## 1panea2024005

## Source details

**Canonical URL:** [1panea2024005](https://www.imf.org/-/media/files/publications/cr/2024/english/1panea2024005.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2024/english/1panea2024005.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2024/english/1panea2024005.pdf.json)

---

### Scope and methodology
- Technical Note (TN) covering early remediation, recovery and resolution planning, crisis management, and financial safety net elements of the Panamanian banking system (mission period: January 17–30, 2023).
- Reviews legal and institutional frameworks, operations, and approaches for dealing with bank distress; discusses crisis preparedness, interagency and cross-border coordination, and the current financial safety net.
- Uses Financial Stability Board’s Key Attributes and IADI Core Principles as frames of reference; not a formal graded assessment.
- Draws on analysis of legislation, policies, procedures, and discussions with SBP, MEF, and selected private sector actors.

### Key findings: institutional framework and safety net gaps
- Panama lacks several key pillars of a financial safety net:
  - No explicit deposit insurance framework (DIS).
  - No lender-of-last-resort (LOLR) or permanent emergency liquidity assistance (ELA) mechanism to preserve financial stability.
- Constraints tied to full dollarization and absence of a central bank.
- State-owned banks (BNP and La Caja de Ahorros) benefit from an explicit government guarantee for all their liabilities, creating TBTF and moral hazard risks.
- The July 2020 pandemic liquidity facility is temporary; stigma and operational concerns imply a public authority would likely need to assume an LOLR function.
- SBP is the resolution authority for banks and applies administrative corrective actions across four stages (advisor appointment to compulsory liquidation).
- Few compulsory liquidations over the past decade; within the past five years there were three compulsory liquidations; over the past 18 years there have been five cases.
- Liquidation recoveries generally adequate to pay preferred classes of depositors, but administrative processes can be prolonged and payments delayed for months to years.
- Draft legislation to strengthen bank resolution has been prepared and submitted to the Minister of Economics and Finance; remains under deliberation.
- Current framework not compatible with international standards (FSB Key Attributes) in many respects; SBP acknowledges gaps and has begun addressing them.

### Financial sector landscape (selected statistics and structure)
- Banking institutions represent around 90 percent of Panama’s total financial system assets.
- Total assets of the banking system: approximately $140 billion as of end-November 2022.
- Of 67 regulated banking institutions:
  - 42 general license banks (2 state-owned).
  - 15 international license banks.
  - 10 representative offices of foreign banks.
- General license banks’ share of total system assets: increased from 81 percent (in 2013) to 88 percent (as of November 2022).
- Top ten banks (including two state-owned, six domestic and four foreign) account for:
  - 70 percent of banking sector net interest income.
  - 66 percent of lending.
- Ten general license banks designated systemically important (D-SIBs); have not been subjected to heightened prudential requirements beyond more frequent and intensive inspections.
- Permissible activities:
  - General license banks may take deposits and grant loans both within and outside Panama.
  - International license banks may not take deposits from or grant loans to Panamanian persons or entities; may place deposits in general license banks and invest in Panamanian government securities.
- Funding composition for general license banks:
  - 70 percent deposits
  - 16 percent securities issuance
  - 10 percent shareholder capital
  - 3 percent other liabilities
- Local deposits’ share of total deposits rose from 60 percent in 2013 to 72 percent.

### Deposit composition and depositor distribution
- General license bank deposits are domestic: 63 percent.
- Non-Panamanian deposits: 23 percent of the deposit base.
- Composition of local customer deposits by account type:
  - Time deposits: 50 percent
  - Savings deposits: 30 percent
  - Demand deposits: 20 percent
- By number of accounts:
  - Deposits with balances under $10,000 account for 94 percent of total accounts.
- By value:
  - Depositors with balances above $100,000 account for 75 percent of deposits by amount, but represent only 1 percent of total accounts.
- Table of individual deposits (excerpted numeric rows preserved):
  - Less than 10,000 — TOTAL: 2,495,492,717 — Number of Deposit Accounts: 5,179,473 — % of Total Deposit Base: 6 — % of Total Accounts: 94
  - 10,000 - 20,000 — TOTAL: 1,521,029,047 — Number of Deposit Accounts: 107,151 — % of Total Deposit Base: 3 — % of Total Accounts: 2
  - 20,000 - 50,000 — TOTAL: 3,216,061,769 — Number of Deposit Accounts: 100,373 — % of Total Deposit Base: 7 — % of Total Accounts: 2
  - 50,000 - 100,000 — TOTAL: 3,879,507,581 — Number of Deposit Accounts: 52,686 — % of Total Deposit Base: 9 — % of Total Accounts: 1
  - 100,000 - 500,000 — TOTAL: 11,120,234,132 — Number of Deposit Accounts: 50,566 — % of Total Deposit Base: 25 — % of Total Accounts: 1
  - More than 500,000 — TOTAL: 22,503,088,230 — Number of Deposit Accounts: 13,164 — % of Total Deposit Base: 50 — % of Total Accounts: 0
  - TOTAL — 44,735,413,477 — Number of Deposit Accounts: 5,503,413
- Panama uses the U.S. dollar as the primary means of payment; balboa issued in coins only; exchange rate fixed at 1 balboa per U.S. dollar.

### Role of BNP and systemic importance
- BNP is a state-owned commercial bank and:
  - Acts as depository for the State’s financial resources and government treasurer.
  - Provides clearing, settlement, and payments processing functions.
  - Serves as a vital correspondent bank for smaller institutions.
- BNP’s systemic importance reflects full dollarization and absence of a central bank.
- The July 2020 Fund for Economic Stimulus (FES) features:
  - USD 800 million collateralized, medium-term revolving credit facility (1–3 years); as of end-December 2022, BNP disbursed USD 121.5 million to 23 banks (40 percent of the banking sector).
  - Liquidity facility: short-term repo facility (up to 6 months), interest rate fixed at 3.25 percent; as of November 2022, no banks applied for liquidity under this temporary facility.

### Institutional framework, supervisory approach, and corrective powers
- SBP has exclusive competence to regulate and supervise banks (Article 4, Banking Law); corrective powers set out in Banking Law (Chapters 15–18, Articles 124–183).
- Corrective powers apply only to banks, including state-owned banks, and do not extend to non-bank or non-financial affiliates in enforcement scope.
- SBP authorized to carry out consolidated supervision of nonbanking and nonfinancial entities affiliated to banking groups (Article 63) and can require groups to take corrective actions to address material risks to the bank(s), but enforcement powers for non-bank affiliates are not clearly established.
- SBP uses an early warning system (SIAT) with bank-specific trigger levels.
- SBP enforcement and remedial toolkit includes (selected measures):
  - Removal/replacement of directors, appointment of representatives/advisors/administrators, new capital contributions, constitution of reserves or provisions, changes in business strategy, sale/divestment/securitization of assets, suspension of dividend distributions, external audits, suspension of new credit transactions secured by a deposit in the same bank, and provisioning charged to capital accounts.

