buyer, investor) is not available.
    - BR does not seem to have access to all consolidated supervisory data necessary for systemic risk analysis; conglomerates account for the vast majority of cross-border exposures, making access to consolidated reporting critical.
- Data and monitoring recommendations:
  - Leverage BR’s technical expertise and macroeconomic focus by:
    - Formalizing central bank’s responsibility for systemic risk assessment.
    - Granting BR a right to suggest policy actions to other institutions on a comply-or-explain basis.
  - Close data gaps by:
    - Collecting more granular data on foreign exposures of Colombian banks.
    - Closing gaps on indebtedness of domestic households.
  - Enhance analytical methods:
    - Use more sophisticated modelling techniques and analytical approaches as inputs for calibration of macroprudential tools.
  - Ensure BR access to consolidated supervisory data necessary for systemic risk analysis.

---

### COVID-19 RESPONSE, BASEL III IMPLEMENTATION, AND LIQUIDITY REGULATION
- Crisis response following COVID-19 included:
  - Broad range of borrower relief and financial sector measures.
  - Initial unconditional support (temporary moratorium on loan repayments) followed by more targeted measures such as the Program to Support Debtors (PAD).
- Macroprudential measures in Q1 2020:
  - SFC allowed supervised institutions to release the countercyclical provision (CIC) buffers; 11 entities took advantage of this possibility.
  - Financial intermediaries must rebuild CIC provisions within two years from September 1, 2021.
- March 2021 regulatory change:
  - DSTI limit increased from 30 percent to 40 percent for social housing (VIS) mortgages.
- Capital and liquidity requirements:
  - Capital and liquidity requirements were not relaxed during the pandemic.
  - Schedule for implementation of NSFR, capital conservation, and SIFI buffers was not affected.

### IMPLEMENTATION SCHEDULE OF BASEL III MEASURES
- 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 4 years as follows: January 2021: 0.25%, January 2022: 0.5%, January 2023: 0.75%, January 2024: 1%.
- Net stable funding ratio:
  - The NSFR requirement is differentiated by the systemic importance of the regulated entities (Groups 1 and 2), and it 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%.

