## EXECUTIVE SUMMARY

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### Major findings on institutional framework and capacity
- Since the 2012 FSAP, Panama has strengthened macroprudential institutions and instruments:
  - Established a dedicated Macroprudential Policy Committee (CPMP).
  - Updated the SBP’s decision making process for macroprudential policy issues.
  - Drafted a macroprudential policy strategy document.
  - Improved public communication via the Financial Stability Report (FSR).
  - Addressed data gaps.
- Assessment:
  - Institutional framework broadly meets principles of good design for the banking sector but needs further operationalization (regular discussions, strategy development, enhanced interagency cooperation).
  - The Superintendency of Banks of Panama (SBP) is the key institution; its objective (Article 5 of the Banking Law No. 9-1998, modified by No. 2-2008) is safeguarding the soundness and efficiency of the banking system.
  - The banking system accounts for over 90 percent of the financial sector’s total assets.
  - SBP leads in financial stability analysis and in the Financial Coordination Council (CCF) arrangements.

### Systemic risk monitoring and data
- SBP monitoring tools and outputs:
  - Semiannual Financial Stability Report (FSR), Monthly Banking Activity Report, analytical research papers.
  - Improved systemic risk dashboard and stress testing framework since last FSAP.
  - Sensitivity analysis framework guiding loan-loss provisioning and capital calibration.
  - Ongoing development of a solvency stress test model with IMF TA support.
- Data capabilities and gaps:
  - Internal borrower-level monthly database covering all bank loans, including loan-to-value ratio at origination, repayment performance, and total debt service payments per borrower.
  - Remaining gaps: household and corporate sector data, especially individual borrowers’ income; corporate loans by economic groups; debt service information.
- Monitoring enhancements recommended (high-level):
  - Further develop bank stress testing (credit, market, liquidity risks).
  - Complete data collection initiatives for borrower-level income and corporate-group loan data.
  - Expand FSR outreach (publish in English; make underlying data public).
  - Address shortfalls in the IPVN and develop price indices for existing houses and commercial real estate.
  - Strengthen Financial Stability Directorate capacity.

### Macroprudential toolkit and implementation
- Current tools and status:
  - Broad-based measures: leverage ratio limit, dynamic provisioning (DPR), ad hoc and specific provisioning requirements to maintain buffers and influence sectoral credit growth.
  - Roadmap to phase in a capital conservation buffer (CCB) starting in 2023 and a surcharge for domestic systemically important banks (D-SIBs).
  - Sectoral risk weights targeted at households and corporates (Rule 3-2016).
  - Banks complying with Basel III Liquidity Coverage Ratio (LCR) since 2022Q4.
  - SBP intends to evaluate Net Stable Funding Ratio (NSFR) and countercyclical capital buffer (CCyB) feasibility before deciding on implementation.
- Pandemic response:
  - SBP implemented temporary debt service relief framework, a 3 percent ad hoc provisioning requirement for benefited loans, and allowed banks to use dynamic provisioning buffers.
- Gaps and priority expansions:
  - Need borrower-based household tools (mortgage LTV caps; DTI or DSTI caps).
  - Need tools for corporate sector leverage and systemic concentration.
  - Need strategy with clear objectives and indicators to guide timing and modality of tool implementation.
  - Continue building experience evaluating intended and unintended policy effects.

### Key policy recommendations (selected, with authorities and timing)
- Institutional Framework for Macroprudential Policy
  - Regular and timely discussions on macroprudential issues: ensure SBP and CCF Macroprudential Policy Committees meet quarterly; SBP Board hold quarterly or semiannual macroprudential sessions (Authority: SBP and CCF. Timing: I).
  - Publish and finalize macroprudential policy strategy (Authority: SBP. Timing: ST).
  - Expand FSR use to explain policy decisions and underlying analysis; broaden FSR to entire financial sector (Authority: SBP and CCF. Timing: ST).
  - Allocate a nonvoting MEF role in the CCF and consider adding a “comply or explain” clause to CCF rules (Authority: CCF. Timing: ST).
- Systemic Risk Monitoring
  - Further develop bank stress test model suite (credit, market, liquidity) (Authority: SBP. Timing: ST).
  - Complete data sourcing of individual borrowers’ income and corporate loans by economic groups and debt service information (Authority: SBP. Timing: I).
  - Publish FSR in English and make underpinning data available on SBP webpage (Authority: SBP. Timing: ST).
  - Address IPVN shortfalls; develop existing-homes and commercial real estate price indices (Authority: SBP. Timing: ST, MT).
  - Strengthen Financial Stability Directorate capacity (Authority: SBP. Timing: MT).
- Implementation of Macroprudential Policy Tools
  - Establish borrower-based tools (caps on mortgage LTVs; caps on DTI or DSTI) (Authority: SBP. Timing: ST).
  - Expand toolkit to contain corporate-sector leverage and systemic risks (Authority: SBP. Timing: ST).
  - Develop a strategy with objectives and indicators to guide tool activation and timing (Authority: SBP. Timing: ST).
  - Build experience evaluating policy effects and unintended side effects (Authority: SBP. Timing: MT).
  - Publish LCR data (Authority: SBP. Timing: I).
  - Proceed with planned implementation of CCB and D-SIB surcharge and consider CCyB and NSFR (Authority: SBP. Timing: ST).

- Timing legend: I–Immediate (within 1 year); ST–short term (within 1–2 years); MT–medium term (within 3–5 years).

### Analytical and operational priorities
- Operationalize institutional framework:
  - Regular quarterly CPMP meetings and SBP Board macroprudential sessions.
  - Finalize and publish macroprudential policy strategy (planned by end of 2023).
  - Enhance interagency cooperation within CCF and consider MEF role.
- Data and indicators:
  - Close borrower-level data gaps (individual income, debt service details, corporate loans by economic groups).
  - Improve real estate price measurement: address IPVN shortfalls; develop existing-homes and commercial real estate indices.
- Toolkit expansion and calibration:
  - Implement borrower-based household tools and corporate-sector measures.
  - Continue phased implementation of Basel III elements (LCR in place since 2022Q4; CCB and D-SIB surcharge roadmap starting in 2023); evaluate CCyB and NSFR feasibility.
- Evaluation and communication:
  - Use FSR actively to explain policy and provide data; build ex post and ex ante evaluation capacity.

---

### Decision‑making structure and CPMP
- Organizational setup:
  - Financial Stability Directorate (FSD) is dedicated unit for macroprudential policy and analysis; collaborates with Risk Management Directorate (RMD) and Supervision Directorate.
  - CPMP created by Resolution SBP-ADM-0017-2021 (dated September 16, 2021).
- CPMP design:
  - Objectives: evaluate, analyze, and recommend macroprudential policies; intermediate objectives include mitigating excessive credit growth, maturity mismatches, risk concentration, moral hazard, and macroprudential threats from microprudential issues.
  - Chair: Superintendent.
  - Voting members: Financial Stability, Risk Management, and Supervision Directorates.
  - Nonvoting member: Directorate of Regulation.
  - Frequency: at least quarterly; FSD prepares agenda and minutes.
  - CPMP consultative; Superintendent raises proposals to SBP Board which makes ultimate decisions.
- CPMP meeting chronology: first meeting November 11, 2021; subsequent meetings on April 13, 2022; June 14, 2022; July 6, 2022; July 19, 2022; September 13, 2022; March 23, 2023; May 12, 2023.

### Financial sector structure (December 2022) — key statistics
- Aggregate:
  - Total institutions: 1,407.
  - Total assets: 150.5 USD billion.
  - Share of total assets: 100.0 percent.
  - Share of GDP: 212 percent.
- Banks:
  - Total banks: 56; assets 135.7 USD billion; share of total assets 90.1 percent; share of GDP 192 percent.
  - General license banks: 42; assets 119.4 USD billion; share of total assets 79.3 percent; share of GDP 169 percent.
    - State-owned: 2; assets 21.0 USD billion; share of total assets 14.0 percent; share of GDP 30 percent.
    - Domestically owned: 13; assets 39.0 USD billion; share of total assets 25.8 percent; share of GDP 55 percent.
    - Foreign-owned: 27; assets 59.4 USD billion; share of total assets 39.5 percent; share of GDP 84 percent.
  - International license banks: 14; assets 16.3 USD billion; share of total assets 10.8 percent; share of GDP 23 percent.
- Nonbank Financial Intermediaries:
  - Total NBFIs: 1,351; assets 14.8 USD billion; share of total assets 9.9 percent; share of GDP 20 percent.
  - Insurance and reinsurance: 54; assets 3.6 USD billion; share of total assets 2.4 percent; share of GDP 5 percent (data to March 2022).
  - Securities companies and pension funds: 179; assets 5.0 USD billion; share of total assets 3.3 percent; share of GDP 7 percent.
  - Cooperatives: 536; assets 2.4 USD billion; share of total assets 1.6 percent; share of GDP 3 percent.
  - Other financial entities: 582; assets 3.8 USD billion; share of total assets 2.5 percent; share of GDP 5 percent.
- Notes: bank data to June 2022; insurance data to March 2022.