### Bank insolvency, corrective-action stages, and payout rules
- Four levels of Corrective Actions (need not be sequential):
  - Appointment of an advisor (Articles 124–130).
  - Seizure of operational and administrative control; appointment of administrator (Articles 131–140).
  - Reorganization (Articles 141–153).
  - Compulsory liquidation (Articles 154–183).
- Compulsory liquidation process:
  - Liquidator appointed; liquidation administrative; final report submitted to the Third Chamber of the Supreme Court of Justice.
  - Article 161: deposits of less than $10,000 must be paid within 15 days from the order of compulsory liquidation using available liquid assets; if multiple deposits in the category belong to the same person, only the largest shall be paid up to ten thousand balboas (modifiable by the Superintendency).
  - In practice, compulsory liquidation is generally preceded by seizure and closing of access to deposit accounts; mandated 15-day payment may be delayed in practice.

### Judicial review and legal uncertainty
- SBP decisions may be challenged in court; actions of the Superintendent bear a presumption of legality (Article 20); Superintendent and staff have right to legal expense coverage (Article 21).
- Judicial review is limited to due process or abuse of regulatory powers, but courts can reverse SBP decisions, creating uncertainty and lack of finality in resolution transactions.
- Draft reform legislation should ensure judicial relief is limited only to monetary damages.

### Key gaps in the resolution framework and required powers
- Framework not fully consistent with international standards; draft reform bill addresses many gaps but material deficiencies remain, notably on funding of bank resolutions:
  - Funding to recapitalize insolvent firms (e.g., via bail-in) is not fully addressed.
  - Temporary liquidity provision and a viable public backstop are not addressed.
- Recommended statutory clarifications and extensions:
  - Explicit statutory objective to maintain financial stability.
  - Clear designation of lead resolution authority and roles of sister resolution authorities.
  - Powers extending to holding companies, affiliated non-bank and non-regulated operational entities, and branches of foreign firms to ensure continuity of critical functions.
  - Clear information-gathering powers from entities within resolution groups.
  - Clarification of powers to enforce, repudiate, or transfer contracts and temporary stay of default provisions.
  - Restriction of judicial challenges to prevent reversal of resolution authority actions (limit relief to monetary damages).
- Resolution tools needed:
  - Bridge bank powers.
  - Bail-in powers to write down or convert creditor claims.
  - Access to temporary funding during resolution.
  - Powers to ensure continuity of essential services from group entities.
  - Powers to require changes to operational arrangements or structure to remove resolution obstacles.
  - Temporary stay of early termination rights for affected contracts.
  - Purchase and assumption (P&A) powers and orderly wind-down with timely pay-out or transfer of insured deposits.
- Powers should be circumscribed by NCWO standard, exhaustion of internal resources, and recoupment mechanisms.

### Deposit insurance (DIS): need, scope, funding, and design
- An explicit DIS should be established and extend protection to a class of depositors at all general license banks.
- Rationale:
  - DIS would facilitate prompt payment of deposit claims and support resolution tools (P&A, bridge banks).
  - It would level the playing field between state-owned banks (currently guaranteed) and other banks.
- Funding: premiums charged to general license banks; access to government backup support (e.g., line of credit with MEF) and ex post recovery methods to indemnify the government.
- DIS design to mitigate moral hazard:
  - Ensure large depositors, subordinated debtholders, and correspondent banks understand funds remain at risk.
  - Make membership compulsory.
  - Implement risk-adjusted premiums.
- IADI Core Principles recommended as benchmark; include governance independence, relationship with other safety-net participants, insurer’s role in resolution, cross-border considerations, and insured depositor preference.

### Bail-in, LAC, and implementation challenges
- Bail-in powers proposed to write down equity and unsecured/uninsured creditor claims and convert claims to equity consistent with liquidation hierarchy.
- Implementation challenges include operationalization specific to Panama (modes of bail-in, suspension/delisting/relisting of securities).
- Banks need adequate levels of loss absorbing capacity (LAC) and “bail-inable” debt; certain large banks already issue subordinated debt that could support progress.
- LAC standards should be established and enforced.

### Temporary public funding backstop and limitations
- A temporary public source of funding is necessary to ensure orderly resolution and preserve financial stability for systemic events.
- Conditions and limitations for public temporary funding:
  - First reliance on the bank’s own internal resources.
  - Funding only when necessary to foster financial stability and after private sources exhausted.
  - Losses should be sustained by equity holders and unsecured/uninsured creditors (subject to NCWO).
  - Recoupment from industry via ex-post assessments, insurance premiums, or similar mechanisms.
- The July 2020 facility (FES) is temporary, operated via MEF trust with BNP as trustee; not a permanent public LOLR and unlikely to be accessed due to stigma when disbursed via a commercial bank.

### Resolution planning, crisis management, and coordination
- SBP should develop resolution plans beginning with D-SIBs and regional banks; plans to be subject to resolvability assessments once resolution tools are in place.
- SBP to require recovery plans for all banks, with tailored requirements for international license banks.
- SBP should establish an internal crisis management committee responsible for crisis response and management.
- SBP to expand role of Financial Coordination Council (CCF) as an interagency crisis coordination body or establish an alternative mechanism.
- SBP should review and revise bilateral supervisory MOUs to fully address bank resolution and crisis management and put in place institution-specific cross-border information sharing/cooperation agreements for D-SIBs and regional banks.
- Crisis management groups or resolution colleges should be established for D-SIBs and regional banks; resolution strategies (single point-of-entry or multiple point-of-entry) should be developed, tested, and periodically assessed.

### Key reform priorities and operational recommendations (summary)
- Institutional framework:
  - SBP to continue legislative reforms to strengthen bank resolution framework and address key gaps (Authority: SBP; Timeline: I).
  - SBP to adopt structural changes to ensure operational independence of the resolution authority (Authority: SBP; Timeline: ST).
- Resolution powers and planning:
  - SBP to develop resolution plans for D-SIBs and regional banks and conduct resolvability assessments (SBP; ST).
  - SBP to set and enforce minimum loss-absorbing capital requirements for at least D-SIBs (SBP; I).
  - SBP and MEF to ensure resolution plans address funding needs and include an effective temporary public source of funding subject to moral hazard protections (SBP and MEF; ST).
- Contingency planning and crisis management:
  - SBP to require recovery plans for all banks (SBP; I).
  - SBP to establish internal crisis management committee (SBP; I).
  - SBP to expand CCF’s role or establish alternative interagency crisis coordination (SBP; I).
  - SBP to review MOUs and establish institution-specific cross-border agreements, and to set up crisis management groups/resolution colleges (SBP; ST).
- Financial safety net:
  - SBP and MEF to establish an explicit industry-funded DIS once sufficient progress on resolution reforms has been made; DIS should extend protection to certain protected class(es) of depositors at all general license banks (SBP and MEF; ST).
  - SBP to review early warning mechanisms and consider adopting early intervention and prompt corrective action triggers (SBP; I).
  - SBP and MEF should explore mechanisms to establish an LOLR facility provided by a public authority (SBP and MEF; ST).

*Source: Extract from 1panea2024005 (IMF staff report chapter/section).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Scope and methodology
- This Technical Note (TN) discusses early remediation, recovery and resolution planning, crisis management, and financial safety net elements of the Panamanian banking system (mission period: January 17–30, 2023).
- The TN reviews legal and institutional frameworks, operations, and approaches for dealing with bank distress, and discusses crisis preparedness, interagency and cross-border coordination, and the current financial safety net.
- The TN follows up on recommendations from the 2012 FSAP and prior TA missions and uses the Financial Stability Board’s Key Attributes and IADI Core Principles as frames of reference, while not constituting a formal graded assessment.
- The TN draws on analysis of legislation, policies, procedures, and extensive discussions with SBP, MEF, and selected private sector actors.