---

### CONSUMER CREDIT, MORTGAGES, NFC DEBT, AND STRUCTURAL VULNERABILITIES
- Consumer credit quality and recent developments:
  - Consumer loans growth slowed to 2 percent in 2020.
  - Share of NPLs in the consumer segment increased from about 3.3 percent to 5.5 percent between June 2020 and June 2021.
  - High volume of lending shortly before the COVID-19 shock raises concerns about performance of the outstanding stock of consumer loans.
- Borrower-based tools and macroprudential response:
  - The SFC tightened provisioning requirements for the consumer loan segment after identifying risks, while macroprudential policies were not used.
  - There are no debt-to -income (DTI) limits in the macroprudential toolkit in Colombia.
  - DSTI limits apply only to costs related to servicing mortgage loans.
- Mortgage market, LTV and DSTI limits, and household indebtedness:
  - Since 2000, the LTV limit for mortgage loans has been fixed at 70 percent (and at 80 percent for VIS loans).
  - Since March 2021 the first payment of a mortgage loan cannot exceed 30 percent of the family income and 40 percent for VIS loans; previously, it was 30 percent for all mortgage loans.
  - Variable-rate loans account for only 10 percent of all mortgage loans.
  - Practically all loans to households are granted in local currency.
  - Aggregate household debt to disposable income ratio is about 20 percent.
  - Footnote: DSTI ratios of indebted households, when accounting for credit card debt, have been edging up in recent years.
- Risks of regulatory leakages in mortgage limits:
  - LTV and DSTI limits apply only to mortgages issued by institutions supervised by the SFC, posing potential future leakage to the nonbank sector (nonbank lending is currently marginal).
  - “House leasing loans,” which account for about 12 percent of all housing loans, are not subject to the LTV limits.
- Nonfinancial corporate (NFC) debt and interest rate sensitivity:
  - Nominal NFC debt increased by 8.3 percent in 2018 and by 6.5 percent in 2020.
  - NFC bank credit grew by 2.3 percent in 2020.
  - Domestic bank credit to NFCs accounts for about 60 percent of NFC debt outstanding; intercompany loans account for 32.5 percent.
  - Share of debt securities is 6.6 percent.
  - NFC debt in foreign currency stands at 35.5 percent of total debt; FX loans account for 8.3 percent of corporate loans by financial intermediaries.
  - Most corporate bank loans (84.9 percent) are variable-rate, making corporates vulnerable to sharp adjustments in financing conditions.
- Liquidity and FX risks:
  - Mortgage lending to households in FX currency is not allowed.
  - Financial intermediaries face conservative FX regulations: net open FX position limits and an “FX matching” regulation requiring matching of foreign currency funding by an exposure of at least the same maturity in the same currency or by an exposure in Colombian peso with an appropriate hedging transaction; the FX matching regulation applies at a transaction level.
  - Since 2009 the SFC requires banks to keep a minimum 100 percent ratio of liquid assets to short-term liabilities (IRLs) for 7-day and 30-day horizons.
  - IRL ratios are constructed similarly to the Basel III LCR, but many parameters receive more favorable treatment or are not yet determined.
  - In March 2020 the SFC started implementation of an NSFR requirement, to be finalized by end-March 2022.
  - Colombian banks maintain healthy buffers above the IRL requirements and broadly comply with the final NSFR requirements already, ahead of the March 2022 deadline.
  - Both IRL and NSFR requirements apply to Colombian banks on an unconsolidated basis only.
  - The BR imposes an individual (IEI) and a consolidated (IEC) liquidity requirement on Colombian banks, similar in spirit to the IRL requirements by the SFC; the IRL requirements imposed by the SFC include an additional adjustment parameter (haircut) to control for exchange rate risk.
- Structural vulnerabilities: foreign operations, conglomerates, and concentration
  - NPLs of subsidiaries of Colombian banks have increased significantly, although they account for less than 2 percent of total loans.
  - Foreign subsidiaries contribute largely to profits of internationally active Colombian banks; further deterioration abroad could negatively impact domestic banks’ profitability.
  - Foreign lending equals about 33 percent of total domestic credit outstanding.
  - Lending by nonbanks accounts for less than 5 percent of total domestic credit.
  - The five largest financial conglomerates (FCs) own about 60 percent of the total financial system’s assets.
  - Colombian FCs’ exposures abroad increased from US$11 billion in 2009 to US$93 billion in 2020; about one-third of these exposures are in Panama, and about 92 percent of these assets are held in Central America.
  - The SFC should continue efforts to enhance monitoring of interconnectedness risks within FCs.
  - The SIFI buffer: authorities decided to introduce a 1 percent capital buffer for SIFIs, which will become fully operational in 2024.
  - A capital conservation buffer of 1.5 percent (binding for all banks) will be fully phased in by 2024.

### POLICY RECOMMENDATIONS (PRACTICAL ACTIONS)
- Expand the LTV and DSTI tools to cover:
  - (i) leasing products; and
  - (ii) nonbank credit;
  - and expand the DSTI tool to include nonmortgage debt to limit leakage effects and address future risks from rapid growth in overall indebtedness.
- Better align IRL and NSFR limits with Basel III standards; consider applying IRL and NSFR requirements on a consolidated basis given large foreign exposures of some Colombian banks.
- Simplify liquidity regulations by relying on one set of IRL measures while ensuring proper treatment of risks from foreign currency exposures domestically and abroad.
  - In case of a build-up of FX risks, consider adding IRL and NSFR ratios binding at an individual currency level to the toolkit.
- Evaluate introducing a countercyclical capital buffer at a neutral positive rate to lock in available capital and complement countercyclical provisions.
- Continue close monitoring of credit risks of Colombian banks’ foreign exposures and increase granularity of data on portfolios of Colombian banks’ subsidiaries.
- Intensify monitoring and analysis of interconnectedness risks within financial conglomerates, including through their cross-border networks.