### Ability to act (legal powers and information)
- Legal basis:
  - Article 11 of the Banking Law empowers SBP to establish necessary regulations to achieve Article 5 objectives—provides “hard powers” to introduce, repeal, or change calibration of instruments.
  - Chapter IX grants SBP right to request information from banks and banking groups.

### Cooperation and interagency arrangements
- Financial Coordination Council (CCF) (Law 67-2011):
  - Six domestic agencies as voting members; CCF Board chaired by Superintendent and meets quarterly.
  - CCF voting members include SBP, SMV, SSRP, IPACOOP, SIACAP, National Directorate of Financial Companies (Ministry of Commerce and Industry).
  - Nonvoting members include UAF and Technical Accounting Board (Ministry of Commerce and Industry).
  - CCF powers: Article 9 of Title I of Law No. 67 allows recommendations to members (“soft powers”); role has been mostly information sharing.
  - November 2021: creation of CCF technical committee on macroprudential policy to jointly assess systemic risks relevant for banks and NBFIs.

### Systemic risk monitoring and analytical capacity
- Dominance and tools:
  - Banking sector accounts for 90 percent of total financial sector assets; NBFIs 10 percent.
  - FSD leads macroprudential surveillance using heat map, cobweb diagram, solvency stress tests, and other indicators aligned with GEFR and IMF Guidance Note (2014).
- Stress testing and example:
  - Regular internal stress tests inform provisioning and capital calibration.
  - Example: August 2022 stress test led to a bank required to inject capital amounting to US$ 100 million.
- Data and capacity needs:
  - Macroprudential decisions should combine indicators, analytical tools, and expert judgment based on granular data.
  - Clear communication is essential to counteract inaction bias and enhance legitimacy.

### Interpretation of credit and systemic risk indicators
- FSD complements credit-to-GDP gap metrics with expert judgment on the credit cycle (auge de crédito) to assess systemic risks.
- Rationale: credit-to-GDP gap alone can give false signals (example: in 2020 indicator signaled a credit boom due to GDP decline while credit cycle showed contraction).
- Recommended analytical practice: explore alternative filtering techniques (e.g., Yogo (2008) and Hamilton (2018)) alongside HP filter methods.

### SBP/FSD institutional capacity and outputs
- Publications and initiatives:
  - SBP issues semiannual FSR, Monthly Banking Activity Report, research reports, and participates in regional Financial Stability Report.
  - Capacity-building and data projects:
    - Household income reporting consultation with banks; expected adoption by mid-2023 to enable DTI analysis.
    - More granular deposit information collection.
    - Project to group borrowers by economic groups for monthly surveillance; pilot scheduled for 2022Q4 with six banks selected.
    - “Financial analysis sheet” for banks to report corporate borrower financials.
- Stress testing enhancements with IMF TA: develop market and liquidity risk modules and enhance credit risk stress testing.

### Data availability, gaps, and recent improvements
- Household sector:
  - Basic indicators available: loans to households (growth rate, average number of loans, share of household loans), unsecured loans indicators.
  - Additional indicators: LTV of new mortgages, interest burden, delinquency rates.
  - Mortgage data specifics: mortgages for first homes and preferential-rate properties up to US$ 180,000; since 2011Q2 data on second-home mortgages available; buy-to-let not differentiated.
  - Borrower-level panel dataset: monthly coverage of all bank loans with repayment history, borrower demographics, loan amounts, interest, amortization, repayment performance.
  - New requirement: borrower income at origination to compute DTI and DSTI; debt-to-income reporting requirement introduced with timeline to receive information by June 2023.
- Corporate sector:
  - Indicators from corporate loan portfolios: growth by activity, corporate LTVs, interest charges, NPLs by activity, loans by company size and sector.
  - Foreign-currency transaction info allows FX exposure monitoring; 80 percent of foreign loans concentrated within North America and South America.
- Property price indices:
  - SBP produces IPVN (new houses) with noted deficiencies: covers only new homes, omits existing homes, does not differentiate market segments.
  - IPVN example: showed 6.5 percent increase in 2016 while middle- and high-end segments reportedly rose about 50 percent.
  - Inventory example from a major bank:
    - Above US$800,000: June 2017 (pre-COVID) 1,466 properties for sale; June 2022 (post-COVID) 620 properties for sale.
    - US$400,000 to US$800,000: June 2017 (pre-COVID) 2,700 properties for sale; June 2022 (post-COVID) 1,100 properties for sale.

### Recommendations and policy priorities (analytical and operational)
- Strengthen stress testing framework with IMF TA:
  - Refine credit risk module; develop market risk and interest income/expense modules; develop liquidity stress test simulation.
  - Use integrated stress tests to inform timing and calibration of macroprudential tools (e.g., phase-in of CCB and D-SIB surcharges, time-varying CCyB).
- Close data gaps:
  - Complete sourcing of individual borrowers’ income, corporate loans by economic groups, and debt service information.
  - Collect debt service to operating income for corporate borrowers.
- Communication and transparency:
  - Continue FSR press conferences; expand outreach (press releases, expert-level presentations with Q&A).
  - Publish FSR in English and make underlying data available on SBP webpage.
- Regular tailored analyses:
  - Make household indebtedness and real estate risk analyses recurring products reviewed by CPMP, SBP Board, and CCF.
  - Begin analytical work and databases for climate-related systemic risks.
- Real estate indicators:
  - Disaggregate IPVN by market segment; complete existing-homes index; introduce commercial real estate index; complement with inventory (quantity) indicators.

### Systemic risk oversight capacity and institutional context
- Financial Stability Directorate (FSD) is secretariat for CPMP but is relatively small for its responsibilities; recommended to strengthen capacity and resources.
- Macroprudential policy relies on strong microprudential supervision under Banking Law (Law 52-2008).
- Systemic risk definition: disruptions in provision of key financial services with serious real economy consequences due to interconnectedness via debt.
- Panama’s banking sector: total assets amounting to 192 percent of GDP; financial intermediaries contribute 6.5 percent to GDP on average each year.

### Mapping vulnerabilities to tools and principles
- Broad-based credit booms: address with capital buffers (CCB, leverage ratio).
- Household/corporate risks: targeted sectoral tools (sector-specific capital requirements; LTV, DTI, DSTI caps).
- Liquidity shocks: liquid asset buffers and restrictions on funding/maturity mismatch.
- D-SIB structural vulnerability: specific capital buffer, ICAAP, resolution and safety-net measures, large exposure limits, risk-weighting.
- Current SBP measures: dynamic provisioning, CFZ-specific provisioning (Rule 2-2014), sectoral risk weights (Rule 3-2016).
- Pandemic macroprudential measures have been phased out.

### Broad-based measures and recent regulatory progress
- Capital:
  - 2015: SBP revised regulatory capital in line with Basel III.
  - Rule 1-2015 minimums: 4.5 percent CET1; 6 percent Tier 1; 8 percent total risk-based capital.
  - Basel III operational and market risk charges implemented in 2017.
- Leverage ratio:
  - Introduced in 2015; defined as CET1 divided by total non-risk-weighted exposures; minimum set at 3 percent.
  - Phasing started from 3.75 percent CET1 and 5.25 percent Tier 1 through January 2019.
- DPR framework:
  - DPR(t) = αL(t) + βmax{∆L(t), 0} - SP(t)
    - α = 1.5 percent
    - β = 5 percent
    - L(t) = RWA for loans classified under the normal category
    - SP(t) = variation in the balance of specific provisions
  - DPR capped at 2.5 percent of qualifying RWA; floor 1.25 percent.
  - DPR disclosed as standalone item and maintained in addition to 8 percent regulatory minimum.
  - Drawdown restricted and subject to SBP decision.
- Pandemic actions:
  - SBP released 80 percent of dynamic provisions pre-emptively; only six banks used dynamic provisioning.
  - Rule 9-2020: 3 percent ad hoc provisioning requirement on gross modified loan portfolio.
  - SBP allowed use of dynamic provisions amounting to US$1.3 billion (about 2 percent of GDP); only six banks used them.
  - Total loan-loss provision increased to 148 percent of NPLs in 2020 (from 102 percent in 2019).
  - Total regulatory capital adequacy ratio averaged 15.7 percent in 2020.
- CFZ provisioning (Rule 2-2014):
  - Credit exposure to CFZ commercial loans: 3 percent of total loans (at reference time).
  - Delinquency rose from 0.3 percent to 15 percent between mid-2012 and mid-2018.
  - Specific provisioning schedule by indebtedness multiple (10 percent to 50 percent tiers) led to decline in CFZ commercial loans and NPLs.