### Key findings: institutional framework and safety net gaps
- Panama lacks several key pillars of a financial safety net:
  - No explicit deposit insurance framework (DIS).
  - No lender-of-last-resort (LOLR) or permanent emergency liquidity assistance (ELA) mechanism to preserve financial stability.
- Constraints stem from Panama being fully dollarized and having no central bank, which limit development of safety net components.
- State-owned banks benefit from an explicit government guarantee.
- The July 2020 pandemic liquidity facility is temporary and accessed through a commercial bank; stigma and operational concerns imply a public authority would likely need to assume an LOLR function.
- SBP is the resolution authority for banks and uses administrative corrective actions across four stages (from advisor appointment to compulsory liquidation), emphasizing strong prudential supervision and remediation to avoid liquidation.
- There have been few compulsory liquidations over the past decade and no bank failures during the pandemic; within the past five years there were only three compulsory liquidations.
- Liquidation recoveries have generally been adequate to pay preferred classes of depositors, but the administrative process can be prolonged and payments to depositors and creditors can be delayed for months to years.
- The current approach to bank resolution has not changed since the 2012 FSAP and recent TA missions; the Banking Law framework underpinning SBP corrective actions dates from 2008.
- Authorities have reviewed the resolution framework, identified needs for improvement, and prepared draft legislation to strengthen bank resolution and expedite the resolution process; the draft law has been submitted to the Minister of Economics and Finance and remains under deliberation.
- The current framework is not compatible with international standards (FSB Key Attributes) in many respects; SBP acknowledges gaps and has begun addressing them.

### Financial sector landscape (selected statistics and structure)
- Banking institutions represent around 90 percent of Panama’s total financial system assets.
- Total assets of the banking system were approximately $140 billion as of end-November 2022.
- Of 67 regulated banking institutions:
  - 42 are general license banks (2 of which are state-owned).
  - 15 are international license banks.
  - The remaining ten entities are representative offices of foreign banks.
- General license banks’ share of total system assets increased from 81 percent (in 2013) to 88 percent (as of November 2022).
- The top ten banks (including the two state-owned banks, six domestic and four foreign banks) account for a majority of total Panamanian banking sector activity and:
  - Generate over two-thirds of banking sector net interest income: 70 percent.
  - Generate two-thirds of lending: 66 percent.
- Ten general license banks have been designated systemically important by SBP (D-SIBs); these are all general license banks and have not yet been subjected to heightened prudential requirements (beyond more frequent and intensive inspections).
- Permissible activities:
  - General license banks may take deposits and grant loans both within and outside Panama.
  - International license banks may not take deposits from or grant loans to Panamanian persons or entities; they may place deposits in general license banks and invest in Panamanian government securities.
- Funding composition for general license banks:
  - 70 percent deposits
  - 16 percent securities issuance
  - 10 percent shareholder capital
  - 3 percent other liabilities
- General license banks’ funding has migrated toward increased reliance on domestic deposits; local deposits’ share of total deposits rose from 60 percent in 2013 to 72 percent.

### Key reform priorities and operational recommendations (summary of Table 1)
- Institutional framework
  - SBP to continue development of reform legislation to strengthen the bank resolution framework in Panama; key remaining gaps should be addressed. (Authority: SBP; Timeline: I)
  - SBP to adopt structural changes to ensure operational independence of the resolution authority and autonomous capacity to implement new resolution tools. (Authority: SBP; Timeline: ST)
- Resolution powers and planning
  - SBP to develop resolution plans, commencing with D-SIBs and regional banks, and subject plans to resolvability assessment once adequate resolution tools are in place. (SBP; ST)
  - SBP to ensure banks maintain adequate levels of loss absorbing capacity (LAC) to support resolution plans, including setting and enforcing minimum loss-absorbing capital requirements for at least D-SIBs. (SBP; I)
  - SBP and MEF to ensure resolution plans address funding needs and include an effective temporary public source of funding subject to moral hazard protections. (SBP and MEF; ST)
- Contingency planning and crisis management
  - SBP to require recovery plans for all banks, with tailored requirements for international license banks. (SBP; I)
  - SBP to establish an internal crisis management committee. (SBP; I)
  - SBP to expand the role of CCF as an active interagency crisis coordination body or establish an alternative venue. (SBP; I)
  - SBP to review and revise bilateral supervisory MOUs to fully address bank resolution and crisis management and to put in place institution-specific cross-border information sharing/cooperation agreements for D-SIBs and regional banks. (SBP; ST)
  - SBP to establish crisis management groups or resolution colleges for D-SIBs and regional banks. (SBP; ST)
- Financial safety net
  - SBP and MEF to establish an explicit industry-funded deposit insurance system (DIS) once sufficient progress on resolution reforms has been made; the DIS should extend protection to certain protected class(es) of depositors at all general license banks. (SBP and MEF; ST)
  - SBP to review early warning mechanisms and consider adopting early intervention and prompt corrective action triggers that consider recovery and resolution plans and the absence of an LOLR or temporary public backstop. (SBP; I)
  - SBP and MEF should explore and implement mechanisms to establish an LOLR facility provided by a public authority and not a commercial bank. (SBP and MEF; ST)
- Implementation considerations highlighted in the TN:
  - New resolution tools (e.g., bridge bank and bail-in) require mechanisms to recapitalize and fund failed banks during resolution and adequate LAC at relevant banks.
  - Resolution planning must address banks’ capacity to self-fund and the potential need for a temporary public backstop with moral hazard protections.
  - Resolution powers and coordination must extend across complex financial conglomerates and cross-border banking groups, including continuity of critical functions provided by non-bank/non-financial group entities.
  - Authorities should develop internal crisis management plans, firm-specific resolution plans, institution-specific MOUs for D-SIBs and regional banks, and establish crisis management groups and resolution colleges.

*Source: Panama: EXECUTIVE SUMMARY (Technical Note) — IMF FSAP mission materials.*

### 9.      Domestic deposits constitute most of the banks’ deposit liabilities, alongside

### 9.      Domestic deposits constitute most of the banks’ deposit liabilities, alongside

### Deposit composition and depositor structure
- General license bank deposits are domestic: 63 percent.
- Non-Panamanian deposits comprise: 23 percent of the deposit base.
- Composition of local customer deposits by account type:
  - Time deposits: 50 percent
  - Savings deposits: 30 percent
  - Demand deposits: 20 percent
- The Government’s deposits with domestic banks are significant.
- Panama uses the U.S. dollar as the primary means of payment in the local economy. Panama’s national currency (balboa) is issued in the form of coins only and serves as a unit of account. The exchange rate is fixed at 1 balboa per U.S. dollar.

### Depositor concentration and distribution (individual deposits)
- By number of accounts, small retail deposits dominate:
  - Deposits with balances under $10,000 account for 94 percent of total accounts.
- By value, large depositors dominate:
  - Depositors with balances above $100,000 account for 75 percent of deposits by amount, but represent only 1 percent of total accounts.

