## 1colea2023004 ## Source details **Canonical URL:** [1colea2023004](https://www.imf.org/-/media/files/publications/cr/2023/english/1colea2023004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1colea2023004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1colea2023004.pdf.json) --- ### Executive summary — key findings and role of the FSR - The Financial Stability Report (FSR) of the Banco de la República of Colombia (BR) is a biannual publication (May and November) providing broad coverage of the macroeconomic environment and assessment of risks in the financial system. - The FSR is one of the main sources of data and information on financial stability in Colombia and is presented publicly at publication time. - The FSR is integrated into a broader systemic risk monitoring framework and is presented to the Financial Sector Coordination and Monitoring Committee (CCSSF), whose members include the BR, the Financial Superintendency of Colombia (SFC), Fogafin, and the Ministry of Finance (MHCP). - Current FSR structure: macroeconomic environment, developments in risks and vulnerabilities, stress tests, and changes in financial regulations, augmented by 4-7 thematic boxes. ### Key analytical and data priorities - Continue compiling granular data, particularly on household sector indebtedness and financial conglomerates. - Address time lags in published data: - Consider producing an “interim” update focused on data with a brief macroeconomic outlook between FSR cycles, based on preliminary or more aggregate data and leveraging other publications (e.g., monetary policy report). - Alternatively, include more up-to-date (clearly labeled preliminary) data in the FSR. - Streamline internal weekly/monthly reports to reduce resource constraints. ### Forward-looking analysis and stress testing - Expand forward-looking analyses, including stress testing and sensitivity analyses of corporate and household sectors and interconnectedness. - Ensure stress test assumptions are consistent with the bank stress test and the macro scenario used in the FSR. - Given increasing exposure of Colombian financial conglomerates in Central America, examine cross-border linkages and potential spillovers. - BR’s stress-test models: base model plus several satellite models mapping to credit risk, market risk, and interest rate risk; use of second-round effects (e.g., interest rate model feeding spread dynamics into the macro scenario). - Key information gaps: detailed bank exposures to subsidiaries/other jurisdictions and interconnections between firms. ### Messaging and communication recommendations - Sharpen messages on key risks and make them more forward-looking by: - Conveying a consistent narrative throughout the report. - Elaborating risk transmission channels. - Linking risks explicitly to stress test scenarios employed in the report. - Supplement the vulnerability matrix with indicators from the Heatmap to substantiate assessments. - Adopt a layered communication approach: - Hold separate briefings for journalists and for expert audiences (e.g., financial analysts) to tailor technical depth. - Enhance “in-reach” within the BR and with financial regulatory community to foster structured exchanges. - Publication and briefing practice: - Current: press briefing on publication day; Governor opens, director of the FSD presents, Q&A; livestreamed to journalists and experts. - Recommendation: Layer 1 plain-language summary and infographic; Layer 2 succinct technical summary for experts; Layer 3 full FSR and Special Reports. Hold separate briefings for journalists and experts. ### Longer-term considerations - Deepen understanding of interactions between monetary policy and financial stability. - Enhance knowledge sharing between staff working on financial stability and monetary policy and improve information on sensitivity of vulnerabilities to assist monetary policy decision-making. - Medium- to long-term actions: - Clarify and analyze channels through which financial stability matters to the central bank. - Consider broadening the FSR’s view of financial stability to include continued provision of financial services and implications for economic performance. - Continue special reports on areas such as microfinance and consider inclusion of messages in layered public communication. ### Table 1 — Key Recommendations (summary with priorities and timeframes) - 1 Review and update FSR structure — Medium priority — Medium term - 2 Consider producing an ‘interim’ data-focused update — Medium priority — Medium term - 3 Continue developing analytical approaches on household sector and financial conglomerates — High priority — Short term - 4 Expand forward-looking analyses, stress testing and sensitivity analyses for corporate and household sectors — High priority — Medium term - 5 Streamline internal reports and leverage FSR forward-looking analysis — Medium priority — Medium term - 6 Enhance clarity and forward-looking nature of messages and elaborate transmission channels — High priority — Short term - 7 Link stress test assumptions explicitly with risks discussed in conjunctural chapters — High priority — Medium term - 8 Develop layered communication approach — High priority — Short term - 9 Introduce separate briefings for media and expert audiences — High priority — Short term - 10 Enhance in-reach within BR and across financial authorities for structured exchange — Medium priority — Long term - 11 Develop deeper understanding and knowledge sharing on monetary policy and financial stability interactions — High priority — Long term - Note: Short term: less than 12 months; Medium term: between 12 and 24 months; Long term: more than 24 months. ### I. Introduction — context and purpose of the TA mission - FSRs face challenges in delivering clear, candid, and forward-looking assessments without causing undue concern. - BR launched its FSR in 2002; published twice a year; slides since 2007; underlying data since 2011. - IMF MCM TA mission (September 26 – October 7, 2022) assessed FSR production, content, analyses, and stakeholder views and made recommendations for the BR’s 2023 update. ### II.A Production process - Publication cadence: twice a year; production cycle ~3-4 months starting mid-March and mid-September for end-May and November publications. - Led by the Financial Stability Department (FSD); team size at mission time: 19 staff and 3 interns. - At onset, dialogue with chief risk officers, academics, and think tanks informs risk assessment. - Main vulnerabilities and stress test features discussed with the Technical Deputy Governor and Head of MIIS and presented to the Board before finalization. - FSR is a staff product; incorporates comments from the SFC; Governor signs short summary and participates in press presentation. - FSD collaborates with MAD (macroeconomic forecast inputs), SFC (data sharing under MoU), and other agencies to enhance data and granularity. ### II.B Financial stability risk monitoring framework - Monitoring tools and frequencies: - Market risk and money market fund liquidity risks: weekly internal monitoring. - Bank liquidity: monthly. - Emerging vulnerabilities: bi-monthly departmental meetings under MIIS. - Published surveys: credit demand and supply; foreign indebtedness and credit lines (quarterly); perception of vulnerabilities and resilience (semi-annually). - FSR role in policy: - FSR results presented at CCSSF (BR, SFC, MHCP, Fogafin). - SFC and MHCP review report prior to presentation; SFC provides feedback; MHCP receives presentation as Board member. - SFC conducts top-down and bottom-up stress tests quarterly with a micro approach; BR conducts top-down macro stress tests including interlinkages and second-round effects on a semi-annual basis, but BR lacks the same data access as SFC. ### Box 1 — stakeholder feedback highlights - Stakeholders value the FSR as a primary source and generally agree with covered risks. - Boxes are highly valued; stakeholders welcome seminars or briefings on box topics. - Data time lag limits usefulness; demand for a more forward-looking FSR. - Household and corporate analyses are highly valuable and often unique. - Stress tests are extremely valuable; stakeholders want more detail on scenarios and model information. - Market participants request analyst briefings separate from press briefings. - Stakeholders request more information on financial conglomerates and international risks; some desire analysis on climate change, fintech, and cyber. ### Structure and evolution of the FSR - FSR comprises four chapters: (i) macroeconomic environment, (ii) vulnerabilities of the financial system, (iii) stress tests, and (iv) financial regulation. - Major structural changes in September 2015: - Combined previous chapters on risks by sector and by nature of risks. - Launched quantitative assessments of financial system resilience (first as sensitivity analyses and macro stress tests since 2017). - Executive summary includes an expansive risk heatmap (introduced in 2017) covering 4-10 indicators per sector/source of risks; indicators color-coded against historical observations. - 2021 changes: Governor’s message and a vulnerability matrix for financial stability in the executive summary. ### Boxes, special reports, and thematic coverage - Typical FSR includes 4-7 boxes on in-depth analyses, methodological overviews, and implications of financial regulations. - Special reports: - Four semi-annual reports: (i) credit risk, (ii) market risk, (iii) market liquidity, (iv) mortgage loans and real estate market analysis. - Three annual reports: (i) concentration and competition in deposit and credit markets, (ii) international indicators, (iii) financial inclusion. - Published about a month after the FSR with more detailed data and focused analyses. ### Assessment and recommendations on report structure - Current structure is well suited to cover various risks and track vulnerabilities over time. - Recommendations: - Embed different dimensions of risk (interest rate, market, liquidity) into sectoral analyses. - Consider permanent inclusion of recurrent thematic issues (household indebtedness, financial conglomerates exposures in Central America, climate change, fintech, cyber) as data and relevance increase. - Conduct a stock-take in 1-2 years to assess structural change needs. - Moderate adjustments: (i) embed risk sources into sectoral sections, (ii) move glossary/background to annexes, (iii) turn financial regulation updates into a separate document. ### Data and analysis — main focus - FSR data and analysis