## 083101 - 1. Banking System ## Source details **Canonical URL:** [083101 - 1. Banking System](https://www.imf.org/-/media/files/publications/ofca/english/083101.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/083101.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/083101.pdf.json) --- ### Executive summary and mission - The assessment was carried out by an MAE-led team that visited Panama City from April 23 to May 5, 2001. - The mission conducted a stand-alone Module 2 assessment of Panama’s compliance with the Basel Core Principles (BCP), covering onshore and offshore sectors, under the IMF initiative for offshore financial centers (Module 2 described in SM/00/136 of June 23, 2000). - The mission held extensive discussions with the Superintendency of Banks (SB) staff, the Superintendent and SB’s board, several banks, accounting firms, the Ministry of Economy and Finance (MEF), Ministry of Commerce and Industry (MCI), the Superintendency of Insurance and the National Securities Commission. - The SB completed a Module 1 self-assessment (with IMF participation) in the fourth quarter 2000. ### Module 2 assessment: overall findings - Panama has achieved substantial progress toward a supervisory and regulatory framework that meets most international standards since the 1998 banking law. - The mission assessed Panama as compliant or largely compliant with 23 of the 25 Basel Core Principles. - Two principles were considered materially non-compliant: - BCP 16 (offsite monitoring): shortcomings in analysis of prudential factors and data quality. - BCP 5 (investment activities): weaknesses in analysis of investment activities and in processes for analyzing and approving bank mergers or other material transactions. - SB regulations issued and applied include: - requirement that banks and financial groups adopt internationally-accepted accounting and auditing standards; - a new capital adequacy framework in line with the Basel Capital Framework; - limits on loans and investments with related parties and single obligors; - improved internal risk management procedures for liquidity, interest rate and country risk. - SB promotes consolidated supervision, monitors foreign activities of Panamanian banks, and conducts onsite inspections of material subsidiaries (both domestic and foreign). ### Banking system structure and key statistics (as of end-2000) - Total bank assets: $38 billion. - Bank assets relative to GDP: approximately 3.8 times gross domestic product. - Number of banks: 80 general and international license banks (total system of 88 DFIs including representative offices). - Distribution of assets and institutions (December 31, 2000): - General license banks: Number of DFIs 54; Percent of total Assets 61.4; Assets $31; Percent of total Loans 81.6; Loans $18; Percent of total Deposits 85.8; Deposits $21; Percent of total 78.8. - Panama headquartered banks: Number 26; Percent of total Assets 29.5; Assets $21; Percent of total Loans 55.3; Loans $13; Percent of total Deposits 59.0; Deposits $13; Percent of total 46.8. - Branches of foreign banks: Number 18; Percent of total Assets 20.5; Assets $7; Percent of total Loans 18.6; Loans $4; Percent of total Deposits 18.1; Deposits $6; Percent of total 23.4. - Subsidiaries of foreign banks: Number 10; Percent of total Assets 11.4; Assets $3; Percent of total Loans 7.7; Loans $2; Percent of total Deposits 8.8; Deposits $2; Percent of total 8.6. - International license banks: Number 26; Percent of total Assets 29.5; Assets $7; Percent of total Loans 18.4; Loans $3; Percent of total Deposits 14.2; Deposits $6; Percent of total 21.2. - Representative offices: Number 8; Percent of total Assets 9.1; Assets N/A; Loans N/A; Deposits N/A. - Total Banking System: Number 88; Percent of total Assets 100.0; Assets $38; Percent of total Loans 100.0; Loans $21; Percent of total Deposits 100.0; Deposits $27. - Market share: General license banks hold 82 percent of system assets compared to 18 percent for international license banks. - System soundness indicators: - Equity-to-asset ratio for the system: 9.4 percent. - Equity-to-asset ratio for Panama-headquartered banks: 11.7 percent. - Regulatory minimum equity-to-asset (capital) requirement: 8 percent. - Nonperforming loans (NPLs): 2.7 percent of loans (compared with 2.4 percent at end-1999). - Provisions against loan losses: 74 percent of NPLs (equal to end-1999). - Return on average assets for the system: 1.3 percent in 2000 (compared to 1.4 percent in 1999). - Composition and licensing specifics: - Of 80 banks cited, 54 were general license (GL) banks and 26 were international license (IL) banks. - Six of the 26 International License banks are headquartered in Panama. - There are 28 foreign banks with assets of US$10 billion holding a general license and operating as subsidiaries or branches. - IL banks are restricted to business with non-residents (exception: participation in Panama’s interbank market). - Licensing requires a physical presence and allows general license eligibility to both local and foreign ownership. ### Financial condition and near-term outlook - Mission observed indications of a weakening credit environment; system-level NPLs are moderate but signs of deterioration in asset quality and capital levels among locally-headquartered banks merit further scrutiny. - Factors pressuring profitability in the medium term (12-18 months): - new loan classification regulation coming into full force in the latter part of 2001 requiring larger provisioning for loan losses; - diminished opportunities for prudent loan growth given the economic climate; - higher operating expenses from consolidation and staffing related to recent merger activity. - The mission largely did not review financial factors in depth during the visit. ### Anti-money laundering (AML) assessment and actions - The mission reviewed SB’s AML efforts focusing on banking and trust activities, principally BCP 15. - SB considered fully compliant with AML criteria in the core principles. - SB AML program features and resources: - a well-developed module to verify bank implementation of laws and regulations; - transaction sampling to ensure compliance with “know your customer” requirements and proper reporting of suspicious transactions to the appropriate law enforcement agency; - interaction with Panama’s financial intelligence unit (UAF), the center of the AML program. - Projected for 2001: SB to complete reviews of AML compliance in 38 examinations of banks and 17 examinations of trust companies. - Onsite examiner resources dedicated to AML: 20-30 percent. - Legislative and enforcement actions addressing FATF June 2000 criticisms: - Laws 41 and 42 (October 2000) expanded criminalization and reporting requirements and authorized supervisory powers. - Acuerdo 9–2000 implemented reporting types and fines ranging from 5,000 to 1 million balboas for non-compliance. - Acuerdo 10-2000 required each bank to have an AML compliance program and designate at least one compliance officer. - Executive Decree No. 163 authorized exchanges of information with foreign counterparts when an MOU is in place. - Outcome: FATF reviewed progress and removed Panama from FATF’s list of Non-Cooperative Countries or Territories (FATF vote on June 22, 2001). ### Supervisory and regulatory framework, governance and resources - SB institutional structure and powers: - Superintendency of Banks replaced the National Banking Commission following the 1998 banking law. - Board of Directors: five members appointed by the Executive Branch for a maximum of two eight-year terms; Board members may not currently be engaged in the banking business. - Superintendent: salaried, full-time public official appointed by the Executive Branch for a five-year term renewable one time; term does not coincide with that of the Executive Branch. - Board establishes general policies, norms, regulation and interpretations, approves SB’s budget and resolves appeals; Superintendent handles licensing, supervising and issuing orders and resolutions. - SB staffing and functions: - Professional staff of about 100 for onsite and offsite supervision. - 20 staff for legal and administrative duties and reviewing applications. - 10 staff for information systems. - Offsite surveillance by a bank analysis group focusing on prudential indicators and managerial reports, with emphasis on related party transactions. - Recent regulatory developments since 1998: - New regulations covering accounting and auditing standards, a Basel-like capital adequacy requirement, exposure limits on credit to related parties and single obligors, and risk management requirements for liquidity, interest rate and country risk. - Loan classification and provisioning regulations came into force beginning in the first quarter of 2001. - SB issued for public comment regulations on corporate governance, licensing procedures and limitations on investments in equity securities. - SB indicated a forthcoming regulation clarifying that banks are to limit equity holdings on a cumulative basis to 25 percent of capital. - Consolidated and cross-border supervision: - SB empowered to supervise economic groups and their bank and nonbank affiliates on a consolidated basis (Acuerdo 3–99). - SB requires offices of foreign banks to be subject to consolidated supervision by their home country supervisor. - SB pursued MOUs with 16 foreign jurisdictions: four agreed and signed, two deferred, others under active negotiation. ### Non-bank financial sectors and legal framework issues - Securities: - New securities law passed in July 1999 (Decree Law Number 1–1999) created the National Securities Commission (SC). - In 1999 there were 54 public offerings with a total value of $851 million, up from $593 million in 1998; $29 million in equity securities. - Insurance: - Superintendency of Insurance (SI) supervises domestic insurance companies; at end 1999 there were 24 insurance companies with assets of $627 million. - SI remained a bureau of the Ministry of Commerce and Industry under 1996 legislation and funding constrained by $2,500 annual fee per company. - Finance companies: - MCI responsible; at end-1999 there were 152 finance companies with total assets of $900 million or less than 3 percent of total bank assets. - Regulatory fee fixed at $200 annually per finance company; new legislation pending to improve resources. - Development banks: - National Mortgage Bank (BHN) and Agricultural Development Bank (BDA) created by special legislation; both troubled by inefficiency and inconsistent profitability. - Authorities moving to liquidate BHN; BDA to remain open with operations rationalized. - Bankruptcy law concerns: - Difficulties with the bankruptcy law impede effective resolution of distressed credits; absence of formal court-administered reorganization may lead to protracted workouts and weak outcomes. ### Memoranda of Understanding (MOUs) and on‑site inspections - MOUs intended for sharing supervisory information only; contrast with MOUs for law enforcement or prosecution. - SB prefers an MOU for information sharing and to allow onsite inspections, but an MOU is not a pre-condition for a foreign supervisor to conduct an onsite inspection; onsite inspections can be arranged case-by-case. - SB pursued MOUs with 16 foreign jurisdictions in the Western Hemisphere: four agreed and signed, two deferred, others under active negotiation. - Despite many foreign banks operating in Panama, SB reported receiving and consenting to only a few requests from foreign supervisors to conduct on-site inspections; in most consented cases SB engaged in a joint examination. ### Trust services: structure, concentration and supervision - At end-2000 there were 46 trust administrators with assets under administration of $1.1 billion. - The ten largest administrators hold 79 percent of aggregate assets. - The largest participant is one European bank that has over 30 percent of total administered assets. - By provider type: 30 banks; 5 law firms; 2 insurance companies; 9 other non-bank financial institutions. - SB supervision for trusts: - SB responsible for supervision of trust service providers; active supervision began in the fourth quarter 2000 after new legislation. - SB created a specialized Trust Unit in late 2000 and prepared an inspection procedures manual. - Executive Decree #16 (as amended) grants powers including fines up to B/.50,000 and powers to suspend or cancel trust licenses. ### Assessment of prudential standards and selected Principle‑by‑Principle findings (highlights) - Overall BCP assessment: Compliant or largely compliant with 23 of 25 Principles; material non-compliance on BCP 16 (off-site monitoring) and BCP 5 (investment activities) with remediation efforts underway. - Principle 1 (objectives, independence, legal framework, enforcement, protections, information sharing): - SB assessed Compliant for objectives, independence, legal framework and enforcement powers. - Principle 1 (5) Legal protection for supervisors: Largely compliant; Executive Decree 49 of 1998 establishes a veracity presumption but Banking Law lacks statutory protections for litigation costs. Recommendation: amend Banking Law to provide legal protections and allow reimbursement for litigation costs; interim measures suggested. - Principle 3 (Licensing): Largely compliant—Acuerdo 4-81 is obsolete; SB issued a new Licensing regulation for public comment and should complete internal procedures for evaluating licenses, mergers and acquisitions. - Principle 5 (Investment Criteria): Materially non-compliant—lack of aggregate limitation on equity security holdings beyond 25 percent per non-bank enterprise; potential combined exposure up to 50 percent to a single party (25 percent debt + 25 percent equity). Recommendations: - revisit treatment of equity investments where there is not control (consider deduction from capital per Acuerdo 5-98) or apply larger risk-weights; - require more in-depth analysis for bank purchases of other banks (effects on prudential indicators, management competency, legal and market/public interest). - Principle 6 (Capital Adequacy): Compliant—Article 45 sets legal minimum of 8 percent risk weighted capital; Acuerdo 5-98 models Basel methodology; SB may increase minimum and require remedial steps where below minimum. - Principle 8 (Loan Evaluation): Largely compliant—Acuerdo 6-2000 and Acuerdo 7–2000 set classification and provisioning consistent with international standards; SB implementing “Central de Riesgos” scheduled fully operational in the first quarter 2002; recommendation to expand examination guidelines for specialized credit risks. - Principles 9–11 (Large exposures, Connected lending, Country risk): Generally Compliant or Largely compliant with clear limits (single borrower limit 25 percent of consolidated capital; related party limits: 5 percent individual, aggregate 75 percent) and monitoring. Recommendation: require arm’s-length treatment and Board approval for related party transactions above certain amounts. - Principle 12–13 (Market and other risks): Largely compliant—guidance exists (Resolution 2–2000 for interest rate risk; Acuerdo 2-2000 for liquidity), but gaps include exclusion of affiliate deposits in liquidity formula, limited foreign exchange reporting, and need for flexible guidelines and periodic regulatory information on FX instruments. - Principle 14 (Internal controls): Largely compliant—SB requires compliance officers and draft Corporate Governance regulation issued for public comment; recommendation to finalize corporate governance and internal control standards. - Principle 15 (Money laundering): Compliant—Law No. 42 of 2000 and Acuerdos 9–2000 and 10–2000 impose KYC, reporting and AML program requirements; SB dedicates 20-30 percent of exam resources to AML. - Principle 16 (On-site and off-site supervision): Materially non-compliant—off-site analysis weak, data quality issues, inadequate manuals, limited specialization and absence of an early warning/rating system. Recommendations: - complete off-site operating manual and standard reporting package; - focus on quality over quantity of data, develop peer groups and core indicators; - implement specialist training (information systems, treasury, derivatives); - include specific on-site modules (commercial real estate, loans to Financieras, agriculture, loans to Economic Groups) and periodic assessments of exposures to large Economic Groups. - Principle 17 (Bank management contact): Largely compliant—SB should establish policy for high-level contacts and present on-site results to boards of larger banks and banks with significant deficiencies. - Principle 20 (Consolidated supervision): Largely compliant—legal framework satisfactory; recommendation to make consolidated statements the key tool for supervision and analyze the economic group as a single organization. - Principle 22 (Remedial measures): Largely compliant—SB has enforcement powers but lacks internal guidelines for remedial actions and contingency planning for significant failures. Recommendation: draft internal guidelines including informal communications, MOUs with boards, appointment of Advisors, Orders to Cease and Desist, and mechanisms to transfer deposits up to the $5,000 preferential amount in liquidation situations. - Principles 23–25 (Global consolidated supervision, cooperation, equal treatment of foreign banks): Largely compliant to Compliant—SB has powers to supervise foreign activities; signed MOUs with Costa Rica, Ecuador, El Salvador and Peru and negotiating others; recommends collecting country-by-country data and implementing on-site exams abroad and closer cooperation with host supervisors. ### Capital haircut treatment and concentration concerns - Acuerdo 5-98 requires deduction from capital for investments in non-financial subsidiaries; no capital haircut required for other equity investments. - Concern: 25 percent single borrower lending limit and 25 percent limitation on investments in a single enterprise are not inter-related, potentially allowing combined exposure of 50 percent to one counterparty. - Recommendation: SB consider applying more consistent capital haircut treatment for all equity investments and analyze