*Source: EXECUTIVE SUMMARY and extracted sections, COLOMBIA, INTERNATIONAL MONETARY FUND.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### INTRODUCTION
- The COVID-19 pandemic caused a contraction in GDP of 6.8 percent in 2020, described as the largest recession on record in Colombia.
- Over five million jobs were temporarily affected; the unemployment rate exceeded 20 percent in 2020 and the participation rate dropped 11 percentage points in 2020. Growth rebounded to 10.6 percent in 2021.
- Banking-sector developments during 2020:
  - Nominal credit growth moderated from 7.7 percent in 2019 to 3.9 percent in 2020.
  - Consumer loans growth fell from 15.7 percent in 2019 to slightly above 2 percent in 2020.
  - Systemwide NPLs to total loans increased from 4.3 percent in 2019Q4 to 5 percent at end-2020; NPLs are expected to continue rising in the near term as support measures fade out.
- Main forward-looking risks for the financial sector:
  - (i) a prolonged pandemic with limited containment;
  - (ii) a sharp tightening of global financial conditions;
  - (iii) political and social uncertainty disrupting economic activity.
- Main vulnerabilities identified:
  - (i) fragilities in nonfinancial corporates exacerbated by COVID-19 disruptions;
  - (ii) rapidly growing consumer credit before the pandemic, with shortcomings in macroprudential regulation and data;
  - (iii) opaque domestic and international risk transmission channels.
- Purpose: assess strengths and weaknesses of Colombia’s macroprudential policy framework and provide policy recommendations.

### INSTITUTIONAL FRAMEWORK
- Institutional arrangement:
  - Macroprudential policy for the banking sector is a shared competency of the SFC, the Banco de la República (BR), and the Ministry of Finance (MHCP).
  - The Financial Sector Coordination and Monitoring Committee (CCSSF) (SFC, BR, MHCP, Fogafin) is the main platform for information sharing and cooperation but has no macroprudential mandate or formal powers.
  - Only the SFC has a statutory responsibility for financial stability, though the concept is not clearly defined in law.
- Recent toolkit and Basel III implementation:
  - The Net Stable Funding Ratio (NSFR) implementation will be finalized in 2022.
  - The capital conservation buffer (CCB) and a buffer for systemically important financial institutions (SIFI) will be fully phased in by 2024.
  - The CCB buffer was set at 1.5 percent and the SIFI buffer at 1 percent.
  - The NSFR requirement applies to Colombian intermediaries supervised by the SFC on an unconsolidated basis; the level depends on systemic importance. Institutions to which the SIFI buffer will apply were identified following the Basel III methodology.
- Strengths and vulnerabilities in willingness and ability to act:
  - Strengths: advanced systemic risk monitoring framework; proactive authorities; enhanced macroprudential toolkit in line with Basel III.
  - Vulnerabilities:
    - Informality of institutional arrangements: CCSSF lacks decision powers and formal mandate.
    - Central bank (BR) has a comparatively weak role in macroprudential decision making, which may create bias toward inaction or “blind spots.”
    - Partitioning of hard powers among various agencies, some without explicit financial stability mandates, is a considerable vulnerability.
    - Current process governing decisions on Loan to Value ratio (LTV), Debt Service to Income ratio (DSTI), and loan amortization limits poses a risk of these tools being used with insufficient regard for the financial stability objective.
- Data and coordination powers:
  - The BR and SFC have a Memorandum of Understanding (MoU) for data flow and a technical committee to discuss shared data.
  - The SFC supervises asset managers and insurers but no formal macroprudential oversight framework exists for those sectors.
  - The recently implemented Financial Conglomerates Law has given the SFC additional data-collection powers regarding financial conglomerates (FCs).

### OPERATIONAL FRAMEWORK AND RISK MONITORING
- Data gaps and monitoring needs:
  - Need for more granular data on Colombian banks’ foreign subsidiaries to identify risks from foreign exposures.
  - Closing data gaps on household indebtedness will improve assessment of risks from household credit.
  - Monitoring of interconnectedness within financial conglomerates needs enhancement; the SFC is working to improve analysis of interconnectedness risks.
- Institutional roles and information flows:
  - The URF can access information on regulated financial institutions through requests to the SFC.
  - During early 2020, the SFC intensified frequency and scope of reporting smoothly.
  - Despite MoUs and working groups with host-country supervisors, information from foreign subordinates of Colombian banks is insufficiently granular for financial stability risk assessment and macroprudential policy conduct.

### SYSTEMIC RISKS AND MACROPRUDENTIAL POLICY STANCE
- Credit quality and cross-border exposures:
  - High pre-pandemic capitalization and profitability helped Colombian banks weather the shock so far.
  - The pandemic led to deterioration in credit quality; NPLs rose and are expected to continue rising as support measures fade.
  - Credit risks are building in foreign portfolios, which account for a large share of profits of internationally active Colombian banks.
  - Close monitoring of foreign exposures and increased granularity of data on subsidiaries’ portfolios are recommended.
- Interconnectedness:
  - Interconnectedness risks within financial conglomerates, including cross-border networks, warrant intensified monitoring.
- Macroprudential toolkit enhancements suggested:
  - Expand LTV and DSTI tools to cover leasing products and nonbank credit; expand DSTI to include nonmortgage debt to limit leakage and address risks from rapid growth in overall indebtedness.
  - Consider applying short-term liquidity and NSFR requirements on a consolidated basis given large foreign exposures of some banks.
  - Consider better aligning liquidity regulations by the SFC and the BR with Basel III standards.