### Basel III roadmap and planned measures
- CCB and D-SIB surcharge schedule:
  - Capital conservation buffer:
    - 2023: Issuance of regulation for CCB requirement.
    - December 2024: First stage of CCB (1.25 percent of common equity) to be established by banks.
    - December 2025: Second stage of CCB (additional 1.25 percent of common equity) to be established by banks.
  - D-SIB surcharge:
    - December 2024: Issuance of regulation on the systemic buffer.
    - December 2026: D-SIB surcharge (1.5 percent) to be fully implemented.
- SBP intentions:
  - Fully restore dynamic provisioning across all banks by March 2024.
  - Once DPR restored, consider implementing CCyB and whether it should replace or coexist with DPR.

### Resilience, CCyB reciprocity, and D-SIBs
- Panama lacks a lender of last resort; stronger capital buffers recommended to bolster resilience to foreign-origin shocks.
- Ten D-SIBs identified, accounting for two thirds of total banking system assets.
  - Six D-SIBs are Panamanian-owned (60 percent of total D-SIB assets).
- CCyB cross-border reciprocity:
  - Authorities activating CCyB expected to inform foreign counterparts; BCBS member jurisdictions must reciprocate for CCyB up to 2.5 percent.
- Strategy refinement:
  - Clarify objectives and interactions among DPR, CCB, CCyB, and D-SIB surcharge; assess DPR parameters when implementing CCB.
  - Consider positive cycle-neutral CCyB rates to hold buffers when risks are neither subdued nor elevated.

### Sectoral measures, exposures, and borrower-based tools
- Sectoral risk weights (selected examples):
  - Household:
    - 35 percent for main home if LTV < 80 percent and appraisal within past three years.
    - 50 percent for main home if LTV between 80 and 100 percent and appraisal within past 10 years.
    - 50 percent for second-home mortgages if LTV ≤ 80 percent and appraisal within past five years.
    - 50 percent for main home if LTV < 80 percent and appraisal > three years old.
    - 100 percent for all other mortgages.
  - Corporate:
    - 50 percent if pledged by commercial real estate used as collateral with LTV < 60 percent and appraisal within three years, or residential property collateral with LTV < 70 percent and appraisal within three years.
  - Footnote: risk weights recalibrated when properties are revalued (once every three years).
- Sectoral exposures and lending shares:
  - Mortgages: 33.9 percent of total lending.
  - Construction loans: 8.8 percent of total lending.
  - Mortgages + construction: 42.7 percent of total lending.
  - Personal consumption loans: 22.8 percent of total lending.
  - Bank lending by sector (In Percent): Public sector, 2.3; Financial and insurance, 2.6; Farming, 0.8; Cattle, 2.5; Fishing, 0.2; Mines and quarries, 0.1; Trade, 20.3; Industry, 5.6; Micro credit, 0.0.
- Mortgage and insolvency features:
  - Average mortgage LTV is high (above 80 percent) and increased since the COVID-19 pandemic.
  - Insolvency resolution takes on average 2.5 years.
- Recommended borrower-based measures:
  - Implement LTV caps and DTI/DSTI limits, differentiated by borrower risk profile (first-time buyers vs investors).
  - Develop ex ante quantitative frameworks and conduct counterfactual analysis to assess tool effectiveness.
  - For corporates, consider caps on growth of new corporate credit, share of new corporate loans, exposure caps for risky segments, and carefully calibrated debt-service-to-operating-income limits where feasible.
- Data prerequisites:
  - Address borrower-level data gaps to enable borrower-based tools completion of ongoing data collection initiatives is essential.

### Liquidity framework, NSFR, and structural resilience
- Panama lacks central bank and deposit insurance; liquidity tools are critical.
- Legal Liquidity Index (LLI) introduced 2009:
  - Banks required to hold liquid assets ≥ 30 percent of qualifying deposits.
  - Since introduction, liquid assets averaged about 60 percent of short-term liabilities.
- LCR:
  - LCR set at 100 percent for large banks and 50 percent for others.
  - Two-year compliance period starting 2018; extended to end-2022 due to pandemic.
  - By 2022Q3, all banks complied with LCR.
  - Recommendation: publish LCR data and submit to IMF Financial Soundness Indicators.
- NSFR:
  - SBP intends to evaluate feasibility and begin a calculation exercise for D-SIBs in 2024.
- Structural measures recommended:
  - Develop liquidity stress tests with IMF TA.
  - Medium-term: develop deposit insurance and official lender of last resort; until then, keep FES emergency liquidity window.
  - FES details: USD1 billion fund comprising two USD500 million facilities (emergency liquidity window and credit facility); liquidity facility structured as revolving short-term repo (up to 6 months), collateralized; interest rate fixed at 3.25 percent.

### Construction boom and macroeconomic context (Box 4 highlights)
- Construction boom features:
  - Panama had highest share of construction in GDP among peers with similar income.
  - Major projects included Panama Canal expansion, Tocumen Airport expansion, new skyscrapers, and a large copper mine.
  - Total investment reached up to 44 percent of GDP during the boom.
  - Real GDP grew by 6 percent annually during the boom.
  - Panama reached high-income status in 2017 (World Bank methodology).
  - Boom slowed in 2018; growth moderated to 3 percent in 2019.
- Financial sector vulnerabilities:
  - Banks vulnerable to slowdown in real estate and construction; 47 percent of bank lending in housing and construction.
  - External headwinds could reduce demand and property prices, increasing developer defaults and NPLs.
- Policy recommendations:
  - Use phased introduction of macroprudential tools (e.g., phased CCB) with clear objectives and indicators.
  - Be prepared to delay full implementation under exceptional circumstances to avoid procyclical tightening.
  - Build experience in ex post and ex ante policy evaluation and simulation; use findings to inform adjustments and gather stakeholder feedback.

*Source: IMF Technical Note and staff analysis (selected excerpts from 1panea2024006).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Major findings on institutional framework and capacity
- Since the 2012 FSAP, Panama has significantly strengthened its institutional framework and instruments for macroprudential policy-making, including:
  - Establishing a dedicated Macroprudential Policy Committee (CPMP).
  - Updating the SBP’s decision making process for macroprudential policy issues.
  - Drafting a macroprudential policy strategy document.
  - Improving public communication via the Financial Stability Report (FSR).
  - Addressing data gaps.
- The institutional framework broadly meets the principles of good design for the banking sector but needs further operationalization (regular discussions, strategy development, enhanced interagency cooperation).
- The Superintendency of Banks of Panama (SBP) is the key institution for monitoring and safeguarding financial stability; the SBP’s objective (Article 5 of the Banking Law No. 9-1998, modified by No. 2-2008) is safeguarding the soundness and efficiency of the banking system.
- The banking system accounts for over 90 percent of the financial sector’s total assets.
- The SBP leads in financial stability analysis and in the Financial Coordination Council (CCF) arrangements.

### Systemic risk monitoring and data
- SBP’s monitoring tools and outputs:
  - Semiannual Financial Stability Report (FSR), Monthly Banking Activity Report, and analytical research papers.
  - An improved systemic risk dashboard and stress testing framework since the last FSAP.
  - A sensitivity analysis framework covering banks’ credit risk to guide calibration of loan-loss provisioning and capital requirements.
  - Ongoing development of a solvency stress test model with IMF TA support.
- Data capabilities:
  - An internal database with granular data on all loans from all banks in Panama, including the loan-to-value ratio at origination, subsequent repayment performance for each loan, and total debt service payments for each borrower.
  - Remaining data gaps on household and corporate sectors; SBP initiatives aim to support borrower-based indicators (debt-to-income and debt service-to-income ratios).
- Recommendations to improve monitoring (high-level):
  - Further develop bank stress testing (credit, market, liquidity risks).
  - Complete initiatives to enhance data collection (individual borrowers’ income; corporate loans by economic groups; debt service information).
  - Expand FSR outreach (publish in English; make underlying data public).
  - Address shortfalls in the IPVN and develop price indices for existing houses and commercial real estate.
  - Strengthen Financial Stability Directorate capacity.