the combined exposure issue in detail; any broadened haircut approach should allow a gradual transition. ### Key supervisory recommendations (summary) - Finalize and issue updated Licensing and Corporate Governance regulations. - Strengthen off-site monitoring: implement new information system, focus on qualitative analysis, reduce reporting frequency for non-critical items to allow deeper analysis, and establish peer groups and a core set of high-quality indicators. - Complete and deploy “Central de Riesgos” by first quarter 2002 and use it to enhance loan evaluation and provisioning reviews. - Revise liquidity regulations to address the exclusion of affiliate deposits and account for undrawn commitments. - Clarify treatment and limits for equity investments; consider aggregate limits, deduction from capital or higher risk-weights. - Develop internal remedial guidelines and contingency plans for distressed banks, including mechanisms for depositor protection up to the $5,000 preferential amount. - Continue to expand consolidated supervision practices, MOUs with foreign supervisors, and targeted on-site inspections of foreign subsidiaries. - Maintain strong AML supervision while rebalancing inspection resources so risk-oriented safety-and-soundness examinations remain central. *Source: IMF MAE-led Module 2 assessment mission to Panama City (April 23–May 5, 2001) and Superintendency of Banks data as presented in the Module 2 assessment.* ### 1. Banking System....................................................................................................... ### 083101 - 1. Banking System ### Executive summary and mission - The assessment was carried out by an MAE-led team that visited Panama City from April 23 to May 5, 2001. - The mission conducted a stand-alone Module 2 assessment of Panama’s compliance with the Basel Core Principles (BCP), covering onshore and offshore sectors, under the IMF initiative for offshore financial centers (Module 2 described in SM/00/136 of June 23, 2000). - The mission held extensive discussions with the Superintendency of Banks (SB) staff, the Superintendent and SB’s board, several banks, accounting firms, the Ministry of Economy and Finance (MEF), Ministry of Commerce and Industry (MCI), the Superintendency of Insurance and the National Securities Commission. - The SB completed a Module 1 self-assessment (with IMF participation) in the fourth quarter 2000. ### Module 2 assessment: overall findings - The assessment validates that Panama has achieved substantial progress toward a supervisory and regulatory framework that meets most international standards since the 1998 banking law. - The mission assessed Panama as compliant or largely compliant with 23 of the 25 Basel Core Principles. - Two principles were considered materially non-compliant: offsite monitoring (BCP 16) and investment activities (BCP 5), showing shortcomings in analysis of financial factors. - The SB has issued and applies regulations including: - requirement that banks and financial groups adopt internationally-accepted accounting and auditing standards; - a new capital adequacy framework in line with the Basel Capital Framework; - limits on loans and investments with related parties and single obligors; and - improved internal risk management procedures for liquidity, interest rate and country risk. - The SB promotes consolidated supervision and monitors foreign activities of Panamanian banks, conducting onsite inspections of material subsidiaries (both domestic and foreign). Local offices of foreign banks receive similar supervisory treatment to locally headquartered banks, including those holding international licenses. ### Banking system structure and key statistics (as of end-2000) - Total bank assets: $38 billion. - Bank assets relative to GDP: approximately 3.8 times gross domestic product. - Number of banks: 80 general and international license banks (description later notes total system of 88 DFIs including representative offices). - Distribution of assets and institutions (Table 1 summary, December 31, 2000): - General license banks: Number of DFIs 54; Percent of total Assets 61.4; Assets $31 (billion); Percent of total Loans 81.6; Loans $18 (billion); Percent of total Deposits 85.8; Deposits $21 (billion); Percent of total 78.8. - Panama headquartered banks: Number 26; Percent of total Assets 29.5; Assets $21; Percent of total Loans 55.3; Loans $13; Percent of total Deposits 59.0; Deposits $13; Percent of total 46.8. - Branches of foreign banks: Number 18; Percent of total Assets 20.5; Assets $7; Percent of total Loans 18.6; Loans $4; Percent of total Deposits 18.1; Deposits $6; Percent of total 23.4. - Subsidiaries of foreign banks: Number 10; Percent of total Assets 11.4; Assets $3; Percent of total Loans 7.7; Loans $2; Percent of total Deposits 8.8; Deposits $2; Percent of total 8.6. - International license banks: Number 26; Percent of total Assets 29.5; Assets $7; Percent of total Loans 18.4; Loans $3; Percent of total Deposits 14.2; Deposits $6; Percent of total 21.2. - Representative offices: Number 8; Percent of total Assets 9.1; Assets N/A; Loans N/A; Deposits N/A. - Total Banking System: Number 88; Percent of total Assets 100.0; Assets $38; Percent of total Loans 100.0; Loans $21; Percent of total Deposits 100.0; Deposits $27. - Market share: General license banks hold 82 percent of system assets compared to 18 percent for international license banks. - System soundness indicators: - Equity-to-asset ratio for the system: 9.4 percent. - Equity-to-asset ratio for Panama-headquartered banks: 11.7 percent. - Regulatory minimum equity-to-asset (capital) requirement: 8 percent. - Nonperforming loans (NPLs): 2.7 percent of loans (compared with 2.4 percent at end-1999). - Provisions against loan losses: 74 percent of NPLs (equal to end-1999). - Return on average assets for the system: 1.3 percent in 2000 (compared to 1.4 percent in 1999). - Composition and licensing: - Of 80 banks cited, 54 were general license (GL) banks and 26 were international license (IL) banks. - Six of the 26 International License banks are headquartered in Panama. - There are 28 foreign banks with assets of US$10 billion holding a general license and operating as subsidiaries or branches. - IL banks are restricted to business with non-residents (exception: participation in Panama’s interbank market). - Licensing distinguishes Panama from many OFCs by requiring a physical presence (an office with local staff) and allowing general license eligibility to both local and foreign ownership. ### Financial condition and near-term outlook - The mission observed indications of a weakening credit environment; while system-level NPLs are moderate, signs of deterioration in asset quality and capital levels among locally-headquartered banks merit further scrutiny. - Factors pressuring profitability in the medium term (12-18 months): - new loan classification regulation coming into full force in the latter part of 2001 requiring larger provisioning for loan losses; - diminished opportunities for prudent loan growth given the economic climate; - higher operating expenses from consolidation and staffing related to recent merger activity. - The mission largely did not review financial factors in depth during the visit. ### Anti-money laundering (AML) assessment - The mission reviewed SB’s AML efforts focusing on banking and trust activities, following BCP methodology, principally BCP 15. - The SB was considered fully compliant with the AML criteria in the core principles. - SB’s AML program features: - a well-developed module to verify bank implementation of laws and regulations; - transaction sampling to ensure compliance with “know your customer” requirements and proper reporting of suspicious transactions to the appropriate law enforcement agency; - interaction with Panama’s financial intelligence unit, the center of the AML program. - Resource commitment: - Projected for 2001: SB to complete reviews of AML compliance in 38 examinations of banks and 17 examinations of trust companies. - Onsite examiner resources dedicated to AML: 20-30 percent. - Outcome related to international scrutiny: - Panama had been listed as a “non-cooperative” country in the fight against money laundering by the Financial Action Task Force (FATF) in June 2000. - Following corrective actions by the authorities and the industry, the FATF reviewed progress and subsequently removed Panama from FATF’s list of Non-Cooperative Countries or Territories. ### Supervisory and regulatory framework, governance and resources - SB institutional structure and powers: - The Superintendency of Banks replaced the National Banking Commission following the 1998 banking law. - Powers are divided between a Board of Directors (five members appointed by the Executive Branch for a maximum of two eight-year terms; Board members may not currently be engaged in the banking business) and the Superintendent (salaried, full-time public official appointed by the Executive Branch for a five-year term renewable one time; term does not coincide with that of the Executive Branch). - The Board