- Table of Individual Deposits (as provided)
  - Range — TOTAL Number of Deposit Accounts — % of Total Deposit Base — % of Total Accounts
  - Less than 10,000 — 2,495,492,717 — 5,179,473 — 6 94
  - 10,000 - 20,000 — 1,521,029,047 — 107,151 — 3 2
  - 20,000 - 50,000 — 3,216,061,769 — 100,373 — 7 2
  - 50,000 - 100,000 — 3,879,507,581 — 52,686 — 9 1
  - 100,000 - 500,000 — 11,120,234,132 — 50,566 — 25 1
  - More than 500,000 — 22,503,088,230 — 13,164 — 50 0
  - TOTAL — 44,735,413,477 — 5,503,413

### Role of the National Bank of Panama (BNP)
- BNP is a state-owned commercial bank with unique and systemically important roles:
  - Depository for the State’s financial resources, acting as government treasurer.
  - Provides critical financial market utility functions: clearing, settlement, and payments processing.
  - Serves as a vital correspondent bank for smaller institutions.
- BNP’s systemic importance reflects Panama’s full dollarization and absence of a central bank.

### Challenges posed by large and complex banking groups
- Largest Panamanian banks have complex organizational and ownership structures:
  - Multi-tiered holding companies, bank and non-bank subsidiaries and affiliates, non-bank/non-financial subsidiaries and affiliates (commercial and operational entities).
- Funding and operational interconnections across legal entities require full mapping to identify critical functions and entities to be maintained during stress.
- At present, SBP does not have a mapping of critical functions to the various legal entities in broad groups to determine which entities must be maintained and supported during periods of financial stress.

### Recent developments in the resolution framework and identified gaps
- The legal framework for SBP corrective actions and bank insolvency has not changed since the Banking Law of 2008.
- Authorities reviewed the resolution framework against international standards (Key Attributes) and identified the need for improvement; current framework is not compatible with international standards in many respects.
- SBP drafted legislation to strengthen the bank resolution framework; draft law submitted to the Minister of Economics and Finance and remains under deliberation. If approved by the National Assembly, it would override the existing legal framework on bank resolution as set forth in the Banking Law.
- Material gaps remain in the proposed reform legislation:
  - The draft does not address key areas necessary for orderly resolution, notably the approach to funding of bank resolutions:
    - Funding to recapitalize insolvent firms (e.g., via bail-in) is not addressed.
    - Temporary liquidity provision and a viable public backstop are not addressed.
  - Reform should proceed in conjunction with any changes to the financial safety net (such as establishment of a DIS).

### Institutional framework: roles and powers
- Superintendency of Banks (SBP)
  - Exclusive competence to regulate and supervise banks (Article 4, Banking Law).
  - Objective includes safeguarding the soundness and efficiency of the banking system and inspecting and supervising all banks.
  - Supervisory and corrective powers are set out in the Banking Law (Chapter 1, Title III; Chapters 15-18, Articles 124-183).
  - Corrective Action powers apply only to banks, including state-owned banks.
  - Corrective powers include: close or transfer banking establishments; authorize voluntary liquidation; order seizure of administrative control; compel reorganization; order compulsory liquidation.
  - Corrective action provisions do not extend to non-bank or non-financial affiliates within banking groups.

- Supervision of non-bank and non-financial affiliates
  - SBP authorized to carry out consolidated supervision of nonbanking and nonfinancial entities affiliated or related to banking groups (Banking Law; Article 63).
  - For non-bank or non-financial affiliates, SBP can require groups, including holding companies, to take corrective actions to address material risks to the bank(s) within the group.
  - Corrective actions in the Banking Law do not extend to such entities; enforcement powers for non-bank affiliates are not clearly established.

- Sectoral regulators and separate resolution regimes
  - Non-bank financial entities are supervised and resolved by their sectoral regulator:
    - Insurance companies: Superintendency of Insurance and Reinsurance (SSRP).
    - Securities brokers, investment and pension funds: Superintendency of the Securities Market (SMV).
  - Each agency administers crisis management and resolution unique to each entity type; separate resolution tools, authorities, claims and distribution schemes apply to affiliated non-bank financial and non-financial entities.

- Dual-licensed banks (bank + brokerage)
  - Two banks currently authorized to conduct securities activities within the banking entity.
  - Presence complicates bank resolution and requires coordination between SBP and SMV.
  - Recommendation: avoid expansion of dual-license entities; SBP should establish and agree with existing dual-license banks on a path for separation, perhaps over a period of 3–5 years.

- Ministry of Economy and Finance (MEF)
  - MEF has no formal role in bank supervision or resolution.
  - MEF would be obligated to support resolution of state-owned banks due to comprehensive legislated state guarantees for all liabilities of the two large state-owned banks; MEF retains contingent exposure to provide equity and funding support.

### SBP supervisory approach and tools
- SBP relies on strong prudential supervision to avoid bank failures and remove weak institutions.
- SBP uses an early warning system (Sistema de Alerta Temprana or SIAT) to collect data and generate metrics tracking capital, liquidity, credit, asset quality, and other indicators; trigger levels are set per bank given business model and risk profile.
- SBP enforcement and remedial toolkit (selected measures supported by Banking Law Title III; Chapter 15-18, Articles 124-183):
  - Removal and replacement of directors, officers, managers, executives, administrators, agents.
  - Appointment of a representative entitled to attend meetings of administrative bodies with right to speak but not vote.
  - Appointment of one or more advisors.
  - New capital contributions by current or new shareholders.
  - Constitution of reserves or provisions to cover liabilities.
  - Reduction of operating costs and expenses.
  - Changes in business strategy, legal or operating structure.
  - Sale, divestment, or securitization of certain assets.
  - Improvements to corporate governance, internal control, and/or risk management systems.
  - Prohibiting, making conditional, or suspending distribution of dividends and variable remuneration.
  - Periodic submission of reports on implementation and effectiveness of corrective measures.
  - Suspension of new credit transactions secured by a deposit in the same bank.
  - Provisioning charged to the primary and secondary capital account.
  - Require external audits or a change of auditors.

### Bank insolvency and resolution process
- Current approach: administrative process conducted under SBP authority using Corrective Actions (Banking Law, Chapters 15–18).
- Four levels of Corrective Actions with increasing intensity:
  - Appointment of an advisor (rarely employed).
  - Appointment of an administrator with powers to reorganize, merge, sell, freeze payments, and control fund outflows.
  - Reorganization with option to merge or sell the bank or certain assets.
  - Compulsory liquidation ordered by the Superintendent.
- Interventions need not proceed sequentially; any tool can be used when statutory requirements are met.
- Appointment of an advisor to an open bank is likely destabilizing and may precipitate depositor runs.
- Compulsory liquidation:
  - A liquidator is designated to liquidate assets and satisfy debts.
  - To close liquidation, a final report is submitted to the Third Chamber of the Supreme Court of Justice for final adjudication.
- Protected depositor classes and payout timing upon compulsory liquidation:
  - Deposits of less than $10,000 must be paid within 15 days from the order of compulsory liquidation using available liquid assets.
  - Deposits to be paid within this timeframe are those given first and second priority in the liquidation claims hierarchy: (1) New deposits taken during the period of reorganization, and (2) Deposits for $10,000 or less.