are highly valued by market participants. - Household analysis: - Focuses mainly on consumption credit; mortgage debt less prevalent than in other countries. - Analysis is descriptive and backward looking; recommendation to show stress-test/stressed-levels (e.g., DSRs under stress scenario). - Financial conglomerates: - Important but opaque; coverage increasing (e.g., stress-testing to an exchange rate risk in first FSR of 2022). - Data often at consolidated level with insufficient detail on foreign branches/subsidiaries; confidentiality constrains public sharing. - Corporate analysis: - Improved considerably; moved to more in-depth forward-looking analysis with stress tests and mitigants. - Data constraints: many corporate data are annual; quarterly data available for some large firms. - Planned innovation in second FSR of 2022: use the same macro scenario as banks’ stress test across the FSR to improve coherence. ### Data recommendations and timeliness gaps - Continue developing household and financial conglomerates data. - Household data constraints: - Difficulty obtaining reliable individual income data due to a large informal sector; informal sector not covered in the credit registry. - SFC merged loan data with social security data; greater sharing and BR access to granular datasets would help. - Surveys are costly and likely biased; merging with tax data would be incomplete but useful for largest debts. - Financial conglomerates data constraints: - Dominated by large/complex conglomerates with increasing cross-border exposures; monitor intragroup risks and contagion. - Explore communication methods within confidentiality constraints (e.g., reporting number of banks that would face difficulties under scenarios). - Timeliness: - FSR release lags: example—an FSR released in May often uses banks’ balance sheet data from February or earlier, making it over a quarter out of date by release. - Options: use preliminary less-granular data with caveats; leverage monthly SFC updates; propose a short update heavily built off the monetary policy report focused on a key financial stability message. ### Leveraging the FSR internally - Use FSR forward-looking analysis as the basis for more frequent internal reports to streamline staff workload. - If market moves are smaller than stress-test scenarios, limited benefit from running full ad hoc analyses. - Freeing staff time could support longer-term analytical work. - Use FSR and special reports as inputs for BR policy decisions where BR has responsibilities (e.g., FX and interest rate ceilings). - Ensure recommendations draw on FSR analysis to avoid crowding out outreach. - Consider allocation of analyses lacking synergy with FSD to other BR divisions. ### Assessment of current structure and content (further observations) - Chapter 1: draws on IMF WEO and BR Monetary Policy Report but does not explicitly explain how the conjuncture affects financial stability; last part offers brief linkage to stress test scenario. - Chapter 2: tends to be backward-looking; some forward-looking efforts exist (e.g., May 2021 corporate simulation). - Short-term recommendations: - Reiterate consistent narrative and elaborate risk transmission channels. - Focus Chapter 1 on conjuncture relevance and its effects on the Colombian financial sector. - In Chapter 2, provide forward-looking perspectives and describe spillover channels in more detail. - Link risks more closely to resilience analysis; discuss stress testing scenarios in more detail and include a simplified Sysmo diagram to show feedback channels. ### Heatmap, vulnerability matrix, and synergies - Vulnerability matrix is helpful for the executive summary; recommend supplementing with indicators from the Heatmap and extracting key indicators to support assessments. - Executive summary and press presentation: create a unified product or exploit synergies to make evidence for key messages more obvious and reduce duplication. ### Comparative layered communication examples (Box 2 and Annex) - Riksbank: upfront “In Brief” plain-language summary; forward-looking discussions; highlights data gaps. - ECB: infographics and chapter-level key facts; very forward looking; links triggers to policy responses. - Bank of England: “nutshells” for public and simplified chapter versions; focuses on risks to key vulnerabilities with judgements on institutions’ ability to withstand shocks. - Federal Reserve: data-rich; explains assessment framework upfront; near-term risks and brief exploration without quantitative estimation. *Source: IMF Technical Assistance Report – Colombia, Assessment of Financial Stability Report (selected extract).