establishes general policies, norms, regulation and interpretations, approves SB’s budget and resolves appeals; the Superintendent handles licensing, supervising and issuing orders and resolutions. - SB staffing and functions: - Professional staff of about 100 for onsite and offsite supervision. - 20 staff for legal and administrative duties and reviewing applications. - 10 staff for information systems. - Offsite surveillance by a bank analysis group focusing on prudential indicators and managerial reports, with emphasis on related party transactions. - Regulatory developments since 1998: - New regulations covering accounting and auditing standards, a Basel-like capital adequacy requirement, exposure limits on credit to related parties and single obligors, and risk management requirements for liquidity, interest rate and country risk. - Loan classification and provisioning regulations that came into force beginning in the first quarter of 2001. - Since the mission visit, SB issued for public comment regulations on corporate governance, licensing procedures and limitations on investments in equity securities. - The Superintendent commented that foreign exchange risk is low given the use of the dollar as currency, lessening need for specific supervisory guidance on foreign exchange exposure. - SB indicated a forthcoming regulation clarifying that banks are to limit equity holdings on a cumulative basis to 25 percent of capital. - Consolidated and cross-border supervision: - SB is empowered to supervise economic groups and their bank and nonbank affiliates on a consolidated basis, including requiring audited financial statements and other reporting. - Policy work remains warranted on which specialized financial and nonfinancial activities should be permitted within a bank or bank subsidiary. - SB requires offices of foreign banks to be subject to consolidated supervision by their home country supervisor. - SB has pursued memoranda of understanding (MOU) with 16 foreign jurisdictions; of these, four have been agreed and signed, two have been deferred, and the others are under active negotiation. ### Non-bank financial sectors and legal framework issues - Insurance, securities and other non-bank financial sectors were not included in Module 2 assessment because they are small relative to the banking system. - The mission observed apparent scarcity of resources for supervision in insurance and finance companies. - Bankruptcy law concerns: - Difficulties with the bankruptcy law pose concerns for effective resolution of distressed credits. - Several bankers referenced the absence of a formal mechanism for court-administered reorganization; liquidation often appears to be the only alternative, with protracted workouts and weak outcomes. *Source: IMF MAE-led Module 2 assessment mission to Panama City (April 23–May 5, 2001) and Superintendency of Banks data as presented in the Module 2 assessment.* ### 28. The MOUs are intended for the sharing of information for supervisory purposes, ### 083101 - 28. The MOUs are intended for the sharing of information for supervisory purposes, ### Memoranda of Understanding (MOUs) and on‑site inspections - MOUs are intended for the sharing of information for supervisory purposes only and contrast with MOUs intended to facilitate information flows for law enforcement or crime prosecution purposes. - The Superintendency of Banks (SB) prefers an MOU for information sharing and to allow onsite inspections, but an MOU is not a pre-condition to conducting an onsite inspection by a foreign supervisor; onsite inspections can be arranged on a case-by-case basis. - Arrangements for onsite inspections set out guidance on use of information and stipulate that information obtained be for supervisory purposes only. - There is precedent for allowing an onsite inspection by a foreign supervisor without an MOU in place. - The SB has pursued MOUs with 16 foreign jurisdictions in the Western Hemisphere: four have been agreed and signed, two have been deferred, and all others are under active negotiation. - Despite the large number of foreign banks operating in Panama, especially from Europe and North America, the SB reports that it has only received (and consented to) a few requests from foreign supervisors to conduct on-site inspections; in most consented cases the SB engaged in a joint examination with the foreign supervisor. ### Prior assessments and international rankings - Financial Stability Forum (FSF) assessment (May 2000): - Panama was categorized in Group III along with 24 other countries and territories. - Group III was characterized as jurisdictions “having a low quality of supervision, and/or being non-cooperative with onshore supervisors, and with little or no attempt being made to adhere to international standards.” - The FSF groupings were based on a 1999 survey of impressions of supervisors and regulators in 27 onshore jurisdictions that considered 42 offshore financial centers. - The authorities expressed disappointment with the FSF characterization and noted important developments since 1998 that they felt were not appropriately considered. - Mission team view: - The SB has achieved very favorable results towards meeting international standards for supervision of its locally and foreign-controlled banks and is expected to continue strong commitment. - The SB has an effective program for supervision of foreign banks operating in Panama and good mechanisms to ensure foreign supervisors are not inhibited from carrying out consolidated supervision. - The SB demonstrates good cooperation with home country supervisors and is an active participant in the Offshore Group of Bank Supervisors. - Advancements include receipt of information on foreign activities of Panamanian banks and onsite inspections of foreign subsidiaries. - The SB publishes monthly and quarterly financial information on a bank-by-bank and system basis on its website, facilitating monitoring by home country supervisors. ### Financial Action Task Force (FATF) and anti‑money laundering (AML) actions - FATF June 2000 criticism listed Panama as “non-cooperative” with four principal shortcomings identified: - (i) failure to criminalize money laundering for crimes other than drug trafficking; - (ii) inefficient reporting of suspicious transaction reports to competent authorities; - (iii) overly restrictive rules for international information exchange; - (iv) civil law provisions that impeded identification of true beneficial owners of trusts. - Authorities, with strong industry support, enacted new legislation responsive to FATF criticisms, including: - Expanded SB authority to examine anti-money laundering compliance by trust companies, giving SB access to customer information for trust service providers similar to banks. - Broad authority for the SB to use means necessary to ensure banks and trust service providers comply with the law, including authority to issue regulations intended to deter money laundering. - The SB and government worked actively to implement legislation passed in the fourth quarter 2000. - On June 22, 2001, the FATF voted to remove Panama from its list of non-cooperative countries and territories. ### Self‑assessment (Module 1) and preparatory work - The SB completed in October 2000 a self-assessment against the Basel Core Principles (BCP) under Module 1 of the Offshore Financial Center (OFC) initiative. - The self-assessment was assisted by a Fund staff member and considered compliance with the Basel Core Principles for Effective Banking Supervision. - The self-assessment prepared the groundwork for a Fund-led standalone BCP assessment. ### Non‑bank financial sectors: securities, insurance, finance companies, and development banks - Securities: - New securities law passed in July 1999 (Decree Law Number 1–1999) created the National Securities Commission (SC) as an autonomous regulatory agency with three full-time commissioners and staff. - In 1999 there were 54 public offerings with a total value of $851 million, up from $593 million in 1998. Except for $29 million in equity securities, these were bonds or other debt instruments. - Insurance: - Superintendency of Insurance (SI) supervises primarily domestic insurance companies offering property, casualty, and life products. - At end 1999 there were 24 insurance companies with assets of $627 million. - Under 1996 legislation the SI remained a bureau of the Ministry of Commerce and Industry (MCI) and accountable to a nine-member board (five government, four industry representatives), lacking the autonomy granted to banking and securities agencies. - SI funding constrained by 1996 fee structure: each insurance company pays only $2,500 annually regardless of size or risk profile. - Authorities are pursuing an effort to increase fees to enhance SI resources; this requires board concurrence. - Finance companies: - MCI has responsibility for finance companies specializing in consumer lending. - At end-1999 there were 152 finance companies with total assets of $900 million or less than 3 percent of total bank assets. - Thirteen finance companies are subsidiaries