### KEY RECOMMENDATIONS (excerpted and preserved)
- Institutional Framework
  - Ensure that the financial stability objective is included in statutory acts or prepare a joint macroprudential oversight strategy. — MHCP, SFC, BR — MT
  - Strengthen the central bank’s role in systemic risk monitoring and of the Banco de la República (BR) and the Superintendency of Financial Institutions in macroprudential decision making. — MHCP, SFC, BR — ST
  - Assign the powers over borrower-based tools, the systemic risk buffer, leverage ratio, and the capital conservation buffer to the BR and the SFC. — MHCP — ST
- Operational Framework for Risk Monitoring and Analysis
  - Formalize the BR’s role as the institution responsible for the systemic risk assessment. — MHCP, SFC, BR — ST
  - Close data gaps in the areas of cross-border exposures and household indebtedness. — SFC — I
- Systemic Risks and Macroprudential Policy Stance
  - Expand LTV and DSTI tools to cover leasing products and nonbank credit, and the DSTI tool to include nonmortgage debt. — MHCP — ST
  - Consider better aligning the liquidity toolkit with Basel III standards. Apply the IRL and the NSFR requirements at both unconsolidated and consolidated bases. — SFC, BR — ST
  - Intensify monitoring of credit risks of cross-border exposures and of interconnectedness risks within financial conglomerates. — SFC — I

- Timing notation preserved: I: Immediate (within 1 year); ST: Short term (within 1–2 years); MT: Medium Term (within 3–5 years).

*Source: EXECUTIVE SUMMARY, COLOMBIA, INTERNATIONAL MONETARY FUND.*

### 18.      Each institution has hard powers over the macroprudential tools that lie within its

### 18.      Each institution has hard powers over the macroprudential tools that lie within its mandate, although the borrower-based limits are set by the government.

### Institutional powers and division of the macroprudential toolkit
- Powers over the macroprudential toolkit are split among the SFC, the BR, the MHCP (via the URF), and the government.
- SFC responsibilities:
  - Sets countercyclical provisions.
  - Sets the Liquidity Risk Indicator requirement (IRL).
  - Sets the NSFR.
- MHCP (via URF) responsibilities:
  - Powers over the leverage ratio.
  - Capital conservation buffer.
  - Capital buffer for systemically important institutions (SIFI buffer).
- BR responsibilities:
  - Controls IRL requirements accounting for currency mismatches.
  - Net open FX position limits.
  - A macroprudential reserve requirement.
  - Credit growth limits.
- Governmental role:
  - Borrower-based limits (Loan to Value (LTV), Debt Service to Income (DSTI), and amortization period limits) can be changed via a decree at the request of a group of ministries and require the signature of the President of The Republic of Colombia.
  - The process for changing borrower-based limits is complex and poses risks:
    - Changes can be requested by ministries not involved in financial sector oversight and with objectives other than financial stability.
    - Proposals need MHCP approval, but approval or consultation with the SFC or the BR is not required.

### Coordination and cooperation arrangements
- CCSSF:
  - Serves as the main platform for information sharing and policy coordination (no voting arrangements).
  - Meetings occur at a minimum quarterly frequency.
  - Agenda preparation and technical analysis led by a Technical Subcommittee consisting of technical staff from each institution.
  - Secretariat (staffed by the MHCP) proposes the agenda to the Technical Subcommittee; all members participate actively in work program and agenda setting.
- Other coordination bodies include:
  - SFC’s Advisory Board.
  - URF Steering Committee.
  - BR’s Board of Directors.
- Data-sharing:
  - SFC collects most data relevant for macroprudential policy and is obliged to share with URF and BR as needed.
  - BR does not seem to have full access to consolidated supervisory data necessary for systemic risk analysis (see paragraph 29).