*Source: 1panea2024005 - 9.      Domestic deposits constitute most of the banks’ deposit liabilities, alongside*

### 30.      Decisions adopted by the SBP may be challenged in court, and SBP’s administrative

### 1panea2024005 - 30.      Decisions adopted by the SBP may be challenged in court, and SBP’s administrative

### Judicial review, Corrective Actions, and legal uncertainty
- Decisions adopted by the SBP may be challenged in court, and SBP’s administrative decisions can be overturned.
- The Banking Law provides that the actions of the Superintendent bear a presumption of legality (Article 20).
- The Superintendent, the Board of Directors, and SBP staff have the right for payment of all legal expenses and costs necessary for their defense in the event of litigation (Article 21).
- At each stage of the Corrective Actions, challenges may be brought to appeal SBP decisions.
- Judicial review is limited to due process challenges, or other abuse of regulatory powers.
- The courts retain the ability to reverse or overturn SBP’s decision, which leads to uncertainty and lack of finality in conducting resolution transactions.
- Though SBP has been successful in defending its actions in court proceedings to date, the draft reform legislation should ensure that judicial relief is limited only to monetary damages.

### Recent experience with bank failures and closings
- SBP prefers consensual sale, merger, or voluntary liquidation over compulsory liquidation; troubled banks are subject to enhanced monitoring and may be invited to initiate voluntary liquidation when operations are not viable but resources remain.
- Within the past five years, there have been only three compulsory liquidations of banks in Panama; no banks failed during the COVID-19 pandemic.
  - The three compulsory liquidations followed at least one prior use of SBP’s authorized corrective actions (appointment of an advisor and/or appointment of an administrator).
  - The three liquidations are ALLBANK, CORP. (Resolution SBP-0205-2019 of November 8, 2019); FPB BANK, INC. (Resolution SBP-0057-2017 of April 7, 2017); and Banca Privada D'Andorra (Panama), S.A. (Resolution SBP-0015-2017 of January 27, 2017).
- Full recovery to all creditors is expected in two of the three liquidations.
- Over the past 18 years, there have been only five cases of compulsory liquidation.
- Recoveries are generally adequate to pay preferred classes of depositors, but depositors are not provided prompt access to their funds, with delays ranging from months to years.
- There is no deposit insurance or resolution fund; deposit claims may only be satisfied from available liquid assets.
- ARTICLE 161 on PAYMENT OF PRIMARY DEPOSITS AND OTHER OBLIGATIONS: “In order to maintain trust in the banking system, the liquidator or the board of liquidators will pay all deposits and other obligations described in paragraphs 1 and 2 of Article 167 of this Decree Law within fifteen days following the date in which the resolution ordering the liquidation enters into force. These payments shall be made in accordance with the information in the bank’s books, using the available liquid assets until exhausted.” Under this provision, “if there were two or more deposits in this category belonging to the same person, only the largest of them shall be paid, up to the sum of ten thousand balboas. This amount may be modified by the Superintendency.” Banking Law, Article 167 sets out the ORDER OF PRIORITY for payment to the failed bank’s liabilities.
- Compulsory liquidation is generally preceded by administrative interventions that involve seizure of the bank and closing of access to deposit accounts; the mandated 15-day payment may nevertheless be delayed in practice because of these interventions.

### Key gaps in the Panamanian resolution framework (summary of identified deficiencies)
- The current Corrective Action tools are not fully consistent with international standards.
- Draft reform bill addresses many identified gaps, but significant work remains; additional in-depth review is necessary.
- The reform bill should be reviewed against the KAs and with detailed focus on implementation in the Panamanian banking, financial, legal, and judicial systems.
- Key remaining gaps identified include:
  - The goal of maintaining financial stability should be plainly established as a statutory objective.
  - The roles and responsibilities of a lead resolution authority—and of sister resolution authorities—should be clearly described.
  - The resolution authority’s powers should clearly extend to holding companies and to affiliates as required to ensure continuity of critical functions and services from group entities.
  - The nature and scope of information-gathering from entities operating within a resolution group should be clearly established.
  - The provisions regarding the power to enforce, repudiate or transfer contracts, including special provisions that address a temporary stay of default provisions, transfer, and enforcement of certain financial contracts should be revised and clarified.
  - The ability to bring judicial challenges should be clarified to not allow the reversal of resolution authority’s actions and decision; restricting judicial relief to monetary damages.
  - Provision should be made to address gaps in financial safety net schemes (DIS, LOLR) discussed in Section IX.
- Additional gaps are likely to arise following a comprehensive study analyzing implementation of purchase and assumption, bridge bank and bail-in mechanisms in Panama.

### Statutory objectives, lead authority, and scope of powers
- The goal of maintaining financial stability should be explicitly established as the primary, statutory objective of the SBP; the Banking Law currently allows promotion of the international banking center to rank equally with safety and soundness concerns (ARTICLE 5. OBJECTIVES OF THE SUPERINTENDENCY lists objectives 1–4).
- The resolution authority’s statutory objectives and functions should clearly seek to pursue financial stability and ensure continuity of systemically important financial services, and payment, clearing and settlement functions.
- Given multiple regulatory agencies may be resolution authority over material entities within conglomerates, a lead resolution authority should be designated to coordinate resolution actions; roles and responsibilities of various resolution authorities should be clearly defined and coordinated.
- Resolution authority’s powers should extend to:
  - Holding companies over Panamanian banks and banking groups;
  - Affiliated non-bank financial as well as non-regulated operational entities operating within a financial group or conglomerate that are significant to the business of the group or conglomerate, as necessary to preserve continuity of critical functions and services;
  - Branches of foreign firms.
- SBP currently has broad authority to obtain information from affiliates within a consolidated group, but does not clearly establish what information should be accessible from non-bank financial and non-regulated operational entities, including holding companies.
- SBP should have unimpeded access to relevant entities material for resolution planning and implementation; information needs for resolution can differ from ongoing supervision.

### Triggers, PONV, and timing of intervention
- The triggering of resolution should be tied to a viability standard that ensures early intervention before equity is exhausted.
- The current framework does not define a “point-of-non-viability” (PONV) or when a determination is made that the bank is “failing or likely to fail.”
- The reform legislation defines PONV (Article 10) and ties intervention to when a firm is no longer viable or likely to be no longer viable and has no reasonable prospect of becoming so.
- The revised framework supports SBP intervention and application of resolution tools before all equity has been fully wiped out (a point where book insolvency may not exist, yet the troubled bank is ‘reasonably expected’ to be nonviable within the next six months).
- These PONV provisions in the draft law should be retained to ensure compatibility with the KAs.