of banks and subject to SB supervision; these are among the larger finance companies. - Typical loan risk mitigants: direct payroll deduction, direct disbursements from social security for retirees, cosigners, collateral, and life insurance policies covering loan balance on death. - Law prohibits finance companies from accepting deposits; funding comes from bank borrowings, shareholder loans, debt offerings, other liabilities and owner equity. - Regulatory fee is fixed at $200 annually per finance company; fee structure deemed inadequate to cover administrative costs. - New legislation for finance companies is pending to improve regulatory resources. - Development banks: - Two development banks: National Mortgage Bank (BHN) for housing loans and Agricultural Development Bank (BDA) for agriculture loans. - Both created by special legislation for social and development objectives; both troubled by inefficiency and inconsistent profitability. - Authorities moving to liquidate BHN; BDA to remain open with operations rationalized to benefit smaller farmers. - Supervision of BHN and BDA provided by Panama’s Controller’s office, which primarily audits banks’ financial statements; SB does not supervise them because they do not carry out commercial banking activities nor accept deposits. ### Assessment of prudential standards and Basel Core Principles (BCP) - The mission team assessed Panama’s observance and implementation of the Basel Core Principles using the Basel Committee methodology. - The assessment focused on legal and regulatory framework and the thoroughness of ongoing supervision processes. - Findings: - The 1998 banking law provides a good legal base for SB supervision; SB has broad authority to draft regulations for banks and their affiliates, including economic banking groups. - The mission found Panama to be compliant or largely compliant with 23 of the 25 Basel Core Principles. - The remaining two principles were considered materially non-compliant with efforts underway to achieve compliance: - BCP 16 (offsite monitoring): shortcomings in analysis of prudential factors and data quality; SB collects vast amounts of information and has adequate legal powers but was stretched to analyze information consistently and had inadequacies in data collection. SB is undertaking a comprehensive information system upgrade with important aspects coming on line by end 2001; once on line SB needs to focus on qualitative analysis. - BCP 5 (investment activities): weaknesses in analysis of investment activities and in processes for analyzing and approving bank mergers or other material transactions; need for a formal policy/position on types of non-financial investments permitted within a bank or as bank subsidiaries, considering appropriateness, relative size, management demand, and transparency. - The SB has satisfactory legal power to supervise economic groups and their bank and nonbank affiliates on a consolidated basis, including the right to require audited financial statements and reporting information as appropriate from affiliates (Acuerdo 3–99, Consolidated Supervision of the Economic Banking Group). - The SB is the consolidated supervisor of 11 banks that have either a branch or subsidiary in a foreign jurisdiction and has instituted onsite inspections of significant foreign subsidiaries; an inspection of a significant foreign subsidiary was in process at the time of assessment. - Legal protection to supervisors (BCP 1.5)—Largely compliant: - Executive Decree 49 of 1998 establishes a veracity presumption in favor of supervisory personnel as to their declarations. - The Banking Law does not provide statutory protections for SB personnel or an indemnity against expenses of litigation. - Recommendation: - The Banking Law should provide legal protections against civil suits brought against SB employees (including Board members) for actions taken in their official capacity and in good faith. - Any amendment should allow the SB to reimburse employees for litigation costs, including costs of retaining legal counsel, out of pocket expenses, and costs of settlement. As an interim measure, the SB should consider adopting a policy or obtaining insurance to cover employees (including former employees and Board members) against such costs or expenses. *Source: Fund-led assessment and mission team (Assessment as of April–May 2001).* ### 17. Bank management contact X ### 17. Bank management contact X ### Licensing Criteria (BCP 3) - Finding: The Banking Law provides the SB with broad power to issue or deny a banking license. - Finding: The SB lacks formal internal procedures for evaluating new licenses, and the Regulation regarding licensing is obsolete (Acuerdo 4-81). - Finding: The SB has issued a draft of a new regulation for public comment. - Recommendation: The mission team encourages the SB to complete and issue its proposed regulation regarding licensing requirements and procedures. ### Ownership (BCP 4) - Finding: The Banking Law requires prior approval of the SB for changes in ownership of banks. - Finding: There are no formal procedures to consider mergers, acquisitions or changes in control of banks. - Recommendation: Refer to BCP 5. ### Investment Criteria (BCP 5) - Finding: The SB has sufficient authority to review and reject proposals for the creation of new banks, or for the transfer of controlling interest in an existing bank to other parties. - Finding: A project is underway (already issued for public comment) to update the SB’s regulation for licensing, which dates from January 1981. - Finding: The draft Acuerdo should include provisions to: - require applicant to submit consolidated financial statements, - require detailed financial statement of the applicant’s directors officers and large shareholders, - require that effective consolidated supervision is in place in the home country, - discuss any secrecy laws of the home country and how they may limit the supervisor in obtaining relevant information, - disclose source of capital, including from where did the shareholder obtain the funds, - disclose banking experience of the applicant, - require control systems to be put in place. - Finding: There is a need for an internal review and analysis procedure for licensing and acquisitions. - Finding: Article 67 of the Banking Law establishes that a bank may not invest more than 25 percent of its consolidated capital in any business that is not related to the banking business. - Finding: The 25 percent limitation appears to allow a bank to reinvest its funds in equity securities without an aggregate limit. - Finding: Per the legal framework, a bank with the same party may lend to it up to 25 percent of its capital base and hold equity securities of up to 25 percent of its capital base (so long as it does not have a controlling stake), making a possible combined exposure of up to 50 percent to a single party. - Recommendation: The mission team considers the lack of an aggregate limitation on equity security holdings (when there is not control of the underlying enterprise) to be a weakness. The SB should: - revisit the treatment of equity investments where there is not control, and consider the application of comparable treatment as is applied to equity investments in non-financial subsidiaries (per Acuerdo 5-98, which requires that the investment be deducted from capital), or - apply a larger risk-weight to equity investments. - Recommendation: More in-depth analysis is necessary when a bank purchases other banks, including analysis similar to that for establishing a new bank covering: - effects on prudential indicators—primarily asset quality and capital adequacy, - determination as to management competency given the increase in complexity, - determination as to whether legal requirements are met, - market and public interest considerations. ### Loan Evaluation (BCP 8) - Finding: Acuerdo 6-2000 establishes clear guidelines for classification of loans and minimum reserves requirements. - Finding: Acuerdo 7–2000 establishes similar requirements for investments in securities. - Finding: These guidelines are consistent with international standards. - Finding: The SB is implementing a “Central de Riesgo” (a database similar to a credit bureau) that will include details of each individual loan in the banking system; many banks are participating in pilot tests. - Finding: The system is scheduled to be fully operational in the first quarter 2002. - Recommendation: Refer to BCP 16 regarding strengthening the on-site supervisory manual for specialized credit exposures. - Recommendation: The mission team encourages the SB to take all corresponding steps to assure successful implementation of the “Central de Riesgo.” Proper coordination between end users and the systems developer is necessary. - Recommendation: Once the “Central de Riesgo” is established, the off-site surveillance group should: - verify the calculation of banks loan loss reserves in accordance with Acuerdo 6-2000, - recalculate each bank’s reserves utilizing the worst classification given by any individual bank for all other loans associated with