* ### PREFACE _______________________________________________________________________ 5 ### PREFACE ### Executive summary — key findings and role of the FSR - The Financial Stability Report (FSR) of the Banco de la República of Colombia (BR) is a biannual publication (May and November) providing broad coverage of the macroeconomic environment and assessment of risks in the financial system. - The FSR is one of the main sources of data and information on financial stability in Colombia and is presented publicly at publication time. - The FSR is integrated into a broader systemic risk monitoring framework and is presented to the Financial Sector Coordination and Monitoring Committee (CCSSF), whose members include the BR, the Financial Superintendency of Colombia (SFC), Fogafin, and the Ministry of Finance (MHCP). - The current FSR structure (macroeconomic environment, developments in risks and vulnerabilities, stress tests, and changes in financial regulations), augmented by 4-7 thematic boxes, provides stable coverage but has scope for evolution as risks and data availability change. ### Key analytical and data priorities - Continue compiling granular data, particularly on household sector indebtedness and financial conglomerates. - Address time lags in published data: - Consider producing an “interim” update focused on data with a brief macroeconomic outlook between FSR cycles, based on preliminary or more aggregate data and leveraging other publications (e.g., monetary policy report). - Alternatively, include more up-to-date (clearly labeled preliminary) data in the FSR. - Streamline internal weekly/monthly reports to reduce resource constraints. ### Forward-looking analysis and stress testing - Expand forward-looking analyses, including stress testing and sensitivity analyses of corporate and household sectors and interconnectedness. - Ensure stress test assumptions are consistent with the bank stress test and the macro scenario used in the FSR. - Given increasing exposure of Colombian financial conglomerates in Central America, examine cross-border linkages and potential spillovers. ### Messaging and communication recommendations - Sharpen messages on key risks and make them more forward-looking by: - Conveying a consistent narrative throughout the report. - Elaborating risk transmission channels. - Linking risks explicitly to stress test scenarios employed in the report. - Supplement the vulnerability matrix with indicators from the Heatmap to substantiate assessments. - Adopt a layered communication approach: - Hold separate briefings for journalists and for expert audiences (e.g., financial analysts) to tailor technical depth. - Enhance “in-reach” within the BR and with financial regulatory community to foster structured exchanges. ### Longer-term considerations - Deepen understanding of interactions between monetary policy and financial stability. - Enhance knowledge sharing between staff working on financial stability and monetary policy and improve information on sensitivity of vulnerabilities to assist monetary policy decision-making. ### Table 1 — Key Recommendations (summary with priorities and timeframes) - 1 Review and update FSR structure — Medium priority — Medium term - 2 Consider producing an ‘interim’ data-focused update — Medium priority — Medium term - 3 Continue developing analytical approaches on household sector and financial conglomerates — High priority — Short term - 4 Expand forward-looking analyses, stress testing and sensitivity analyses for corporate and household sectors — High priority — Medium term - 5 Streamline internal reports and leverage FSR forward-looking analysis — Medium priority — Medium term - 6 Enhance clarity and forward-looking nature of messages and elaborate transmission channels — High priority — Short term - 7 Link stress test assumptions explicitly with risks discussed in conjunctural chapters — High priority — Medium term - 8 Develop layered communication approach — High priority — Short term - 9 Introduce separate briefings for media and expert audiences — High priority — Short term - 10 Enhance in-reach within BR and across financial authorities for structured exchange — Medium priority — Long term - 11 Develop deeper understanding and knowledge sharing on monetary policy and financial stability interactions — High priority — Long term - Note: Short term: less than 12 months; Medium term: between 12 and 24 months; Long term: more than 24 months. ### I. Introduction — context and purpose of the TA mission - FSRs have proliferated globally; they face challenges in delivering clear, candid, and forward-looking assessments without causing undue concern. - The BR launched its FSR in 2002. Since then the FSR has been published twice a year, with advances including slides since 2007 and underlying data since 2011. - An IMF working paper (Lim and others, 2017) assessed the BR’s FSR as the second highest in quality among Latin American and Caribbean authorities’ FSRs. - The IMF MCM TA mission (September 26 – October 7, 2022) assessed the BR’s FSR production, content, analyses, and stakeholder views and made recommendations to improve the FSR for the BR’s 2023 update. ### II. Overview of the BR’s FSR — production process and risk monitoring framework A. Production process - Publication cadence: twice a year; production cycle ~3-4 months starting mid-March and mid-September for end-May and November publications. - Led by the Financial Stability Department (FSD); team size at mission time: 19 staff and 3 interns. - At the onset, dialogue with chief risk officers of credit institutions, academics, and think tanks informs risk assessment. - Main vulnerabilities and stress test features are discussed with the Technical Deputy Governor and Head of MIIS and presented to the Board of Directors before finalization. - The FSR is a staff product; it incorporates comments from the SFC; the Governor signs the