### Macroprudential toolkit and implementation
- Current toolset and implementation status:
  - Broad-based measures: limit on leverage ratio, dynamic provisioning, ad hoc and specific provisioning requirements to maintain buffers and influence sectoral credit growth.
  - A roadmap to guide gradual and formal implementation of a capital conservation buffer starting in 2023 and a surcharge for domestic systemically important banks (D-SIBs).
  - Sectoral risk weights targeted at households and the corporate sector.
  - Banks have been complying with the Basel III Liquidity Coverage Ratio (LCR) since 2022Q4.
  - SBP intends to evaluate the feasibility of a Net Stable Funding Ratio (NSFR) and a countercyclical capital buffer (CCyB) before deciding on implementation.
- Pandemic response and resilience:
  - During the COVID-19 pandemic, SBP implemented a framework for temporary debt service relief, a 3 percent ad hoc provisioning requirement for loans benefiting from such relief, and allowed banks to use dynamic provisioning buffers. These actions helped preserve banking system stability.
- Gaps and priority expansions:
  - Need to introduce borrower-based tools for households (caps on mortgage LTVs, caps on DTI or DSTI ratios).
  - Need tools to contain excessive leverage and systemic risk in the corporate sector.
  - Need a strategy with clear objectives and key indicators to guide timing and modality of implementing and activating each tool.
  - Continue building experience in evaluating intended and unintended policy effects.

### Key policy recommendations (excerpted from Table 1)
- Institutional Framework for Macroprudential Policy
  - 1. Regular and timely discussions on macroprudential issues. Ensure the SBP and CCF Macroprudential Policy Committees meet on a quarterly basis and the SBP Board holds regular (quarterly or semiannual) meetings dedicated to macroprudential policy (¶11). Authority: SBP and CCF. Timing: I.
  - 2. Macroprudential strategy. Continue improving the draft macroprudential policy strategy document and publish it within the planned timeframe (end of 2023) (¶12). Authority: SBP. Timing: ST.
  - 3. Public communications. Make greater use of the FSR to explain policy decisions and provide the underlying analysis, complemented by inputs from CCF member entities on their respective sectors, broadening the scope of the FSR to include the entire financial sector (¶13). Authority: SBP and CCF. Timing: ST.
  - 4. Interagency cooperation. Allocate a nonvoting member role for the MEF in the CCF, continue the data advancement exercise, and consider adding to the Internal Rules and Regulations (Resolución #1) of the CCF, or its underlying law as needed, a clause to issue recommendations to its members with a “comply or explain” mechanism (¶14). Authority: CCF. Timing: ST.
- Systemic Risk Monitoring
  - 5. Bank stress testing framework. Further develop the bank stress test model suite, e.g., with regard to credit risk, market risk, and liquidity risks (¶29). Authority: SBP. Timing: ST.
  - 6. Data gaps. Complete the ongoing initiatives to enhance data collection, in particular the data sourcing of individual borrowers’ income, and corporate loans by economic groups and debt service information to close the remaining data gaps in borrower-level data (¶29). Authority: SBP. Timing: I.
  - 7. Communications. Expand the FSR outreach by publishing the FSR in English (in addition to Spanish), given Panama’s importance as a regional financial hub, and make the data underpinning its analysis available to the public through the SBP webpage (¶29). Authority: SBP. Timing: ST.
  - 8. Real estate price index. Address the shortfalls in the IPVN, complete the project to develop a price index of existing houses, and establish an index of commercial real estate prices (¶31). Authority: SBP. Timing: ST, MT.
  - 9. Capacity for systemic risk oversight. Continue to strengthen the capacity of the Financial Stability Directorate to fulfill its macroprudential functions (¶32). Authority: SBP. Timing: MT.
- Implementation of Macroprudential Policy Tools
  - 10. Establish additional borrower-based macroprudential policy tools, such as caps on mortgage LTVs or on DTI or DSTI ratios to limit the buildup of vulnerabilities in the household segment (¶49). Authority: SBP. Timing: ST.
  - 11. Expand the macroprudential policy toolkit with tools to contain excessive leverage and systemic risks in the corporate sector (¶52). Authority: SBP. Timing: ST.
  - 12. Develop a strategy—with clear objectives and main indicators—to guide the appropriate timing and modality of implementing and activating each additional macroprudential policy tool (¶61). Authority: SBP. Timing: ST.
  - 13. Continue building experience in evaluating policy effects, including intended effects of any measures taken and any unintended side effects, to assess needs for policy adjustments (¶62). Authority: SBP. Timing: MT.
  - 14. Publish data on the newly implemented LCR (¶63). Authority: SBP. Timing: I.
  - 15. Proceed with the planned implementation of the CCB and D-SIB surcharge and consideration of the CCyB and NSFR (¶43, 58). Authority: SBP. Timing: ST.

- Timing legend (as in the source): I–Immediate (within 1 year); ST–short term (within 1–2 years); MT–medium term (within 3–5 years).

### Analytical and operational priorities
- Operationalize the institutional framework through:
  - Regular quarterly CPMP meetings and SBP Board macroprudential sessions.
  - Finalizing and publishing the macroprudential policy strategy (planned by end of 2023).
  - Enhancing interagency cooperation within the CCF and considering a role for the Ministry of Economics and Finance (MEF) in the CCF.
- Data and indicator development:
  - Close remaining borrower-level data gaps to support borrower-based tools: individual income, debt service details, corporate loans by economic groups.
  - Improve real estate price measurement: address IPVN shortfalls, develop price index of existing houses, establish commercial real estate price index.
- Toolkit expansion and calibration:
  - Implement borrower-based household tools (LTV caps, DTI/DSTI limits).
  - Implement corporate-sector measures to limit leverage and systemic concentration.
  - Continue phased implementation of Basel III elements (LCR in place since 2022Q4; CCB and D-SIB surcharge roadmap starting in 2023), and evaluate CCyB and NSFR feasibility.
- Evaluation and communication:
  - Use the FSR more actively to explain policy decisions and make data available.
  - Build experience evaluating policy impacts and unintended side effects to inform adjustments.

*Source: IMF Technical Note prepared by Julian Chow, Wim Fonteyne and Romina Kazandjian (selected excerpts).*

### 3.      The SBP has an effective decision making process, recently updated to include a

### 3.      The SBP has an effective decision making process, recently updated to include a

### Decision‑making structure and CPMP
- The Financial Stability Directorate (FSD) is the dedicated organizational unit for macroprudential policy and analysis; it collaborates closely with the Risk Management Directorate (RMD) and the Supervision Directorate.
- A consultative macroprudential policy committee (Comité de Políticas Macroprudenciales, CPMP) was created by Resolution SBP-ADM-0017-2021 (dated September 16, 2021).
- CPMP: objectives, membership, and modality are specified in the resolution; its key elements:
  - Objectives: Evaluate, analyze, and recommend macroprudential policies to minimize systemic risks and promote banking system stability. Intermediate objectives: (1) mitigate and avoid excessive credit growth and leverage; (2) mitigate and avoid excessive maturity mismatches or market illiquidity; (3) limit direct and indirect risk concentration; (4) limit systemic effects of inadequate incentives to reduce moral hazard; and (5) analyze microprudential issues that represent a macroprudential threat.
  - Chair: Superintendent.
  - Voting members: Financial Stability, Risk Management, and Supervision Directorates.
  - Nonvoting member: Directorate of Regulation.
  - Frequency of meetings: At least quarterly.
  - Agenda and minutes: FSD is responsible for preparing the meeting agenda and minutes.
- CPMP is consultative; the Superintendent decides on policy proposals to be raised to the SBP Board of Directors, which makes ultimate policy decisions.
- CPMP meeting chronology (as reported): first meeting on November 11, 2021; subsequent meetings on April 13, 2022, June 14, 2022, July 6, 2022, July 19, 2022, September 13, 2022, March 23, 2023, and May 12, 2023.

### Financial sector structure (December 2022)
- Aggregate figures:
  - Total institutions: 1,407.
  - Total assets: 150.5 USD billion.
  - Share of total assets: 100.0 percent.
  - Share of GDP: 212 percent.
- Banks: 56 institutions; total assets 135.7 USD billion; share of total assets 90.1 percent; share of GDP 192 percent.
  - General license banks: 42; assets 119.4 USD billion; share of total assets 79.3 percent; share of GDP 169 percent.
    - State-owned: 2; assets 21.0 USD billion; share of total assets 14.0 percent; share of GDP 30 percent.
    - Domestically owned: 13; assets 39.0 USD billion; share of total assets 25.8 percent; share of GDP 55 percent.
    - Foreign-owned: 27; assets 59.4 USD billion; share of total assets 39.5 percent; share of GDP 84 percent.
  - International license banks: 14; assets 16.3 USD billion; share of total assets 10.8 percent; share of GDP 23 percent.
- Nonbank Financial Intermediaries: 1,351 institutions; assets 14.8 USD billion; share of total assets 9.9 percent; share of GDP 20 percent.
  - Insurance and reinsurance: 54; assets 3.6 USD billion; share of total assets 2.4 percent; share of GDP 5 percent (data to March 2022).
  - Securities companies and pension funds: 179; assets 5.0 USD billion; share of total assets 3.3 percent; share of GDP 7 percent.
  - Cooperatives: 536; assets 2.4 USD billion; share of total assets 1.6 percent; share of GDP 3 percent.
  - Other financial entities: 582; assets 3.8 USD billion; share of total assets 2.5 percent; share of GDP 5 percent.
- Notes: bank data to June 2022; insurance data to March 2022. Source: SBP.