### Required resolution tools and powers
- The framework needs to incorporate a full range of resolution tools and powers; gaps include powers to:
  - Establish a temporary bridge institution to take over and continue operating certain critical functions and viable operations of a failed bank;
  - Carry out bail-in within resolution to restore the bank’s financial condition and achieve continuity of essential functions;
  - Access temporary funding to support continuity of critical functions in resolution;
  - Ensure continuity of essential services and functions by requiring other companies in the same group to continue to provide essential services to the entity in resolution;
  - Require changes to banks’ operational arrangements or structure as needed to remove obstacles to resolution;
  - Temporarily stay the exercise of early termination rights that may otherwise be triggered upon entry of a firm into resolution or in connection with the use of resolution powers;
  - Conduct purchase and assumption (P&A) transactions; allowing the prompt transfer of part or all of the failed bank’s assets and liabilities to an acquiring institution;
  - Effect the closure and orderly wind-down (liquidation) of the whole or part of a failing bank with timely pay-out or transfer of insured deposits.
- Powers should be circumscribed by appropriate limitations, such as a ‘no creditor worse off’ (NCWO) standard; requirements to first exhaust banks’ internal resources; and to seek recoupment of any government funds from the bank, its creditors, or the industry at large.

### Deposit insurance, funding in resolution, and P&A implementation
- Implementation of new resolution transactions (e.g., purchase and assumption and/or deposit insurance transfer transactions) depends on the existence of a capacity to promptly fund deposit liabilities at resolution.
- These resolution tools hinge upon the ability to transfer select groups of assets and liabilities to an acquiring institution that will promptly satisfy deposit claims and/or grant access to depositors’ funds.
- These transactions are supported by the presence of a privately funded deposit insurance (or equivalent) resource.
- The presence of deposit insurance coverage will need to be coordinated with the recapitalization approach adopted for bail-in.
- The need to establish a DIS in Panama is a key component of an effective financial safety net.

### Bail-in, LAC, and implementation challenges
- A new resolution transaction in the reform bill is the ability to enforce a bail-in resolution: power to impose losses on creditors and write-down or convert their claims to equity.
- Bail-in can facilitate orderly resolution of systemically important firms while maintaining critical functions without recourse to taxpayer funds, but presents high technical complexity.
- “Bail-in during resolution” employs powers to write down equity, unsecured and uninsured creditor claims to the extent necessary to absorb losses; and to convert into equity all or parts of unsecured and uninsured creditor claims in a manner that respects the hierarchy of claims in liquidation.
- Write-down and conversion of loss-absorbing instruments (e.g., “bail-in-able bonds”) and other debt into equity facilitates creditor-financed recapitalization.
- Implementation challenges for bail-in include operationalization issues unique to the Panamanian financial system, such as modes of bail-in and recapitalization, suspension of trading and delisting of securities of bailed-in firms, eventual relisting and restoration of trading of new and existing securities, among others.
- A vital foundation for bail-in and other resolution tools is the need for banks to maintain adequate levels of LAC (debt).
- LAC standards should be established; banks will need to maintain adequate levels of “bail-inable” debt and LAC to recapitalize a bank in a bail-in resolution, or that can be left behind facing losses in a P&A.
- Certain large banks presently issue subordinated debt instruments which could support progress.

### Resolution funding planning and liquidity during resolution
- Implementing bridge bank and bail-in mechanisms requires establishing an effective source of liquidity to fund critical operations of the bank’s material operating entities during resolution.
- In bridge bank or bail-in scenarios, there is a need to recapitalize the firm and ensure continued funding of critical operations.
- Orderly resolution of Panamanian D-SIBs and complex regional banks will require resolution plans identifying implementable approaches to funding the bank (and banking group) during resolution.
- Resolution plans must demonstrate that banks can maintain viable means to self-fund during resolution; firms must maintain or have access to enough liquidity to meet funding needs and remain solvent throughout resolution.
- During financial stress, operating entities may face severe liquidity outflows, including increased deposit withdrawals, draws on loan commitments, and lack of access to interbank funding markets.
- Material operating entities must be able to maintain sufficient liquidity (or have readily available liquidity) to continue meeting obligations when due and satisfy market counterparties’ requirements.
- The new framework will need to require resolution plans that address funding elements with appropriate metrics, triggers, monitoring, and funding capacity.

*Italic: Source — Extract from 1panea2024005 (IMF staff report chapter/section).*

### 49.      A temporary public source of funding necessary to maintain essential functions should

### 1panea2024005 - 49.      A temporary public source of funding necessary to maintain essential functions should

### Temporary public funding backstop
- A temporary public source of funding should be available to ensure an orderly resolution and preserve financial stability.
- Resolution plans—and related liquidity standards and requirements—may support an individual bank’s capability to ensure adequate liquidity is available (or readily accessed) during resolution.
- There is potential for a banking system-wide liquidity crisis of systemic nature that could threaten financial stability; an official temporary funding backstop would provide an emergency backstop and add to the financial safety net by addressing catastrophic or systemic liquidity risks not addressed in bank’s individual resolution plans.

### Limitations and protections on public temporary funding
- Provision of temporary public funding must be subject to important limitations and protections:
  - First reliance should be on the bank’s own internal resources.
  - Any provision of public temporary funding should be subject to a determination that the funding is necessary to foster financial stability and that private sources of funding have been exhausted.
  - Any funding losses or exposures should be sustained by equity holders and by unsecured and uninsured/unsecured creditors (subject to ‘NCWO principles”).
  - Recoupment of any advances should be from the industry through ex-post assessments, insurance premium or similar mechanism.

### Contract enforcement, repudiation, and temporary stay powers
- The reform legislation should clarify the resolution authority’s power to enforce, repudiate or transfer contracts, including special provisions that address the temporary stay of default provisions of certain financial contracts.
- The draft reform bill is vague regarding:
  - The power of the resolution authority to continue to enforce contracts (across material operating entities).
  - The power to repudiate burdensome contracts.
  - Whether derivatives or other special financial contracts are to be given rights to terminate subject to temporary stay provisions that would be set out in the law.
- These provisions require additional in-depth review to ensure consistency with international standards and market expectations regarding termination, enforcement, or transferability of certain financial contracts.
- Contract terms for local banks’ derivative transactions will likely need to be amended to be consistent with current international protocols.

### Resolution planning, strategies, and resolvability assessment
- Resolution plans, commencing with D-SIBs and regional banks, should be developed and subject to a resolvability assessment process once adequate resolution tools have been put in place.
- Resolution strategies—whether single point-of-entry or multiple point-of-entry—that employ an effective range of resolution powers (e.g., bail-in bridge bank, purchase, and assumption) should be incorporated into implementable resolution plans prepared by SBP as resolution authority.
- These plans should be:
  - Developed in consultation with relevant domestic and international regulatory agencies.
  - Brought forward for discussion within crisis management groups.
  - Subjected to periodic resolvability assessments.
  - Tested (e.g., through crisis simulation exercises).

### Structural reforms for resolution authority independence
- Structural changes should be adopted to ensure the operational independence of the resolution authority:
  - Roles of SBP as supervisor and as resolution authority differ and can conflict (decisions such as when to intervene, when a troubled bank has reached PONV, the resolvability of the bank).
  - The resolution authority should possess operational independence, sound governance, and adequate resources to fulfill statutory obligations.
  - The authority should be subjected to evaluation and accountability mechanisms to assess effectiveness of any resolution measures.
  - The authority should have unimpeded access to banks and firms material to resolution measures and have expertise, resources, and operational capacity to implement resolution measures for large and complex firms.
- At present, there is no distinct operational area within SBP responsible for bank resolutions; appropriate changes in structure and operations will need to be evaluated and implemented as reforms move forward.