short summary and participates in the press presentation. - FSD collaborates with MAD (macroeconomic forecast inputs), SFC (data sharing under MoU), and other agencies to enhance data and granularity (e.g., household indebtedness from social security, tax payments, credit registry). B. Financial stability risk monitoring framework - Multiple monitoring tools across risk dimensions and frequencies: - Market risk and money market fund liquidity risks: weekly internal monitoring. - Bank liquidity: monthly. - Emerging vulnerabilities: bi-monthly departmental meetings under MIIS. - Published surveys: credit demand and supply; foreign indebtedness and credit lines (quarterly); perception of vulnerabilities and resilience (semi-annually). - FSR’s role in systemic risk monitoring and macroprudential policy making: - FSR results are presented at CCSSF (BR, SFC, MHCP, Fogafin). - SFC and MHCP review the report prior to presentation; SFC provides feedback to the draft; MHCP receives presentation as a Board member. - BR and SFC exchange views on stress test results. Footnote: SFC conducts top-down and bottom-up stress tests quarterly with a micro approach; BR conducts top-down macro stress tests including interlinkages and second-round effects on a semi-annual basis, but BR lacks the same data access as SFC. ### Box 1 — Key findings from stakeholder discussions - Stakeholders value the FSR highly as a primary source on Colombia’s financial system; they generally agree with the risks covered. - Boxes in the FSR are highly valued to learn about specific risks; stakeholders welcome seminars or special briefings on box topics. - Data released with the FSR is highly valued but time lag limits usefulness; stakeholders want a more forward-looking FSR. - Household and corporate analyses are highly valuable and often unique; they help validate stakeholders’ own analyses. - Stress tests are considered extremely valuable; stakeholders want more detail on scenarios and model information (possibly as separate reference material). - Financial market participants request analyst briefings separate from press briefings to obtain technical answers, especially on stress tests. - Stakeholders request more information on financial conglomerates and international risks; some desire analysis on newer risks such as climate change, fintech, and cyber. *IMF | Technical Assistance Report – Colombia Assessment of Financial Stability Report* ### 10. The BR’s FSR maintained a consistent structure over the last several years. It comprises ### 1colea2023004 - 10. The BR’s FSR maintained a consistent structure over the last several years. It comprises ### Structure and evolution of the FSR - The FSR comprises four chapters covering: (i) macroeconomic environment, (ii) vulnerabilities of the financial system, (iii) stress tests, and (iv) financial regulation. - The latest major structural changes were introduced in the September 2015 report: - Combined previous chapters on risks by sector and by nature of risks. - Launched quantitative assessments of financial system resilience (first as sensitivity analyses and macro stress tests since 2017). - Chapter 1: - Discusses global and domestic environment. - Highlights main potential sources of risk that the FSR focused on and how they are incorporated into the stress test scenario. - Executive summary: - Includes an expansive risk heatmap, introduced in 2017, which covers 4-10 indicators relating to each sector/source of risks (e.g., credit cycle and risks, performance of credit institutions, and macro variables). - Each underlying indicator is color-coded according to the levels of vulnerabilities assessed against their respective historical observations. ### Changes introduced in 2021 to strengthen messaging - Introduced the Governor’s message, defining the mandate of the central bank and the objective of the FSR, and providing a high-level summary of the state of financial stability in Colombia. - Previously, the executive summary was signed by the Governor and served as his message and as a summary. - Added a vulnerability matrix for financial stability to the executive summary: - Provides a clear summary of key sources of risks, mitigating factors, and the direction of the change. ### Boxes, special reports, and thematic coverage - Boxes: - The FSR typically includes 4-7 boxes presenting in-depth analyses, methodological overviews, and implications of financial regulations. - The FSD discusses and decides at the end of the year the pipeline of topics; adjustments possible depending on developments and progress of ongoing work. - Special reports supplementing the FSR: - Four semi-annual reports covering: (i) credit risk, (ii) market risk, (iii) market liquidity, and (iv) mortgage loans and real estate market analysis. - Three annual reports on: (i) concentration and competition in deposit and credit markets, (ii) international indicators, and (iii) financial inclusion. - These are published about a month after the FSR and include more detailed data, focused analyses, and/or results of annual surveys. ### Assessment and recommendations on report structure (Section B) - Findings: - The current structure is well suited for covering various risks and facilitates readers tracking vulnerabilities and risks over