### Ability to act (legal powers and information)
- Legal basis: Article 11 of the Banking Law empowers the SBP to establish necessary regulations to achieve its objectives (Article 5), providing “hard powers” to introduce, repeal, or change calibration of policy instruments to safeguard banking system soundness and efficiency.
- Information powers: Chapter IX of the Banking Law grants the SBP the right to request information from banks and banking groups.

### Cooperation and interagency arrangements
- Financial Coordination Council (CCF) (established in Law 67-2011): six domestic agencies (voting members listed in Table 4) to strengthen information exchange and coordination on regulatory policies; the CCF Board is chaired by the Superintendent of Banks and meets quarterly.
  - CCF voting members include: Superintendency of Banks of Panama (SBP); Superintendency of the Securities Market (SMV); Superintendency of Insurance and Reinsurance (SSRP); Panamanian Autonomous Cooperative Institute (IPACOOP); System of Savings and Capitalization of Pensions of Civil Servants (SIACAP); National Directorate of Financial Companies of the Ministry of Commerce and Industry.
  - Nonvoting members include: Financial Analysis Unit (UAF); Technical Accounting Board of the Ministry of Commerce and Industry.
- CCF powers: under Article 9 of Title I of Law No. 67, can make recommendations to members (“soft powers”); role to date mostly information sharing.
- Progress: November 2021 decision to create a CCF technical committee to jointly assess systemic risks relevant for banks and NBFIs—the CCF Committee on Macroprudential Policy—helping to complement SBP’s macroprudential authority and mitigate potential regulatory leakages.
- Cross‑border cooperation: SBP participates in CCSBSO and GEFR and collaborates on regional Financial Stability Report.

### Assessment and policy recommendations (key points)
- Progress made on high‑priority IMF TA recommendations:
  - Establishment of CPMP.
  - Updated SBP decision making process on macroprudential policy.
  - Draft macroprudential policy strategy document produced (endorsed by CPMP on July 6, 2022).
  - Improved public communications via the semi‑annual Financial Stability Report (FSR).
  - Advances toward filling data gaps.
- Recommendations and suggested actions:
  - Continue regular and timely quarterly discussions on macroprudential issues by SBP and CCF macroprudential committees; SBP Board should hold regular meetings (quarterly and semiannually) dedicated to macroprudential policy and other topics as needed.
  - Publish the draft macroprudential policy strategy document within the planned timeframe, by end-2023.
  - Strengthen the strategy document by clarifying and tightening links between objectives, risk assessments, and policy tools; specify the set of core and additional indicators for each type of systemic vulnerability.
  - Elaborate the decision making process in the strategy document, including the role of the CPMP and collaboration with the CCF; share the strategy document with the public to counter “inaction” bias.
  - Use the FSR more to explain policy decisions and provide underlying analysis; link systemic risk analysis to policy objectives and consider ex post evaluation of measures.
  - Broaden FSR inputs to include CCF members’ sectoral analyses to extend coverage beyond the banking system.
  - Continue efforts to foster effective domestic interagency cooperation, including allocating a nonvoting role for the Ministry of Economy and Finance (MEF) on the CCF to facilitate legislation changes or fiscal cooperation when needed, while safeguarding agency independence.
  - Consider revising CCF Internal Rules and Regulations (Resolución #1) or underlying law to move from “soft power” to “semihard power” (e.g., permitting recommendations with a “comply or explain” clause) to address regulatory leakages requiring actions by other supervisors.

### Systemic risk monitoring and analytical capacity
- Financial system composition:
  - Banking sector dominates: banks account for 90 percent of total financial sector assets; nonbank financial firms account for 10 percent.
  - Among NBFIs, pension funds invest predominantly abroad; cooperatives account for 1.6 percent of total assets.
- Analytical approach:
  - Macroprudential surveillance is primarily the responsibility of the FSD, in close collaboration with RMD and Supervision Directorate.
  - Monitoring uses a set of analytical tools and data including a heat map of risks, a cobweb diagram, and solvency stress tests.
  - The heat map and cobweb diagram incorporate credit indicators (e.g., growth of credit, share of risky credit), banking sector indicators (e.g., solvency and liquidity indicators), and market indicators (e.g., volatility of sovereign bond yields, emerging markets bond index). Definitions are consistent with GEFR’s Regional Financial Stability Report and the IMF 2014 Guidance Note (including financial soundness indicators, credit-to-GDP and credit-to-GDP gaps, current account deficit, market-based indicators, and house price indices).
  - FSD conducts regular internal stress tests to assess capital adequacy and guide recalibration of loan‑loss provisioning and capital requirements; stress test outputs are inputs for supervision.
    - Example: Following a stress test conducted in August 2022, a bank was required to inject capital amounting to US$ 100 million.
  - FSD performs ad hoc focused research on vulnerabilities (e.g., household indebtedness, real estate) and presents findings to CPMP and CCF; some analyses are published on the SBP website.
- Data and capacity needs:
  - Macroprudential decisions should reflect “guided discretion,” combining indicators, analytical tools, and expert judgment based on granular data and strong analytical capacity.
  - Clear communication is essential to promote public understanding, counter inaction bias, and enhance legitimacy and accountability.

*Source: IMF staff summary of SBP materials and IMF TA findings as presented in the supplied content.*

### 18.       The FSD exercises expert judgment when interpreting risk indicators. As an example, in

### 18.       The FSD exercises expert judgment when interpreting risk indicators. As an example, in

### Interpretation of credit and systemic risk indicators
- The FSD augments credit-to-GDP gap metrics with expert judgment on the credit cycle (auge de crédito) to assess systemic risks and decide on activating macroprudential measures (Figure 3).
- Rationale: credit-to-GDP ratios or gap metrics alone can give false signals (example: indicator signaled a credit boom in 2020 during the pandemic due to a GDP decline, while the credit cycle showed a contractionary position).
- Recommended analytical practice: explore alternative filtering techniques (such as those developed in Yogo (2008) and Hamilton (2018)) to accompany standard HP filter methods.

### SBP/FSD institutional capacity and outputs
- The SBP presents analyses in the semiannual FSR, the Monthly Banking Activity Report, and research reports.
- Capacity-building initiatives and data/analytical projects:
  - Household income reporting: consultation with banks to establish a requirement to report the income level of household borrowers; expected adoption by mid-2023 to enable better measurement of household indebtedness and analysis by mortgage LTV ratios.
  - Nature of deposits: adapting systems to obtain more granular deposit information to analyze deposits per client and the economic activity origin of funds.
  - Borrowers by economic groups: Supervision Division project to group borrowers by economic groups (local and foreign) for monthly surveillance of exposures and provisioning.
- SBP stress testing: the SBP conducts stress tests focusing on solvency of individual Panamanian banks under adverse macro-financial scenarios; IMF Technical Assistance is underway to develop stress test modules for market and liquidity risks and to enhance credit risk stress testing.

### Communication of systemic risk assessments
- The SBP communicates systemic risk and vulnerabilities publicly via the annual FSR, launched with a public presentation by the Superintendent and shared on the SBP’s webpage (video recording available on YouTube).
- The FSR’s executive summary outlines macroeconomic and financial sector developments, vulnerabilities, and banking sector analysis (including stress testing).
- Suggested enhancements to the FSR:
  - Insert a discussion of policies, including macroprudential measures, to address identified risks (policy decisions currently discussed internally).
  - Discuss intersectoral linkages between banks and NBFIs, the government, households, nonfinancial corporations, and the external sector to identify spillover risks.
  - Provide ex post evaluation of macroprudential measures and periodic updates consistent with the macroprudential strategy to build policy credibility.