that borrower (worst-case scenario basis), - review any bank whose reserves are substantially below the recalculated worst-case scenario for appropriate verification. - Note: The worst-case scenario is a tool for early detection and does not imply an automatic need for additional provisions due to factors such as differing collateral. ### Connected Lending (BCP 10) - Finding: Article 64 of the Banking Law establishes clear credit exposure limitations for transactions with related parties: a 5 percent of capital limitation for credit exposure to individual related parties and an aggregate limitation of 75 percent of capital for all related parties. - Finding: The combination of the banking law and regulations adequately define the concept of related party. - Recommendation: The mission team recommends the SB evaluate modifying existing regulation to require that related party transactions be extended at arm’s-length terms and that the bank’s board of directors approve related party transactions (including loans and investments in debt and equity securities) above a certain amount. ### Market Risk (BCP 12) - Finding: The SB has issued guidance as to interest rate risk and other market risk associated with investment securities. - Finding: The SB recognizes the need to improve its approaches to supervision of interest rate and other market risk and is developing improved guidance. - Finding: Foreign exchange risk in the Panamanian banking system appears to be quite limited. - Recommendation: The SB should obtain periodic information to analyze each bank’s foreign exchange exposure and the overall exposure of the financial system. - Recommendation: Through off-site and on-site supervision, any interest rate risk exposure considered too large should be brought to the attention of the bank’s board of directors and management for appropriate action, independent of the trigger mechanism in Resolution 2-2000. - Guidance: As a rule of thumb, a gap exposure in any individual category or on a cumulative basis larger than 50 percent of total capital should be further analyzed. - Guidance: In maturity gap analysis, a portion of demand deposits should be considered according to historical experience as medium and long term funding. - Recommendation: Develop flexible guidelines that consider banks’ individual asset-liability characteristics and address: - policies and procedures to control the nature and amount of interest rate risk, specifying risk limits and lines of authority, - requirement for risk measurement and monitoring, - a system of internal controls, review and audit. - Recommendation: Require regulatory information as to financial instruments that result in foreign exchange exposure. ### Other Risks (BCP 13) - Finding: The SB has issued standards regarding the responsibilities of boards of directors and management for monitoring most types of risk (credit, interest rate, liquidity and market risks). - Finding: The SB’s approach is generally consistent with international practices, though some weaknesses in certain risk management regulations remain. - Finding: Examples include interest rate risk (Resolution 2-2000) and liquidity risk (Acuerdo 2-2000). - Finding: The liquidity standard (i) excludes deposits from affiliates and (ii) does not consider banks’ undrawn commitments to lend. - Recommendation: For banks that are members of a larger economic group where a parent bank or home office does not enhance liquidity, deposits received from affiliates should be included in the liquidity formula. - Finding: There is not yet a regulation that focuses on corporate governance and internal controls, but the SB plans to issue one by end-2001. - Recommendation: The SB should implement a Corporate Governance Standard (refer to BCP 14 and BCP 16). - Recommendation: On-site supervision should focus more resources on ensuring institutions appropriately manage risk comprehensively and on a consolidated basis, including credit, interest rate, liquidity, operational, market, country and foreign exchange risks. - Recommendation: The liquidity standard should be revisited; information relating to affiliated transactions should be clearly highlighted and monitored and liquidity ratios should be computed including all funding sources. - Recommendation: Any signs of weak liquidity on a bank-only or consolidated basis should be thoroughly analyzed and corrective action promptly required; on-site examiners should review management of timing gaps in maturities of assets and liabilities. ### Internal Controls (BCP 14) - Finding: The SB requires each bank to nominate compliance officers for specific areas of risk, and many Acuerdos incorporate aspects of corporate governance for individual risks. - Finding: The principle of corporate governance is addressed for important risk types, but a more holistic approach is preferable. - Finding: The SB has issued for public comment a draft of the Corporate Governance regulation. - Recommendation: The mission team supports the SB’s efforts to complete and issue its Corporate Governance regulation as planned. ### On-site and Off-site Supervision (BCP 16) - Finding: The on-site program covers: (i) FECI—a fiscal compliance exam, (ii) anti-money laundering, (iii) safety and soundness, and (iv) trust exams. - Finding: On-site comprehensive examinations covering all risk areas (including money laundering) are done at least once every two years for all banks operating in Panama. - Finding: Substantial improvement noted in deployment of resources for on-site exams. - Finding: The SB is revising its on-site examination manual; the existing manual is quite limited. - Finding: The Superintendency has only been in existence three years, and substantial effort is underway to train supervision personnel. - Finding: Off-site supervision receives and analyzes a substantial amount of information, but the analysis is weak and data quality issues are apparent. - Finding: The SB is implementing a new off-site monitoring information system to provide better detail on financial, legal and structure information for regulated institutions. - Finding: The Directorate of Financial Analysis and Economic Studies (off-site group) intends to develop its operating manual later this year. - Recommendation: See recommendation for BCP 8. - Recommendation: The mission team recommends the SB include specific modules within the on-site examination program (examples in credit: (i) commercial real estate lending, (ii) loans to Financieras, (iii) agriculture related loans, (iv) loans to Economic Groups). - Recommendation: Modules should also cover general risks such as interest rate risk, liquidity risk, operational risk and market risk, focusing on the reasonableness of board and management policies and controls for compliance with the Banking Law, Acuerdos and Resolutions. - Recommendation: On-site supervisory group should make in-depth reviews of system exposure to certain large Economic Groups and large finance companies and consider periodic assessments (for example once every six months) of system exposure to the largest economic groups. - Recommendation: SB should implement its plan to develop specialists to supervise information systems risk. - Finding: The SB’s off-site supervision group is undergoing change, enhancing analysis; the SB is developing prudential indicators (capital, asset quality, liquidity, earnings) and peer groups for comparison and analysis. - Recommendation: The mission team encourages new information systems projects and advises stressing quality over quantity in collection and analysis of information; begin with a simple set of peer groups and a limited number of high-quality indicators. - Recommendation: Off-site supervision should focus primarily on consolidated financial indicators of banks, except liquidity which must also be thoroughly analyzed on a solo basis. - Finding: Collection of information on local branches of foreign banks is of special significance; SB may consider specialized reporting to monitor net exposures owed to or due from affiliates. - Finding: Data on composition of subsidiaries should be structured and analyzed consistent with the SB’s capital accord; non-financial subsidiaries require a 100% capital haircut and analysis should generally exclude their assets, liabilities and capital. - Recommendation: On a quarterly basis, risk-based capital computations submitted by banks should be thoroughly reviewed. - Recommendation: The SB should complete its operating manual for off-site supervision, including a standard reporting package for users (Superintendent, Junta Directiva, on-site supervision group and the general public). ### Bank Management Contact (BCP 17) - Finding: Given the relatively limited number of banks operating in the Panamanian system, there is considerable contact between senior officers of the SB and bank management. - Finding: During on-site examinations there is significant contact between the SB and senior management of the banks. - Finding: The SB expects to examine all banks at least once every two years. - Recommendation: [No specific additional recommendation text supplied for BCP 17 in the source excerpt.] *Source: Mission team's assessment.