time. - Embedding different dimensions of risk (interest rate, market, liquidity) into sectoral analyses may sharpen discussion on risks, impact, and spillovers. - Medium-term considerations: - The BR could consider updating the structure as thematic issues become recurrent and related data regular: - Potential permanent inclusion of topics such as household indebtedness, financial conglomerates exposures in Central America, climate change, fintech, and cyber as relevance increases. - Suggested stock-take of risk evolution in 1-2 years to assess need for significant structural changes. - Moderate adjustments to enhance clarity (examples): - (i) Embed discussions on different sources of risk into sectoral sections to highlight the most relevant risk. - (ii) Move glossary and other background information to annexes to bring main messages more upfront. - (iii) Turn the chapter on updates to financial regulation into a separate stand-alone document to delink it from FSR production and free space/resources. ### Data and analysis — Main focus (IV.A) - Role and perception: - FSR data and analysis are highly valued; often the main source of data for market participants who use it to update scenarios and models. - Household analysis: - Focuses mainly on consumption credit; households in Colombia take out mortgage debt less than in other countries. - FSR analysis is descriptive and backward looking; recommendation for stress-test/stressed-levels presentation (e.g., showing DSRs under stress scenario). - Financial conglomerates: - Play an important role but are opaque and difficult to analyze. - Coverage has increased, including stress-testing conglomerates to an exchange rate risk in the first FSR of 2022; analysis is in early stages but expanding rapidly. - Corporate analysis: - Improved considerably and is likely the benchmark among sectors. - Moved from early-warning signs to more in-depth forward-looking analysis with stress tests and mitigants. - Data constraints: many corporate data are annual, though quarterly data are available for some largest firms. - Planned innovation in the second FSR of 2022: use the same macro scenario as in the banks’ stress test across the FSR to improve coherence. ### Data — recommendations and gaps (IV.B) - Continue developing data improvements, especially for households and financial conglomerates. - Household data constraints: - Difficulty obtaining reliable individual income data due to a large informal sector; informal sector not covered in the credit registry. - SFC merged loan data with social security data; greater sharing of expertise and BR access to granular datasets would be helpful. - Surveys are a costly alternative and likely biased given response patterns among formal-sector workers. - Merging with tax data would be incomplete but could provide insight into the most important/largest debt for financial stability purposes. - Financial conglomerates data constraints: - System dominated by large/complex conglomerates with increasing cross-border exposures—monitoring intragroup risks and contagion is essential. - Data often at consolidated level with insufficient detail on foreign branches/subsidiaries; confidentiality limits public sharing. - Authorities should explore communication methods within confidentiality constraints (e.g., reporting number of banks that would face difficulties under scenarios). - Timeliness: - Suggestion to release a short interim update focused on key indicators and a short paragraph on the macro-outlook and likely effects on vulnerabilities and financial stability. - Current FSR release lags: e.g., an FSR released in May often uses banks’ balance sheet data from February or earlier, making it over a quarter out of date by release. - Options: use preliminary less-granular data with caveats; leverage monthly SFC updates though current formats are less usable than the FSR. - Proposal: a short update heavily built off the monetary policy report with a key financial stability message rather than a full quarterly assessment. ### Analysis — forward-looking orientation and stress testing (IV.C) - Recommendations: - Expand forward-looking analyses, including stress testing and sensitivity analyses for corporate and household sectors. - Make forward-looking approach the core to reduce obsolescence of the FSR. - Current strengths and suggestions: - BR’s stress-test models are sophisticated with a base model and several satellite models mapping to credit risk, market risk, and interest rate risk. - Satellite models and second-round effects (e.g., interest rate model feeding spread dynamics into the macro scenario) are used. - Key information gaps: detailed bank exposures to subsidiaries/other jurisdictions and interconnections between firms. - Forward-looking analysis should be built around the stress test scenario; planned incorporation of the banks’ macro scenario into corporate stress tests is recommended as a benchmark for other sectors. - International risks and linkages: - FSR should include more on international risks but draw on external analyses (IMF GFSR/WEO, IADB, Monetary Policy Report) rather than duplicating analysis. - BR should focus on understanding financial linkages and spillovers from global conditions and within conglomerates (capital/liquidity