### Data availability, gaps, and recent improvements
- SBP collects financial soundness indicators and supervisory data from banks and periodically updates reporting forms or launches new surveys.
- Household sector data and indicators:
  - Basic indicators: loans to households (growth rate, average number of loans, share of household loans to total loans); unsecured loans (maturity, interest rates, delinquency rates, credit risk profile).
  - Additional indicators: LTV ratio of new mortgage loans, interest burden for households, delinquency rates.
  - SBP has data to analyze mortgages for first homes and mortgages with preferential interest rates for properties not exceeding US$ 180,000; since 2011Q2, data on mortgages for second homes are available. Buy-to-let mortgages are not differentiated in current mortgage data.
  - Borrower-level panel dataset: covers all bank loans at monthly frequency; includes repayments over time, borrower demographics, loan amount outstanding, interest, amortization, and repayment performance. FSD recently analyzed DSTI distribution using a sample of civil service employees.
  - New initiative: SBP plans to add borrower income at origination to compute DTI and DSTI ratios for new and existing loans.
  - A new debt-to-income ratio information reporting requirement has been introduced for banks; SBP set a timeline to receive this information by June 2023.
- Nonfinancial corporate sector data:
  - Indicators from banks’ corporate loan portfolios: growth in corporate lending by main economic activities, corporate LTV ratios, interest charges by activity (interest receivable/number of loans), NPLs and past-due loans by economic activity, loans by size of company and economic sector.
  - Information on transactions in foreign currencies (other than the US dollar) allows monitoring foreign exchange exposure of corporate borrowers; 80 percent of foreign loans are concentrated within North America and South America.
  - Initiatives to enhance corporate data:
    - Preliminary data request template to identify 100 economic groups; banks required to provide information based on Rule 6-2009 and Rule 4-2013. A pilot test was scheduled for 2022Q4; six banks were selected for the pilot.
    - A “financial analysis sheet” designed for banks to report audited or interim financial results of corporate borrowers to establish debt service and operating income information.
- Property price indices:
  - SBP produces a price index of new houses (Indice de Precios de Vivienda Nueva, IPVN) for selected central regions based on third-party provider data; deficiencies noted (Box 1).
  - SBP is resuming a project to produce a price index of existing houses (delayed by the pandemic). A commercial real estate price index is not available due to cost issues.
  - IPVN limitations: covers only new homes for sale, does not include existing homes, and does not differentiate market segments (low-, medium-, high-end), which can distort signals (example: IPVN showed a 6.5 percent increase in 2016 while middle- and high-end segments reportedly rose about 50 percent).
  - Complementary indicators recommended: disaggregate index by market segment, complete existing-homes price index, introduce commercial real estate price index when feasible, and complement price indices with quantity information (inventory of properties available for sale).
  - Inventory example from a major Panamanian bank:
    - Above US$800,000: June 2017 (pre-COVID) 1,466 properties for sale; June 2022 (post-COVID) 620 properties for sale.
    - US$400,000 to US$800,000: June 2017 (pre-COVID) 2,700 properties for sale; June 2022 (post-COVID) 1,100 properties for sale.

### Recommendations and policy priorities
- Enhance bank stress testing framework:
  - With IMF TA, develop remaining components of a bank stress test model suite to cover relevant drivers: refine credit risk module; develop and integrate a market risk module; develop interest income and expense module; cover other P&L drivers.
  - Develop a proper liquidity stress test simulation model (assumptions on deposit outflows, capacity to use liquid assets and inflows).
  - Use integrated stress test model suite to inform timing and calibration of macroprudential tools (e.g., phase-in of CCB and surcharges for D-SIBs, time-varying calibration of CCyB).
- Close data gaps and complete ongoing data collection initiatives:
  - Complete sourcing of individual borrowers’ income and corporate loans by economic groups and debt service information to strengthen household and corporate leverage monitoring.
  - Collect debt service (sum of all loan service commitments) to operating income for corporate borrowers by aggregating loan servicing outlays per firm.
- Communication and transparency:
  - Continue high-level FSR press conferences; expand outreach with press releases and expert-level presentations with Q&A for market analysts and financial journalists.
  - Consider publishing the FSR in English in addition to Spanish and make underlying data available on the SBP webpage.
- Regular tailored analyses:
  - Make analyses on household indebtedness and real estate risks recurring “products” regularly updated and reviewed by CPMP, SBP Board, and CCF.
  - Begin developing analytical frameworks, databases, and tools to assess systemic risks from climate change (risks likely to increase over time).
- Real estate indicator improvements:
  - Disaggregate IPVN into segments (low-, medium-, high-end homes).
  - Complete price index of existing houses and introduce a commercial real estate price index when feasible.
  - Complement price indices with quantity indicators (inventory) for cross-checking early warning signals.

*Source: 1panea2024006 (IMF).*

### 32.      The capacity for systemic risk oversight needs to be further strengthened. The Financial

### 32.      The capacity for systemic risk oversight needs to be further strengthened

### Systemic risk oversight capacity
- The Financial Stability Directorate is responsible for systemic risk oversight and acts as the secretariat for the CPMP.
- The Directorate is relatively small given responsibilities that include drafting the monthly Banking Report, Semiannual Financial Stability Report, ad hoc research on financial stability issues, and conducting stress tests for banks.
- The Directorate would benefit from further capacity building efforts, including development of staff knowledge and expertise on macroprudential matters and, as needed, an increase in resources (including staffing).

### Implementation of macroprudential tools: institutional context
- Macroprudential policy relies on good microprudential supervision.
- The SBP uses a combination of macroprudential and microprudential policies under the Banking Law (Law 52-2008).
- Macroprudential supervision: establish rules to prevent and mitigate systemic risks and increase resilience of the banking system.
- Microprudential supervision: focuses on soundness of each banking institution using a risk-based supervision approach with onsite and offsite examinations.
- Systemic risk is defined as the risk of disruptions in the provision of key financial services that can have serious consequences for the real economy, stemming from interconnectedness of financial institutions and the economy through debt.
- Panama’s banking sector: total assets amounting to 192 percent of GDP; financial intermediaries contribute 6.5 percent to GDP, on average, each year.

### Mapping vulnerabilities to tools (principles)
- Systemic risks from general credit boom and bust cycles: address with broad-based capital tools such as capital buffers and leverage ratio requirements.
- Household or corporate sector risks: require targeted sectoral tools such as sector specific capital requirements and caps on LTV, DTI, or DSTI ratios.
- Liquidity shock resilience: adequate liquid asset buffers and restrictions on funding structure or maturity mismatch.
- Structural vulnerability from D-SIBs: targeted prudential requirements (e.g., specific capital buffer for D-SIBs, introduction of ICAAP) and supervisory framework (e.g., resolution and safety net); other tools include large exposure limits and risk-weighting.
- Macroprudential tools currently in place at the SBP: dynamic provisioning, a specific provisioning requirement for exposures to borrowers from the CFZ, and sectoral risk weights.
- Macroprudential measures taken to address pandemic risks have been phased out.

### A. Broad-based measures: objectives and instruments
- Objective: build capital buffers during economic stability to absorb losses during downturns while maintaining credit provision.
- Broad-based macroprudential tools: CCyBs, dynamic loan loss provisioning requirements (DPRs), leverage ratios, caps on credit growth.
- Basel III CCyB: raised during credit booms and lowered during busts within the range of 0 and 2.5 percent of common equity Tier 1 (CET1).
- DPR: alternative to CCyB; requires loan-loss provisioning to cover expected losses (EL) over an average economic cycle; allows building countercyclical reserve during booms and drawing it down during downturns.
- Panama currently: has dynamic provisioning but no CCyB.
- Capital-based buffers particularly warranted given absence of a central bank able to react countercyclically to downturns.

### Leverage ratio and caps on credit growth
- Leverage ratio: capital measure (e.g., CET1) divided by an (unweighted) exposure measure (commonly total consolidated assets and off-balance sheet exposures); complements risk-based capital requirements.
- Caps on credit growth: used by some countries to reduce excessive credit growth; effective when other instruments unavailable or slow, but are blunt and prone to leakage.

### Recent regulatory progress (past decade)
- Capital:
  - SBP revised definition of regulatory capital in 2015 in line with Basel III.
  - Rule 1-2015 introduced minimums: 4.5 percent for CET1, 6 percent for Tier 1 and 8 percent for total risk-based capital.
  - Requirements extended to bank holding companies.
  - Basel III capital charges for operational and market risks implemented in 2017.
- Leverage ratio:
  - Introduced alongside 2015 capital definition.
  - Ratio defined as CET1 divided by total non-risk-weighted exposures, with the minimum requirement set at 3 percent.
- Phasing: The minimum capital requirements were gradually phased in, starting from 3.75 percent for CET1 and 5.25 percent for Tier 1, through January 2019.

### Dynamic provisioning (DPR) framework
- DPR formula: DPR(t) = αL(t) + βmax{∆L(t), 0} - SP(t)
  - α = 1.5 percent
  - β = 5 percent
  - L(t) = RWA for loans classified under the normal category
  - SP(t) = variation in the balance of specific provisions
- DPR caps and floors:
  - Capped at 2.5 percent of qualifying RWA
  - Subject to a floor of 1.25 percent of qualifying RWA
- Operational details:
  - Each bank calculates DPR quarterly based on quarterly change in risk-weighted loan exposures and quarterly variation in specific provisions.
  - Rule 4-2013: DPR “cannot be less than the amount established in the previous quarter, unless the decrease is the result of a conversion to specific provisions.”
  - DPR disclosed as a standalone item in the capital account and must be maintained in addition to the 8 percent regulatory minimum capital requirement.
  - Drawdown of DPR during a downturn is restricted and subject to a decision by the SBP.