### Contingency planning and crisis management — Bank level
- There is currently no requirement for banks to prepare recovery plans, but SBP has taken preliminary steps:
  - Panamanian banks’ crisis preparedness is limited to prudential requirements to develop business continuity plans and contingency liquidity plans.
  - Under the auspices of the CCSBO and its Committee for Crisis Management and Resolution, regional guides for the preparation of recovery plans have been developed.

### Contingency planning and crisis management — SBP internal
- SBP operates an internal Crisis Committee, but its crisis planning addresses events that pose risks to SBP’s image and reputation and not to the management of financial sector or individual banking crises.
  - The Crisis Committee is a strategic body chaired by the Superintendent; it is not responsible for coordinating a response to financial crisis affecting a bank, group of banks or the system.
  - SBP maintains a business continuity plan and a communication plan; these are not designed to manage a response to financial crises.
- Recommendation: SBP should establish an internal crisis management committee responsible for crisis response and management to address threats to financial stability arising from a single bank failure or group of banks (e.g., D-SIBs and regional banks). The existing Crisis Committee and communication plan could serve as a foundation.

### Interagency — domestic and international coordination
- SBP has adequate legal authority to share confidential supervisory information with foreign and domestic regulators; reform legislation extends SBP’s powers to coordinate resolution activities and enter into cross-border agreements—provisions important to retain.
- Corrective actions taken by SBP against banking groups with non-bank financial entities have been coordinated with relevant securities and insurance superintendencies; however, a formal crisis management process or plan is lacking.
- The Financial Coordination Council (CCF), established in 2011, provides a mechanism to coordinate cross-sectoral policy development but has not extended to coordinating financial crisis management and resolution; CCF has no official role in resolution and no current strategy to develop cross-sectoral plans to address resolution of financial conglomerates or a national crisis management plan, though early discussions are reported.
- Recommendation: SBP should work to expand the role of CCF to serve as an active interagency crisis coordination body or establish an alternative mechanism to coordinate banking crises and resolution of Panamanian financial conglomerates.

### Regional coordination and cross-border arrangements
- SBP participates in CCSBO; CCSBO has undertaken to address recovery and resolution issues and has established a permanent subcommittee—the Crisis Resolution and Management Committee (CGRC)—to enhance cross-border coordination.
- The CCSBO established an mMOU in December 2022 to support cross-border coordination of bank resolutions and establish resolution colleges for regional banks; the mMOU does not create legal obligations but establishes commitments to exercise best efforts to coordinate and plan resolution of cross-border regional banks.
- SBP has 28 MOUs in force with foreign supervisors; these focus on consolidated and cross-border supervision and AML matters. Existing MOUs should be reviewed to fully address bank resolution and crisis management and to clearly incorporate coordination for resolution planning and resolution.
- Recommendation: Institution-specific cross-border information-sharing and cooperation agreements are needed, and domestic interagency bilateral MOUs should be reviewed, amended, or established to address crisis management and bank resolution.
- Recommendation: Crisis management groups or resolution colleges should be established for all Panamanian D-SIBs; SBP should develop institution-specific cross-border agreements covering at least its D-SIBs and regional banks.

### Financial sector safety net
- Key institutional pillars of a financial sector safety net have not been established in Panama:
  - There is no explicit deposit insurance (except for statutory protection granted to state-owned banks).
  - There is no ex-ante resolution fund or arrangement to fund resolution transactions and support uninterrupted operation of critical functions at Panamanian D-SIBs.
  - There is no public authority that provides LOLR or ELA support, although such liquidity support has been provided through BNP on occasion.
  - There is no central bank that can provide short-term lending to address liquidity problems to solvent individual banks or group of banks.

*Source: 1panea2024005 - 49.*

### 69.      State-owned banks benefit from an explicit government guarantee not provided other

### 69.      State-owned banks benefit from an explicit government guarantee not provided other

### Explicit government guarantee and TBTF risk
- Under Panamanian law, BNP and La Caja de Ahorros are the beneficiaries of a state guarantee for all their liabilities, including deposits.
- BNP’s significant role within the Panamanian banking system is considered by market participants as a strong indicator that government support for the state-owned bank can be expected in the event of financial distress.
- These banks are considered ‘too big to fail’ (TBTF) and thereby expose the Panamanian public to a material contingent exposure.
- Preserving the assumption of government support for certain TBTF institutions creates moral hazard that can:
  - inspire excessive risk-taking; and
  - weaken bank management’s motivation to adopt crisis response and management processes, such as recovery or resolution plans.
- Recommendation: Upon adoption of deposit insurance extended to certain deposit classes at Panamanian general license commercial banks, this explicit state guarantee should be removed.

### Need for an explicit Deposit Insurance System (DIS)
- An explicit DIS should be established as a key element of an effective financial sector safety net in Panama.
- Global context from the source:
  - 144 jurisdictions have formal deposit insurance regimes of one form or another.
  - “Out of 189 countries covered, 112 countries (or 59 percent) had explicit deposit insurance by year-end 2013, having increased from 84 countries (or 44 percent) in 2003.”
  - A 2021 study reported the continuing increase in adoption of DISs, with approximately 140 systems worldwide, representing jurisdictions totaling 75 percent of global gross domestic product.
- Deposit insurance is a key element of an effective financial sector safety net and is an important reform that should be strongly considered by Panamanian authorities.

### Scope and funding of the DIS
- The DIS should extend protection to a class of depositors at all general license banks.
- Extending deposit insurance to all deposit-taking general license banks in Panama would help level the playing field between state-owned banks and banks not benefitted by a state guarantee.
- Funding of the deposit insurance would draw from premiums charged from general license banks.
- To address the risk of large losses undermining depositor confidence:
  - establish access to government backup support (e.g., a line of credit with MEF); and
  - incorporate ex post recovery methods that would indemnify the government, protect taxpayers from losses, and ensure that any costs of providing temporary financing to facilitate a resolution is recovered from the industry.

### Operational benefits of adopting a DIS
- Adopting a DIS would facilitate more prompt payment of deposit claims and support the use of new resolution tools intended for adoption in Panama:
  - With a deposit insurer, deposit liabilities can be transferred to an acquiring institution or a payout agent (effectively overnight) and access to customer funds would be uninterrupted.
  - The delay associated with relying on a failed bank’s available liquid funds to pay depositor claims under the current system would be mitigated.
  - The DIS would facilitate resolution tools such as P&A transactions and bridge bank transactions, which are facilitated by the presence of a deposit insurer and immediate coverage of certain deposit liabilities.
- While the Panamanian resolution framework needs to comprehensively address resolution funding mechanisms, deposit insurance is a key component to support these resolution tools.

### Addressing moral hazard through DIS design
- Concerns about moral hazard from deposit insurance are acknowledged and valid, but:
  - these concerns are outweighed given the current moral hazard created by the explicit government guarantee granted to state-owned banks; and
  - they can be effectively addressed by proper DIS design.
- A well-designed DIS should build good incentives for depositors, bank owners, managers, supervisors, and politicians.
- DIS design elements to mitigate moral hazard (as described in the source) include:
  - ensuring large depositors, subordinated debtholders, and correspondent banks understand their funds remain at risk so they can exert market discipline;
  - making membership in the DIS compulsory; and
  - implementing risk-adjusted premiums.
- A well-designed DIS applicable to all general license banks, in conjunction with removal of the explicit government guarantee for state-owned banks, would extend the safety net evenly across similar banking institutions.