### Risks from informal arrangements and multiplicity of functions
- Lack of formal macroprudential oversight arrangements:
  - Both SFC and BR conduct their own systemic risk monitoring and analysis, often using assessments to inform internal policy decisions rather than producing a unified view.
  - BR’s analytical influence is mainly via publications and comments on drafts; future regulatory agendas of SFC and MHCP are not coordinated with BR.
  - Informality poses coordination risk where one agency’s macroprudential tools could undermine another institution’s explicit or implicit financial stability mandate.

### Accountability and communication
- SFC accountability:
  - SFC is the only institution with explicit financial stability mandate.
  - Obliged to publish an annual report on activities and frequently updates parliament on regulatory agenda and financial sector.
  - Publishes reports on supervised industries, focused on aggregate and institution-level data rather than comprehensive systemic risk analysis.
- Communication channels:
  - CCSSF publishes a statement after each meeting; secretariat prepares minutes (not public).
  - BR publishes a semiannual Financial Stability Report (FSR) and topical reports; semiannual Report to Congress explains BR policy actions.
- Concerns:
  - BR and MHCP lack statutory responsibility for financial stability, which might lead to bias for inaction.
  - BR does not have formal powers to propose actions to SFC or MHCP and is not required to be consulted on new regulatory initiatives.

### Key recommendations (explicit)
- Include a financial stability objective in statutory acts or prepare a joint macroprudential oversight strategy:
  - Jointly drafted and signed by all relevant institutions.
  - Could establish a shared definition of financial stability and define key medium-term priorities (e.g., macroprudential toolkit and closing data gaps).
- Strengthen BR’s role in macroprudential policy:
  - Assign BR a clearly defined role to provide systemic risk analysis and to propose policy actions to other institutions on a comply-or-explain basis.
- Increase powers of SFC and BR in decision making:
  - Ideally transfer powers over systemic risk buffer and leverage ratio to SFC and BR.
  - Powers over LTV, DSTI, and mortgage amortization period limits should be in hands of institutions involved in financial system oversight.
  - These changes would reduce multiplicity of functions and risks of agencies undermining each other’s mandates.
- Improve macroprudential publications and communication:
  - Strengthen FSR’s role by centering it on assessment of risks to financial stability.
  - Provide aggregate statements and charts showing change in overall risk since previous assessment.
  - Contextualize descriptions of regulatory changes with developments in financial vulnerabilities.

### Operational framework and risk monitoring — overview
- Macroprudential effectiveness depends on:
  - Comprehensive monitoring and assessment of systemic risk.
  - Ability to translate risk assessments into policy actions.
  - Access to good quality data.
  - Use of different econometric and modelling methods.
  - Mapping systemic risk into policy actions with cost-benefit analysis and frequent ex post evaluation.

### Risk monitoring practices and gaps
- Both SFC and BR conduct continuous systemic risk monitoring; assessments mostly inform their own decisions and do not guarantee unified view.
- Monitoring frameworks are well structured and relatively advanced:
  - Several indicators of vulnerabilities for aggregate credit developments and borrower segments are computed and assessed regularly (many derived from in-house bank surveys and micro-level data).
  - Annual assessment of overall trends in the nonbank financial sector; specific nonbank sectors monitored at higher frequency.
  - Structural risk monitoring includes data on bilateral exposures, intragroup and related-party exposures; indicators of systemic importance using BCBS methodology.
  - SFC working on enhancements to interconnectedness risk monitoring of financial conglomerates.
  - Ex post assessments of macroprudential policy effectiveness are conducted and usually published in thematic reports and analytical paper series (e.g., by BR), although not on a regular basis.

### Use of international approaches and scope for better calibration
- Approaches recommended by international bodies (e.g., BCBS) often used to inform calibration.
- Institutions also analyze international experiences and academic literature.
- Scope exists to support calibration (LTV, DSTI limits, capital buffers) with more advanced technical analysis.
- Ongoing internal review of BR’s financial stability policy framework aims to better align analytical frameworks with macroprudential decisions.

### Data and information limitations
- Financial Conglomerates Law allows SFC to enhance monitoring of conglomerates, including exposures and interconnections.
- Remaining data gaps:
  - Granular data on activities of foreign subordinates (e.g., detailed credit risk profiles by portfolio segment) of Colombian banks on a regular basis could be improved.
  - Lending through foreign entities is equivalent to 33 percent of total domestic credit outstanding.
  - Foreign entities account for as much as 50 percent of total profits for some Colombian banks.
  - Current data does not allow precise calculation and detailed analysis of total household debt-to-income and total debt-service-to-income ratios.
  - Data on mortgage loans by borrower type (first-time buyer, investor) is not available.
  - BR does not seem to have access to all consolidated supervisory data necessary for systemic risk analysis; conglomerates account for the vast majority of cross-border exposures, making access to consolidated reporting critical.