### Pandemic response: use of DPR and ad hoc provisions
- SBP discretionary release: following onset of COVID-19, SBP released 80 percent of dynamic provisions as a pre-emptive measure.
- Only six banks used their dynamic provisioning during the pandemic.
- Ad hoc specific provisioning requirements used as contingency measures to boost resilience and respond to emerging vulnerabilities.

Examples of ad hoc provisioning:
- COVID-19 ad hoc provisioning (Rule 9-2020): mandated banks to create a provision equivalent to 3 percent of the gross modified loan portfolio.
- CFZ (Colón Free Zone) specific provisioning (Rule 2-2014): triggered by rising delinquency in CFZ commercial loans linked to the Venezuelan crisis.
  - Credit exposure to CFZ commercial loans: 3 percent of total loans (at the time referenced).
  - Delinquency rates rose from 0.3 percent of total CFZ commercial loans in mid-2012 to 15 percent by mid-2018.
  - Rule 2-2014: specific provisioning based on level of indebtedness (total liabilities divided by equity):
    - 3 to 4.9 times: 10 percent
    - 5 to 7.9 times: 15 percent
    - 8 to 12.9 times: 20 percent
    - Equal to or greater than 13 times, or having negative net equity: 50 percent
  - Following Rule 2-2014, total CFZ commercial loans and NPLs declined.

### Box: Management of the banking sector during the COVID-19 pandemic (key figures)
- Economic impact:
  - GDP contraction by 17.9 percent in 2020
  - Unemployment rate increased to 18.5 percent in September 2020 (from 7.1 percent in 2019)
- Debt service relief framework:
  - Modified loans not classified as NPLs.
  - Modified loans peaked at 47.6 percent of the local loan portfolio in July 2020 (from 38.8 percent in April 2020).
  - Framework extended until June 30, 2021.
  - Modified loans declined to 42.2 percent at end-2020.
- Use of DPR and ad hoc provisioning:
  - SBP allowed use of dynamic provisions amounting to US$1.3 billion (about 2 percent of GDP); only six banks used such provisions.
  - Ad hoc provisioning requirement: provision equivalent to 3 percent of gross modified loan portfolio.
  - Total loan-loss provision increased to 148 percent of NPLs in 2020 (from 102 percent of NPLs in 2019).
  - Total regulatory capital adequacy ratio in the banking sector averaged 15.7 percent in 2020.

### Basel III roadmap and planned measures
- Current status: Panama’s capital adequacy regulations do not include a Capital Conservation Buffer (CCB) nor a CCyB.
- SBP schedule to implement CCB and D-SIB surcharge:
  - Capital conservation buffer:
    - 2023: Issuance of regulation for the CCB requirement
    - December 2024: First stage of CCB (1.25 percent of common equity) to be established by banks
    - December 2025: Second stage of CCB (additional 1.25 percent of common equity) to be established by banks
  - D-SIB surcharge:
    - December 2024: Issuance of regulation on the systemic buffer
    - December 2026: D-SIB surcharge (1.5 percent) to be fully implemented

### SBP intention regarding CCyB and dynamic provisioning
- The SBP intends to fully restore dynamic provisioning across all banks by March 2024.
- Once dynamic provisioning is fully restored, the SBP will consider the possibility of implementing the CCyB and whether it may replace or coexist with the dynamic provisioning scheme.

*Source: 1panea2024006 - 32. The capacity for systemic risk oversight needs to be further strengthened. The Financial (IMF staff summary of chapter/section).*

### 43.      As Panama does not have a lender of last resort and its financial system could be at

### Panama: Macroprudential Framework and Sectoral Measures

### Resilience, Basel III tools, and D-SIBs
- Panama does not have a lender of last resort; stronger capital buffers are necessary to enhance system resilience to foreign-origin shocks.
- Implementation of Basel III capital-related macroprudential tools is recommended: CCB, CCyB, and surcharge for D-SIBs to increase loss-absorbing buffers, particularly given large exposures to real estate and construction.
- The SBP has identified ten D-SIBs, accounting for two thirds of total assets in the banking system.
- Six of these D-SIBs are owned by Panamanians (comprising 60 percent of total D-SIB assets).
- Dynamic provisioning and a CCyB have similar intended effects (mitigating procyclicality by building buffers during good times), with a key difference:
  - Dynamic provisioning operates on actual capital ratios.
  - CCyB is a capital buffer requirement and therefore influences actual bank capital ratio dynamics only indirectly.

### Cross-border considerations and CCyB reciprocity
- The FSAP systemic risk analysis found notable cross-bank interconnectedness and centrality of banks already assigned the D-SIB label—an argument for D-SIB surcharges beyond size alone.
- Jurisdictional reciprocity is an important feature of the CCyB for a host country with many branches of foreign banks:
  - An authority that activates the buffer in a jurisdiction is expected to promptly inform foreign counterparts; those authorities should require their banks to apply the buffer for exposures in that jurisdiction.
  - Reciprocity is mandatory for all BCBS member jurisdictions for a CCyB up to 2.5 percent.

### Strategy refinement and interaction of instruments
- The SBP should refine strategy for existing tools to reflect planned addition of Basel III capital tools and to prevent overlaps.
  - The SBP has a roadmap to implement the CCB and surcharge for D-SIBs and is considering the CCyB.
  - Clarifying main objectives of each tool is important (e.g., whether CCyB should complement or replace dynamic provisioning).
  - Assessment of dynamic provisioning parameters (floor and cap) would be useful to ensure alignment with objectives when CCB is fully implemented.
  - Consideration should be given to positive cycle-neutral CCyB rates and their role in the strategy document.

### Positive cycle-neutral CCyB rates (Box 3 summary)
- Objective: CCyB increases banking sector resilience in response to periods of excess aggregate credit growth; it is calibrated up during excess credit growth and released during downturns to reduce credit supply constraints.
- Country circumstances: CCyB implementation requires consideration of country-specific circumstances; some jurisdictions implement positive cycle-neutral CCyB rates to have a buffer when risks are neither subdued nor elevated.
- Indicator flexibility: Authorities can use a broad range of indicators (credit-to-GDP gap and other financial and macroeconomic metrics) to determine the cycle-neutral CCyB level.
- Experience: Positive cycle-neutral rates help ensure buffers are available for sudden shocks unrelated to the credit cycle (e.g., COVID-19); evidence shows buffer releases supported credit provision in some jurisdictions.

### Sectoral measures: tools and current SBP practice
- Two sets of sector-specific macroprudential measures:
  - Sectoral capital requirements: higher risk weights on exposures to households or corporates or additional capital requirements on specific economic sectors to increase loss-absorbing buffers and raise cost of capital.
  - Quantitative caps on borrowers’ indebtedness: limits on LTV, DTI, and DSTI ratios; caps on LTV and debt-service-to-operating-income for corporate borrowers.
    - Note: Broad use of debt servicing limits for corporate borrowers is uncommon due to industry leverage differences and risk of circumvention outside the banking sector.
- The SBP implemented sectoral risk weights in 2016 via Rule 3-2016; risk weights are determined by loan type, LTV ratio, and collateral features.
  - The SBP does not intend to adjust sectoral risk-weight parameters for mortgages and corporate loans in an active and time-varying manner.
- Sectoral risk-weight examples (Table 10):
  - Household Sector:
    - Thirty-five percent for the main home if the LTV ratio is less than 80 percent, with the appraisal completed in the past three years.
    - Fifty percent for the main home if the LTV ratio is between 80 and 100 percent, with the appraisal conducted within the past 10 years.
    - Fifty percent for mortgages on second homes, provided the LTV ratio is not greater than 80 percent and the appraisal conducted within the past five years.
    - Fifty percent for the main home if the LTV ratio is less than 80 percent and the appraisal conducted more than three years ago.
    - One hundred percent for all other mortgages.
  - Corporate Sector:
    - Fifty percent if pledged by commercial real estate used as collateral with an LTV ratio less than 60 percent and an appraisal conducted within the last three years, or if pledged by residential properties used as collateral with an LTV ratio less than 70 percent and an appraisal conducted within the past three years.
  - Footnote: The risk weights will be recalibrated when the properties underlying the mortgages are revalued (once every three years).