management, contagion channels). - Progress example: stress testing entities within conglomerates to exchange rate shocks in the first FSR of 2022. - Market risk section: - Should focus more on resilience to movements and potential amplifiers of shocks, becoming more forward-looking and less focused on explaining past market moves. - Ongoing improvements include enhancing market risk model for stress testing and contagion analysis. ### Leveraging the FSR (IV.D) - Integration and internal use: - Use FSR forward-looking analysis as the basis for more frequent internal reports (weekly/monthly) to streamline staff workload. - If market moves are smaller than stress-test scenarios, limited benefit from running full ad hoc analyses. - Freeing staff time could support longer-term analytical work. - Use FSR and special reports as integral inputs for BR policy decisions, including where BR has responsibilities (e.g., FX and interest rate ceilings). - Ensure recommendations draw on FSR analysis to avoid crowding out outreach and to improve synergy with core FSD work. - Consider whether analyses lacking synergy with FSD should be allocated to other BR divisions with greater relevance. *Source: IMF Technical Assistance Report – Colombia, Assessment of Financial Stability Report (selected extract).* ### 31. The FSR has many elements that convey the BR’s assessment of key risks and the state of ### 31. The FSR has many elements that convey the BR’s assessment of key risks and the state of the financial system, but at times can be descriptive and focused on backward-looking developments. ### Assessment of current structure and content - Chapter 1: discusses the macroeconomic environment, drawing on the IMF’s World Economic Outlook and the BR’s Monetary Policy Report. - Main focus adjusted depending on the conjuncture but does not explicitly explain how the conjuncture would affect the stability of the financial system in Colombia. - Last part of Chapter 1: offers an overview of how the conjuncture relates to the assessment of financial system resilience with brief explanation on key factors considered for the stress test scenario and the results. - Chapter 2: on vulnerabilities of the financial system. - Tends to be largely backward-looking, focused on description of developments and performances of different sectors and risks since the previous FSR. - Some efforts to include forward-looking analyses (example: simulation of corporate vulnerability in light of the covid shock in May 2021 FSR). ### Short-term recommendations to sharpen forward-looking messaging - Reiterate a consistent narrative and elaborate on risk transmission channels throughout the report. - Leverage existing elements in the FSR to be more forward-looking: - Focus Chapter 1 on the global and domestic environment most relevant to the conjuncture and elaborate on how they affect the Colombian financial sector. - In Chapter 2, provide forward-looking perspective by describing spillover channels of potential sectoral risks in more detail. ### Linking risks to resilience analysis - Key risks assessed should be more closely linked to assumptions for financial sector resilience analysis. - Discuss stress testing scenarios (Chapter 3) in more detail, explaining how they are calibrated in light of the key risks and channels highlighted earlier. - Include a simplified diagram of the BR’s systemic stress model (Sysmo) to demonstrate feedback channels between the real and financial sectors and highlight the most relevant shocks. ### Heatmap and vulnerability matrix - The recently introduced vulnerability matrix for financial stability is helpful for the executive summary. - Recommendation: supplement the matrix with corresponding indicators from the Heatmap. - Extract a few most relevant indicators from the Heatmap’s rich set to directly support how the assessment is reached. ### Quoted text preserved for context - The FSR notes that it might “[....] serve the monetary authority as a basis for making decisions that promote financial stability in the general context of the objectives of price stability and macroeconomic stability.” And notes that financial stability is a necessary condition for price stability. --- ### Communication: current practice and improvements - Current practice: - The BR holds a press briefing on the day of FSR publication. - Governor opens with brief remarks, followed by a presentation by the director of the FSD and Q&A; Deputy Technical Governor and head of the MIIS participate. - Briefing is livestreamed and attended by journalists and expert audience; the Press Office has engaged journalists previously. - Recommendation: develop a layered communication approach (see Box 2 and Annex I and II). - Layer 1: clear, high-level message in simple, non-technical language (adapt current Governor’s message/introduction; complement with a separate infographic). - Layer 2: succinct summary with some technical detail targeting experts (sharpen Executive Summary and presentation slides on bottom-line assessment and supporting indicators). - Layer 3: the full FSR and supplementary Special Reports providing full technical and granular detail. - Hold separate briefings for journalists and experts to tailor technicality and Q&A. - Publish technical papers underlying FSR boxes