* ### 94. Senior personnel of the SB should consider, in conjunction with key personnel of the ### 083101 - 94. Senior personnel of the SB should consider, in conjunction with key personnel of the examination team, presenting the results of on-site examinations to the board of directors for the larger Panamanian banks and for banks with significant deficiencies ### On-site examinations and board-level engagement - Senior personnel of the SB should, in conjunction with key personnel of the examination team, present results of on-site examinations to the board of directors for larger Panamanian banks and for banks with significant deficiencies. - Such meetings are an opportunity to: - discuss the responsibilities of the members of the bank’s board, and - communicate directly areas of concern. - Recommendation: Establish a policy of high-level contacts for systemically important banks to discuss strategic subjects in the context of risk-focused supervision. ### Off-site data (BCP 18) — Largely compliant - The SB has clear authority to obtain information and obtains vast amounts. - A new system to be implemented later this year will provide additional information. - The off-site supervision group analyzes the information received. - The mission team believes the SB will achieve more effective banking supervision by focusing more on the quality of analysis of critical information and reducing the emphasis on the quantity of information. - Recommendation: - The SB should consider reducing the frequency of most reporting requirements of many balance sheet items to quarterly, with the exception of liquidity reports which should remain weekly. - Reporting frequency may be modified on an individual bank basis as circumstances dictate. - For problem institutions, higher frequency reporting is warranted and should be determined on a case-by-case basis. - A less frequent reporting cadence would allow for greater depth in the analysis of bank indicators. ### Validations of information (BCP 19) — Largely compliant - The on-site examination program includes a step to verify that the information provided to the SB’s off-site financial analysis group matches the information in the accounting records of the bank. - The SB ascertains that all banks file audited financial statements within the time period established by law: three months, and verifies consistency with regulatory information received. - Recommendation: Refer to BCP 16. ### Consolidated supervision (BCP 20) — Largely compliant - Legal authority: - Article 17.14 of the banking law authorizes the SB to supervise economic groups that own a bank. - Article 54 authorizes the SB to request and obtain any information necessary from any bank or economic group that owns a bank. - Implementation: - On-site inspections now include examinations that consider the economic group on a consolidated basis. - The off-site group, starting in the latter part of 2000, began to obtain consolidated data and analyze prudential factors on a consolidated basis. - The on-site supervision group is practicing consolidated on-site examinations that include inspection of a bank in Costa Rica wholly owned by a Panamanian bank. - Recommendation: - Consolidated statements should become the key tool for supervision and surveillance. - The analysis process should be oriented to understand the economic group as a single organization and consider effects of non-financial activities in the banking system overall assessment. ### Remedial measures (BCP 22) — Largely compliant - The SB possesses adequate enforcement powers but has limited experience using them due to the relative youth of the on-site supervisory program. - Recent use: The SB appointed an Advisor to oversee the operations of a bank under distress, viewed as a measured regulatory response. - Deficiencies: - The SB lacks guidelines for working with distressed entities and lacks guidelines for transferring assets and liabilities of an insolvent bank. - Recommendation: - Draft internal guidelines regarding the use of remedial powers, which may include: - (i) an informal communication to management or the Board of Directors to commit to a certain action recommended by the SB, - (ii) a Memorandum of Understanding between the SB and the Board of Directors, - (iii) appointing an Advisor, - (iv) an Order to Cease and Desist of certain actions and require corrective action, among other measures. - Fines as dictated by individual circumstances may accompany the above actions. - Internal guidelines should not be considered constraints, since every regulatory action is unique. - Establish guidelines for distressed situations, including bank liquidations. - Regarding bank liquidations, the SB may consider mechanisms to immediately transfer deposits up to the $5,000 preferential amount per depositor and a similar amount of assets to another entity or entities to calm markets. - Legal clarity is required because unsecured creditors and depositors (for amounts above the preferential amount) may file civil suits against the liquidator. ### Global consolidation (BCP 23) — Largely compliant - Article 30 of the Banking Law establishes that the SB will supervise Panamanian banks on a consolidated basis. - Article 31 states the SB will enter into agreements with foreign banking supervisors to achieve consolidated supervision. - To date, the SB has signed agreements with Costa Rica, Ecuador, El Salvador and Peru and is negotiating agreements with many jurisdictions, including all home countries of any bank with significant presence in Panama. - Recommendation: - The SB has necessary powers to oversee on a consolidated basis the foreign activities of Panamanian banks and is working to implement a program of consolidated supervision. - The SB should consider participating in examinations of foreign offices of Panamanian banks conducted by host supervisors. ### Anti-Money Laundering (AML) — prudential assessment and legislative response - Overall assessment: - Authorities and the banking industry are very aware of prudential risks associated with money laundering and have in place adequate safeguards to deter improper use of the banking system. - The mission team concludes the legal, regulatory and supervisory systems in place in the banking sector compare favorably with internationally accepted prudential supervision practices. - The review focused largely on banking and trust activities under SB supervision; many requirements exceed those in place in industrial countries. - Context: - The FATF considered Panama “non-cooperative” in June 2000, citing four principal shortcomings: (i) failure to criminalize money laundering for crimes other than drug trafficking; (ii) inefficient reporting of suspicious transaction reports to competent authorities; (iii) overly restrictive rules for international information exchange; and (iv) civil law provisions that impeded identification of true beneficial owners of trusts. - Legislative action: - Laws 41 and 42 (October 2000) were enacted to address FATF criticisms. - Law 41 criminalized laundering of proceeds from fraud, extortion, embezzlement, corruption of public officials, kidnapping, terrorism and theft or trafficking in vehicles or weapons. - Law 42 required banks, trust companies, currency exchange offices, money transfer service providers, finance companies, broker/dealers, securities clearing houses, credit unions, among others, to conduct business with due diligence and care to prevent money laundering. - Law 42 authorized the SB and other supervisory entities to share information with the UAF and gave special inspection powers to the SB, Superintendency of Insurance and the National Securities Commission. - Acuerdo 9–2000 implemented reporting types and stipulated fines ranging from 5,000 to 1 million balboas for non-compliance. - Acuerdo 10-2000 required each bank to have an AML compliance program commensurate with its structure, resources and complexity and to designate at least one compliance officer. - Executive Decree No. 163 authorizes the government to exchange information regarding suspicious activity with counterparts in foreign jurisdictions when a Memorandum of Understanding is in place. - Financial Analysis Unit (UAF): - The UAF is Panama’s financial intelligence unit attached to the Council of Public Security and National Defense. - UAF functions include: - (i) receiving and analyzing currency transactions and suspicious transactions reports from all financial institutions and other entities covered by Law 42, - (ii) communicating analysis results to the Attorney General’s Office, - (iii) exchanging information with homologous entities from other countries, - (iv) exchanging information with regulators (SB and Comisión Nacional de Valores) and the Attorney General’s Office, - (iv) assisting regulators and the Attorney General in providing and analyzing intelligence information in penal or administrative proceedings. - Reporting requirements include: - (i) deposits or withdrawals of cash larger than 10,000 balboas or