### Data and monitoring recommendations
- Leverage BR’s technical expertise and macroeconomic focus by:
  - Formalizing central bank’s responsibility for systemic risk assessment.
  - Granting BR a right to suggest policy actions to other institutions on a comply-or-explain basis.
- Close data gaps by:
  - Collecting more granular data on foreign exposures of Colombian banks.
  - Closing gaps on indebtedness of domestic households.
- Enhance analytical methods:
  - Use more sophisticated modelling techniques and analytical approaches as inputs for calibration of macroprudential tools.
- Ensure BR access to consolidated supervisory data necessary for systemic risk analysis.

### Systemic risks and macroprudential policy stance — COVID-19 response and measures
- Crisis response following COVID-19 included:
  - Broad range of borrower relief and financial sector measures.
  - Initial unconditional support (temporary moratorium on loan repayments) followed by more targeted measures such as the Program to Support Debtors (PAD).
- Macroprudential measures in Q1 2020:
  - SFC allowed supervised institutions to release the countercyclical provision (CIC) buffers; 11 entities took advantage of this possibility.
  - Financial intermediaries must rebuild CIC provisions within two years from September 1, 2021.
- March 2021 regulatory change:
  - DSTI limit increased from 30 percent to 40 percent for social housing (VIS) mortgages.
- Capital and liquidity requirements:
  - Capital and liquidity requirements were not relaxed during the pandemic.
  - Schedule for implementation of NSFR, capital conservation, and SIFI buffers was not affected.

### Implementation schedule of Basel III measures (Table 2)
- 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 4 years as follows: January 2021: 0.25%, January 2022: 0.5%, January 2023: 0.75%, January 2024: 1%.
- Net stable funding ratio:
  - The NSFR requirement is differentiated by the systemic importance of the regulated entities (Groups 1 and 2), and it 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%.

### Broad-based vulnerabilities
- Private credit growth has slowed sharply following the COVID-19 shock; pandemic-related uncertainty poses downside risk to credit quality.
- Full impact on banks’ balance sheets has not materialized due to lag effects and borrower relief measures.
- Sudden changes in financial conditions and persistence of pandemic-related restrictions are key risks to borrower solvency and banks’ asset quality.
- CIC release was justified by large 2020 economic contraction; existing evidence suggests countercyclical provisioning can smooth cyclical fluctuations of credit.

_International Monetary Fund — COLOMBIA (extracted content unit)._

### 38.      The credit quality of consumer loans, which grew at a high pace pre-pandemic, could

### The credit quality of consumer loans, which grew at a high pace pre-pandemic, could

### Consumer credit quality and recent developments
- Consumer loans growth slowed to 2 percent in 2020.
- Share of NPLs in the consumer segment increased from about 3.3 percent to 5.5 percent between June 2020 and June 2021.
- High volume of lending shortly before the COVID-19 shock raises concerns about performance of the outstanding stock of consumer loans.

### Borrower-based tools and macroprudential response
- The SFC tightened provisioning requirements for the consumer loan segment after identifying risks, while macroprudential policies were not used.
- There are no debt-to -income (DTI) limits in the macroprudential toolkit in Colombia.
- DSTI limits apply only to costs related to servicing mortgage loans.

### Mortgage market, LTV and DSTI limits, and household indebtedness
- Since 2000, the LTV limit for mortgage loans has been fixed at 70 percent (and at 80 percent for VIS loans).
- Since March 2021 the first payment of a mortgage loan cannot exceed 30 percent of the family income and 40 percent for VIS loans; previously, it was 30 percent for all mortgage loans.
- Variable-rate loans account for only 10 percent of all mortgage loans.
- Practically all loans to households are granted in local currency.
- Aggregate household debt to disposable income ratio is about 20 percent.
- Footnote: DSTI ratios of indebted households, when accounting for credit card debt, have been edging up in recent years.