### Loan classification flexibility and pandemic response
- During COVID-19, the SBP initially allowed modified loans not to be classified as NPLs and established a specific loan classification regime (Rule 3-2021) based on loan service by affected borrowers and restructuring status.
- Loan service improved significantly as the economy rebounded:
  - Modified loans fell to 16.8 percent of total loans at the end of 2021 and to 2.7 percent in November 2022.
  - In January 2023, all remaining modified loans were reclassified according to the prepandemic regulation (Rule 4-2013).

### Sectoral exposures and borrower-based tools (recommendations)
- Banks’ exposures:
  - Mortgages comprise 33.9 percent of total lending.
  - Construction loans comprise 8.8 percent of total lending.
  - Combined, mortgages and construction loans comprise 42.7 percent of total lending.
  - Personal consumption loans comprise 22.8 percent of total lending.
  - Bank lending by sector (In Percent): Public sector, 2.3; Financial and insurance, 2.6; Farming, 0.8; Cattle, 2.5; Fishing, 0.2; Mines and quarries, 0.1; Trade, 20.3; Industry, 5.6; Micro credit, 0.0.
- Mortgage characteristics and risks:
  - The average LTV ratio of mortgages is high (above 80 percent) and has increased since the COVID-19 pandemic.
  - Insolvency resolution on average takes 2.5 years to resolve.
- Policy recommendations:
  - Complement existing sectoral risk weights with borrower-based measures (caps on mortgage LTVs or limits on DTI/DSTI ratios) to prevent household risk buildup.
  - Develop quantitative frameworks to assess effectiveness of borrower-based tools ex ante (i.e., conduct ex ante counterfactual analysis).
  - Implement LTV caps to contain cyclicality and property-market bubbles; differentiate caps by borrower risk profile (e.g., first-time buyers vs investors).
  - Implement DTI or DSTI limits to complement LTV caps; these indicators are more stable than property prices and can be broadened to include noncollateralized exposures.
  - Expand toolkit to address corporate sector systemic risks when capital buffers do not slow lending:
    - Potential tools include caps on growth rate of new corporate credit or share of new corporate loans in total new loans, and exposure caps for risky segments.
    - Consider caps on debt service to operating income for corporate borrowers where feasible, with careful calibration and evaluation of costs and benefits.
- Data and implementation:
  - Address borrower-level data gaps to enable borrower-based tools; ongoing data collection initiatives should be completed.
  - Table 11 core and additional indicators to monitor (selected examples):
    - Household tools core indicators: Household loan growth; Increasing house prices (nominal and real growth); House price-to-rent and house price-to-disposable income ratio; Increasing share of household loans to total credit.
    - Household additional indicators: Increasing house prices by region and by types of properties; LTV ratio; DTI ratio; DSTI ratio.
    - Corporate tools core indicators: Corporate loan growth; Increasing share of corporate loans to total credit; Increasing commercial property prices; Increasing commercial real estate credit; Increasing corporate leverage (debt-to-equity ratio); Corporate credit gap.
    - Corporate additional indicators: Increasing debt-service ratio; Average and distribution of DSTIs on commercial real estate loans; Average and distribution of LTVs on commercial real estate loans.

### Specific past macroprudential actions and rules
- Vehicle loans: SBP observed extension of vehicle loans from five years to nine years (average term of six years) by many banks in 2008; as a policy response the SBP increased the risk weight for vehicle loans with original or remaining term greater than five years to 125 percent (Rule 5-2008) from 100 percent to disincentivize longer tenures.
- Dynamic provisioning applies to foreign banks operating in Panama; it is reciprocated in that sense and covers Panamanian banks’ business abroad.

*Source: IMF staff analysis in the Panama Financial Sector Assessment (selected excerpts).*

### Box 4. Panama: The Construction Boom in Panama

### Box 4. Panama: The Construction Boom in Panama

### Construction boom and macroeconomic context
- Panama experienced a construction boom that produced the highest share of construction in GDP among peers with similar income levels.
- Major projects in the decade and a half preceding the COVID-19 pandemic included: expansion of the Panama Canal, expansion of Tocumen Airport, new skyscrapers in Panama City, and construction of one of the largest copper mines in the world.
- Total investment reached up to 44 percent of GDP during the boom.
- Real GDP grew by 6 percent annually during the boom period.
- Panama reached high-income country status in 2017 according to the World Bank classification methodology.
- The boom started to slow in 2018; economic growth moderated to 3 percent in 2019 as investment gradually slowed following completion of large public infrastructure projects.

### Financial sector vulnerabilities from construction exposure
- Banks are vulnerable to a slowdown in real estate and construction as the boom eases.
- External headwinds (global economic, geopolitical, and health-related) could reduce domestic demand and real estate prices, diminishing developers’ cash inflows and raising the possibility of debt defaults and rising NPL formation for banks.
- Bank lending concentration: 47 percent of bank lending is in housing and construction.

### Liquidity framework and metrics
- Panama lacks a central bank and deposit insurance; liquidity tools are therefore central to financial stability.
- Legal Liquidity Index (LLI) introduced by the SBP in 2009:
  - Banks are required to hold liquid assets of at least 30 percent of qualifying deposits.
  - Qualifying deposits include private deposits, bank deposits, and deposits from other financial institutions with a maturity up to 186 days; deposits received from parent banks are excluded.
  - Liquid assets are short-term assets with maturities below 186 days.
  - Since introduction, the banking sector’s liquid assets averaged about 60 percent of short-term liabilities, well above the 30 percent minimum.
  - Panama did not experience systemic liquidity shortages during the Global Financial Crisis or the COVID-19 pandemic.
- Basel III Liquidity Coverage Ratio (LCR) implemented by the SBP:
  - LCR set at 100 percent for large banks and 50 percent for others.
  - Banks were initially granted a two-year compliance period starting from 2018; timeline extended to end-2022 due to the pandemic.
  - By 2022Q3, all banks complied with the LCR requirement.
- Net Stable Funding Ratio (NSFR):
  - SBP intends to evaluate feasibility and plans to begin a calculation exercise for this ratio with D-SIBs in 2024 and gradually evaluate impact to guide subsequent regulation.

### Structural resilience and systemically important banks
- Ten Domestic Systemically Important Banks (D-SIBs) have been identified using indicators such as size, interconnectedness, cross-jurisdictional activities, complexity, and substitutability.
  - Collectively the D-SIBs account for two-thirds of total assets in the banking system.
  - Six of these D-SIBs (60 percent of total D-SIB assets) are owned by Panamanians.
- SBP aims to issue a regulation for a systemic buffer by end-2024 and to fully implement the D-SIB surcharge by end-2026.
- Interconnectedness among banks, including D-SIBs, is notable and motivates additional loss-absorbing cushions and supervision.

### Policy recommendations — Liquidity measures
- Develop liquidity stress tests (with IMF TA support) to determine whether banks have sufficient funding sources to withstand unexpected market disruptions, particularly for systemically important banks.
- Medium-term: develop a deposit insurance scheme to protect depositors and reduce run risk, and establish an official lender of last resort function to support sound banks with temporary liquidity shortfalls.
  - Until these reforms are implemented, keep the emergency liquidity window of the Fund for Economic Stimulus (FES) in place.
  - FES details: USD1 billion financial stability fund comprising two USD500 million facilities (an emergency liquidity window and a credit facility); liquidity facility structured as a revolving, short-term repo facility (up to 6 months), collateralized; interest rate fixed at 3.25 percent; commercial banks must submit requests to the SBP to access the line; SBP assesses financial soundness, BNP assesses collateral and disburses funds.
- Consider introducing the NSFR following the SBP’s evaluation under its regulatory roadmap.
- Publish LCR data: as banks have complied with the LCR requirement ahead of the end-2022 deadline, the SBP should publish the LCR indicator (in addition to the LLI indicator) and submit to the IMF’s Financial Soundness Indicators to build a time series and increase transparency.

### Policy recommendations — Structural and macroprudential tools
- Develop a strategy to guide the timing and modality of implementing and activating additional macroprudential policy tools, including clear objectives and main indicators to inform activation and communication with the public.
  - Example: phased-in introduction of the Countercyclical Capital Buffer (CCB) over several years to build resilience with minimal tightening effects.
  - Be aware that exceptional circumstances (e.g., the COVID-19 pandemic) could necessitate delaying full implementation to avoid procyclical tightening that discourages bank lending.
- Continue to build experience in evaluating policy effects:
  - Conduct ex post and ex ante policy evaluation (policy simulation) using main indicators specified in the strategy, including unintended side effects on private credit growth and real GDP growth.
  - Use evaluations to inform potential policy adjustments and consider feedback from market participants and international experiences.

*Source: Box 4. Panama: The Construction Boom in Panama (excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1panea2024006.pdf_