and hold seminars to present details to enhance dissemination. - Enhance in-reach within the BR and with other financial sector authorities to promote systematic coordination and absorption of financial stability issues across departments. --- ### Long-term considerations: monetary policy and financial stability linkages - Key point: deepen understanding of channels and interaction between financial stability and monetary policy as the financial system evolves. - Current FSR does not concretely explain why financial stability matters to monetary policy; impact of financial stability on monetary policy appears underappreciated/underestimated. - Monetary policy modeling currently incorporates little role for the financial sector. - Corporate analysis is not extensively incorporated into monetary policy considerations despite exposure to interest rate and exchange rate shocks. - Recommended medium- to long-term actions: - Continue to clarify and analyze channels through which financial stability matters to the central bank, particularly between monetary policy and financial stability. - Note: currently the FSR focuses on credit risk element; as macroeconomic spillover channels from high financial burdens on households and corporates become more important, these should be made more prominent. - Examples: corporate indebtedness affects employment and investment; household indebtedness affects consumption responses to shocks. - Continue to consider what ‘maintaining financial stability’ means: - The FSR currently defines financial stability as the financial system managing and absorbing risks. - It could also consider continued provision of financial services to facilitate economic performance—relevant for a central bank’s FSR. - Microfinance: small in volume but major source of finance for many and has a prominent role in employment—important for monetary policy. - Suggested approach: continue producing special reports externally and analysis for internal Monetary Analysis stakeholders; consider if messages about the microfinance sector should be part of the layered public communication. --- ### Box 2 and Annex examples: layered communication models from other central banks - Riksbank: - Layered structure with an upfront “In Brief” plain-language summary of bottom-line assessment and key risks. - Forward-looking discussions qualitatively and quantitatively on potential channels and policy stances; points out data gaps and further analyses needed. - ECB: - Layered structure with infographics and chapter-level key facts. - Very forward looking; centers on what “could” happen and triggers for financial stability risks, then policy responses. - Bank of England: - Layered structure includes “nutshells” for the general public and simplified chapter versions; overview chapter covers main messages. - Focuses on risks to key vulnerabilities for households, corporates, banks and non-banks with judgements on institutions’ ability to withstand likely shocks. - Federal Reserve: - No layered structure but explains framework upfront for assessing vulnerabilities and shocks. - Report is data-rich and often a data update with limited analysis; ends with near-term risks and brief exploration of effects without quantitative estimation. --- ### Executive summary and press presentation synergies - Current practice: press presentation is very visual and covers key messages, but there is little overlap between presentation content and the Executive Summary. - Recommendation: create a unified product or better exploit synergies to make evidence for key messages more obvious and reduce duplication. - Preserved illustrative Spanish passages used as examples in the Annex (verbatim): - “Durante el último trimestre de 2021 y los primeros meses de 2022 se consolidó la recuperación de los establecimientos de crédito en Colombia. La recuperación de la actividad crediticia y la situación de los mercados financieros están ligadas estrechamente tanto al desempeño general de la economía colombiana como a las condiciones financieras globales. Actualmente coinciden un mayor crecimiento de la economía colombiana, la normalización de la política financiera y de la política monetaria y condiciones financieras globales más restrictivas (con múltiples fuentes de incertidumbre). Las vulnerabilidades emergentes para la estabilidad financiera guardan relación con esas fuerzas y con el legado de la pandemia. Frente a ellas el sistema financiero y las autoridades continúan manteniendo su capacidad para evaluar, administrar y mitigar los riesgos” - “En meses recientes se ha observado una rápida aceleración del crédito a los hogares en Colombia, tanto en la categoría de vivienda como, especialmente, en la de consumo. Aunque los indicadores de calidad de crédito y de auge de crédito para estos segmentos no se encuentran en niveles preocupantes, la tendencia de aceleración del crédito y la reducción de las exigencias para aprobar desembolsos podría eventualmente ocasionar fragilidades, teniendo en cuenta que la razón de endeudamiento a ingreso disponible de los hogares se encuentra alrededor de su máximo histórico.” *IMF | Technical Assistance Report – Colombia Assessment of Financial Stability Report* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1colea2023004.pdf_