### Risks of regulatory leakages in mortgage limits
- LTV and DSTI limits apply only to mortgages issued by institutions supervised by the SFC, posing potential future leakage to the nonbank sector (nonbank lending is currently marginal).
- “House leasing loans,” which account for about 12 percent of all housing loans, are not subject to the LTV limits.

### Nonfinancial corporate (NFC) debt and interest rate sensitivity
- Nominal NFC debt increased by 8.3 percent in 2018 and by 6.5 percent in 2020.
- NFC bank credit grew by 2.3 percent in 2020.
- Domestic bank credit to NFCs accounts for about 60 percent of NFC debt outstanding; intercompany loans account for 32.5 percent.
- Share of debt securities is 6.6 percent.
- NFC debt in foreign currency stands at 35.5 percent of total debt; FX loans account for 8.3 percent of corporate loans by financial intermediaries.
- Most corporate bank loans (84.9 percent) are variable-rate, making corporates vulnerable to sharp adjustments in financing conditions.

### Liquidity and FX risks
- Mortgage lending to households in FX currency is not allowed.
- Financial intermediaries face conservative FX regulations: net open FX position limits and an “FX matching” regulation requiring matching of foreign currency funding by an exposure of at least the same maturity in the same currency or by an exposure in Colombian peso with an appropriate hedging transaction; the FX matching regulation applies at a transaction level.
- Since 2009 the SFC requires banks to keep a minimum 100 percent ratio of liquid assets to short-term liabilities (IRLs) for 7-day and 30-day horizons.
- IRL ratios are constructed similarly to the Basel III LCR, but many parameters receive more favorable treatment or are not yet determined.
- In March 2020 the SFC started implementation of an NSFR requirement, to be finalized by end-March 2022.
- Colombian banks maintain healthy buffers above the IRL requirements and broadly comply with the final NSFR requirements already, ahead of the March 2022 deadline.
- Both IRL and NSFR requirements apply to Colombian banks on an unconsolidated basis only.
- The BR imposes an individual (IEI) and a consolidated (IEC) liquidity requirement on Colombian banks, similar in spirit to the IRL requirements by the SFC; the IRL requirements imposed by the SFC include an additional adjustment parameter (haircut) to control for exchange rate risk.

### Structural vulnerabilities: foreign operations, conglomerates, and concentration
- NPLs of subsidiaries of Colombian banks have increased significantly, although they account for less than 2 percent of total loans.
- Foreign subsidiaries contribute largely to profits of internationally active Colombian banks; further deterioration abroad could negatively impact domestic banks’ profitability.
- Foreign lending equals about 33 percent of total domestic credit outstanding.
- Lending by nonbanks accounts for less than 5 percent of total domestic credit.
- The five largest financial conglomerates (FCs) own about 60 percent of the total financial system’s assets.
- Colombian FCs’ exposures abroad increased from US$11 billion in 2009 to US$93 billion in 2020; about one-third of these exposures are in Panama, and about 92 percent of these assets are held in Central America.
- The SFC should continue efforts to enhance monitoring of interconnectedness risks within FCs.
- The SIFI buffer: authorities decided to introduce a 1 percent capital buffer for SIFIs, which will become fully operational in 2024.
- A capital conservation buffer of 1.5 percent (binding for all banks) will be fully phased in by 2024.

### Recommendations (policy actions the authorities could consider)
- Expand the LTV and DSTI tools to cover:
  - (i) leasing products; and
  - (ii) nonbank credit;
  - and expand the DSTI tool to include nonmortgage debt to limit leakage effects and address future risks from rapid growth in overall indebtedness.
- Better align IRL and NSFR limits with Basel III standards; consider applying IRL and NSFR requirements on a consolidated basis given large foreign exposures of some Colombian banks.
- Simplify liquidity regulations by relying on one set of IRL measures while ensuring proper treatment of risks from foreign currency exposures domestically and abroad.
  - In case of a build-up of FX risks, consider adding IRL and NSFR ratios binding at an individual currency level to the toolkit.
- Evaluate introducing a countercyclical capital buffer at a neutral positive rate to lock in available capital and complement countercyclical provisions.
- Continue close monitoring of credit risks of Colombian banks’ foreign exposures and increase granularity of data on portfolios of Colombian banks’ subsidiaries.
- Intensify monitoring and analysis of interconnectedness risks within financial conglomerates, including through their cross-border networks.

*1colea2022006 - 38.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1colea2022006.pdf_