### Principles, scope, and key design features
- The DIS should comprehensively consider international principles and tailor a framework effective for Panama.
- The IADI Core Principles for Effective DISs provide an effective benchmark; considerations include:
  - means to mitigate moral hazard by setting appropriate deposit insurance limit levels and scope, and enforcing timely interventions;
  - scope of the insurer’s mandate;
  - governance over the deposit insurance function to ensure operational independence and exclusion of active bankers from governance structures;
  - the relationship with other safety net participants;
  - the insurer’s role in resolution planning and execution; and
  - cross-border considerations.
- A key consideration is the incorporation of deposit preference, particularly insured depositor preference, into the framework because treatment of deposit claims strongly influences bank resolution conduct and resolution plans.

### Complementary prudential measures and early intervention
- The financial safety net would be strengthened—and moral hazard concerns further mitigated—by adopting:
  - an early intervention and prompt corrective action framework; and
  - other prudential measures ensuring effective oversight and supervision of banks.
- Effective oversight and timely enforcement of remediation actions and early resolution of troubled banks are conditions precedent to an effective DIS.
- Legal requirements should increase the likelihood that a bank has adequate internal resources remaining to be recapitalized and funded to maintain critical functions during resolution.
- An early intervention framework should build upon SBP’s current supervisory processes and incorporate quantitative and qualitative triggers tied to supervisory responses with established processes and timeframes to minimize improper forbearance.

### Lender of Last Resort (LOLR) and temporary liquidity arrangements
- The July 2020 liquidity facility sought to provide temporary liquidity support during the COVID pandemic, and is not a solution to the lack of a LOLR facility provided by a public authority.
  - In July 2020, the MEF entered into a Trust Agreement with BNP, under which the state-owned commercial bank serves as trustee of funds intended to meet temporary liquidity needs faced by other private banks with a general license in Panama (state-owned banks are excluded from the facility).
  - The SBP established internal procedures and parameters to determine access to the temporary liquidity funds (SBP must corroborate or not object to use of the liquidity funds).
  - The facility was created to meet temporary liquidity needs resulting from the adverse effects of the COVID-19 pandemic; it is not a permanent LOLR facility supported by a public authority.
  - It was not used during the pandemic and is unlikely to be accessed going forward given the very high stigma risks associated with a bank approaching a commercial competitor at times of liquidity stress.
- In the absence of a central bank, Panama should explore alternative mechanisms to put in place an official LOLR function that would be useable in practice:
  - To be effective, solvent banks in need of temporary funding must be comfortable approaching the counterpart that would disburse the LOLR.
  - Stigma risks associated with LOLR requests are very high; involvement of a commercial bank to disburse LOLR funds is likely to raise insurmountable stigma risks.
  - Addressing these would likely require a public authority to assume the LOLR function.

### Coordination of reforms
- Current reforms to the bank resolution framework should move forward contemporaneously with adoption of changes to enhance key components of the financial safety net.
- Key pillars to establish: deposit insurance, LOLR, early intervention mechanisms and prompt corrective action framework, and resolution planning requirements.
- Panamanian authorities’ efforts to enhance and improve the current resolution framework should continue and be supported by equally significant changes to enhance Panama’s financial sector safety net.

### Box 2 — Fund for Economic Stimulus and Liquidity Program (summary of features and usage)
- The Fund for Economic Stimulus (FES) established in July 2020 consists of a trust owned by the MEF and operated by BNP in consultation with SBP.
- Two aspects:
  - Credit stimulus program:
    - USD 800 million collateralized, medium-term revolving credit facility (1–3 years).
    - BNP sets eligibility criteria, haircuts/discount rates, assesses collateral credit worthiness, and enforces risk mitigation.
    - As of end-December 2022, BNP has disbursed USD 121.5 million under this facility to 23 banks, representing 40 percent of the banking sector.
    - The interest rate for this program is higher than the interbank rate, given its longer tenure.
  - Liquidity facility:
    - Operated jointly by SBP and BNP as a revolving, short-term repo facility (up to 6 months), collateralized.
    - Interest rate fixed at 3.25 percent.
    - Commercial banks must submit a request to SBP; SBP assesses financial soundness and, if approved, BNP assesses collateral and disburses funds.
    - As of November 2022, no banks have applied for liquidity under the temporary facility established by the MEF and BNP.

### Appendix I — Current approach to bank resolution: four levels of corrective actions (high-level findings)
- Four main levels of corrective actions under the Banking Law (need not be implemented sequentially):
  a) Appointment of an advisor (Articles 124 through 130):
    - Superintendent may order appointment of one or several advisors when deterioration or weakness exists or may exist.
    - Advisor functions for up to thirty days (extendable for exceptional reasons).
    - Authorities continue to manage the institution during advisory period; advisor prepares a report and the Superintendent has 15 days to assess recommendations.
    - Advisor may be SBP staff (if not previously an inspector) or external; advisor must meet experience requirements and be independent of bank and audit firms.
  b) Seizure of operational and administrative control (Articles 131 through 140):
    - SBP may assume administrative and operational control in defense of depositors and creditors.
    - Temporary administrator appointed for up to 60 days (typically 30 days, extendable by 30 days for exceptional reasons).
    - Seizure cannot be deferred by objections; appeal does not stay execution.
    - Administrator powers include suspending or limiting payments and removing employees responsible for fraudulent or negligent activity.
    - At end of administration, Superintendent must decide among reorganization, compulsory liquidation, or return to directors/legal representatives.
  c) Reorganization (Articles 141 through 153):
    - Superintendent may appoint a reorganizer or reorganization board to exercise exclusive administration and control.
    - Shareholders and directors are barred from decision-making during reorganization.
    - No legal limit on duration; reorganizer must present a Reorganization Plan within 60 days from start of reorganization (plan preparation period not exceeding 30 days, extendable by up to 30 days).
    - Reorganizer’s legal functions include writing down losses against capital; appointing new administrators; authorizing issuance/sale of new shares; managing mergers; recommending compulsory liquidation; and other Superintendent-authorized powers.
    - Compulsory liquidation may be announced at any time during reorganization.
  d) Compulsory liquidation (Articles 154 through 183):
    - Superintendent issues a reasoned resolution ordering administrative liquidation and appoints one or more liquidators.
    - Liquidator or liquidation board exercises exclusive legal representation, administration, and control; is accountable to Superintendent.
    - Within 15 days of start of liquidation, deposits of up to US$10,000 will be paid out against liquid funds as far as available.
    - Liquidator responsible for verification of credit balances, liquidation of assets, allocation of payments, and resolution of disputes; process is administrative and governed by Banking Law and SBP regulations.

*Source: Excerpt from the IMF Panama country report chapter on financial sector safety net, deposit insurance, liquidity facilities, and bank resolution (content unit: 1panea2024005 - 69).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1panea2024005.pdf_