structured transactions within a short period of time that in the aggregate exceed 10,000 balboas, - (ii) exchanges of bills, lottery tickets, checks, manager checks, traveler’s checks or payment orders in low denominations for higher denominated instruments exceeding 10,000 balboas, or vice versa, - (iii) money orders issued to bearer or with blank endorsement, individually or that in the aggregate in a short period of time exceed 10,000 balboas. - Executive Decree No. 163 of October 3, 2000 and Executive Decree No. 1 of January 3, 2001 set authority and supervisory duties, including power to impose fines for non-compliance. - Supervisory program for banking activities: - The SB’s AML program focuses on (i) know your customer (KYC) compliance and (ii) suspicious activity reporting. - Onsite inspections verify compliance with laws, regulations and banks’ own policies. - Inspections review records retention practices, adequacy of AML training and banks’ internal AML policy. - The SB’s inspection work papers evidence reviews of KYC compliance and report actual violations with mandated corrective action. - By law, banks must maintain customer documentation for a minimum of five years (applies to closed and active accounts). - The SB’s program includes transaction sampling to ensure compliance with KYC and reporting of currency transactions over 10,000 balboas or other suspicious transactions. - For the year 2001, the SB is projected to complete reviews of AML compliance in the course of 38 examinations of banks and 17 examinations of trust companies. - The mission viewed the SB’s level of supervision dedicated to AML as exceptional and, under different circumstances, disproportionate relative to the risk posed by money laundering. - Box 1—key provisions of Laws 41 and 42 (October 2000): - Persons covered must: - Identify adequately their clients. - File with UAF the corresponding declarations. - Communicate to UAF any suspicious transactions. - Abstain from divulging to clients that a suspicious activity report was filed with UAF. - Establish internal control procedures to prevent money laundering. - Ensure employees understand requirements and know how to detect suspicious transactions. - Conserve related documentation for five years. - Law 42 establishes as a precondition for securities to trade on an exchange that they be in book-entry form clearly identifying the beneficial owner. - Acuerdo 9–2000 and Acuerdo 10–2000 required banks to: - Reaffirm KYC requirements, including beneficial owners of companies and trusts. - Establish client profiles where transactions are likely to exceed 10,000 balboas. - Adopt a “Know your customer” manual for prevention of money laundering and document the steps. - Have policies and procedures that clearly identify counterparties in purchase and sale of securities, including transactions executed on behalf of customers. - Train personnel in prevention of money laundering. ### Supervisory program for trust activities - SB is responsible by law for supervision of trust service providers, primarily banks but also law firms, insurance companies and other non-bank financial institutions. - Active supervision of trust activities began in the fourth quarter 2000 after new legislation granted the SB requisite legal authority. - Key laws and regulations: - Executive Decree No. 213 of October 3, 2000 establishes SB powers to carry out inspections and gather documents related to trust activities. - SB circular letter FID No. 3–2000 of December 4, 2000 requires trust companies to comply with SB “Know your customer” rules. - The SB created a specialized Trust Unit in late 2000 to undertake inspections of trust activities. - Executive Decree #16 of October 3, 1984 as amended provides powers including: - Power to issue fines of up to B/.50,000 (Article 30). - Power to require corrective action, suspend or cancel a trust license depending on severity (Article 18). - Power for the Superintendency to take control and administer a trust company. - Implementation: - The SB established a trust examinations unit and undertook capacity building/training for inspectors. - An inspection procedures manual was prepared, including pre-inspection planning and analysis, onsite inspection requirements, and preparation of inspection reports and follow-up. - The manual includes a questionnaire and establishes internal control requirements; key considerations focus on AML compliance. *IMF mission team* ### 126. At end-2000, there were 46 trust administrators, with assets under administration of ### 126. At end-2000, there were 46 trust administrators, with assets under administration of $1.1 billion. ### Trust services: structure and concentration - At end-2000 there were 46 trust administrators with assets under administration of $1.1 billion. - The ten largest administrators are responsible for 79 percent of aggregate assets. - The largest participant is one European bank that has over 30 percent of total administered assets. - By entity type providing trust services: - 30 banks - 5 law firms - 2 insurance companies - 9 other non-bank financial institutions ### FATF June 22, 2001 Updated Report on Non-cooperative Countries or Territories (FATF Updated Report) - Paragraphs 33 and 34 of the FATF Updated Report state: - “Panama has made important progress in terms of the implementation of its new anti-money laundering regime. It has a well-developed anti-money laundering supervision programme and has significantly increased the human and financial resources dedicated to its Bank Superintendency and financial intelligence unit. It has enhanced its ability to co-operate internationally, and has actively sought to enter into written agreements with FATF members and other countries to provide for international FIU co-operation. Several such written agreements have been signed. - In the future, FATF will pay attention to Panama’s continued efforts to enter into written agreements for FIU co-operation, its continued practice of international co-operation and its focus on potential money laundering threats in the Colon Free Zone, the ability of Panamanian prosecutors to effectively pursue money laundering cases and further efforts to enhance compliance by the financial sector with the new anti-money laundering requirements. Additionally, Panama should consider adding additional predicates with its money laundering law.” - Given Panama’s “important progress” and its “well-developed anti-money laundering supervision programme” FATF removed Panama from the list of Non-Cooperative Countries and Territories. ### Principle-by-Principle Assessment — overview and Principle 1 (objectives, independence, legal framework, enforcement, protections, information sharing) - The annex provides a principle-by-principle discussion of Panama’s compliance with the core principles with regard to the supervision of banks by the Superintendency of Banks (SB). - Principle 1 (1) Objectives - Description: - Banking Law (Decree law number 9 of February 26, 1998) establishes the Superintendency of Banks as the sole entity with authority and responsibility to supervise banks. - Banking Law and the Regulations (Acuerdos and Resolutions) consider key concepts from the Basel Core Principles. - Superintendent may intervene in banks for orderly resolution, from ordering early remedial measures to closure and liquidation. - Board of Directors (Junta Directiva) of the SB can issue Acuerdos consistent with the Banking Law; Junta Directiva has been active issuing Acuerdos. - SB publishes industry data via its website (www.superbancos.gob.pa) including balance sheet and income statement of individual banks and legal/regulatory information. - Assessment: Compliant. Essential criteria are clearly met. SB is sole bank supervisor; Banking Law clearly establishes SB’s objective. SB utilized authority by designating an Advisor in a bank. SB has wide authority to adopt new regulations through Acuerdos. - Principle 1 (2) Independence - Description: - Article 4 of the Banking Law creates the SB as an autonomous entity with its own legal standing and fiscal resources. - Article 9: Superintendent designated for a five-year term by the Executive Branch; may not be removed except via Supreme Court order for due cause. Junta Directiva members nominated for eight-year terms; removal only for due cause via same judicial procedure. - No apparent interference by government or industry in SB operational independence; Superintendent independent for supervisory action. - Article 19: banks pay annual regulation and supervision fees based on license type plus additional amount based on each bank’s total assets; establishes a maximum of $100,000 for the additional portion. Article 19 also provides Superintendent may increase or decrease fees to adequate levels to comply with functions. - Assessment: Compliant. Essential and Additional Criteria clearly met. SB has issued multiple fines and regulatory measures without interference. SB has adequate financial resources, enabling competitive salaries and very low turnover; has adequate facilities and equipment. - Recommendation: SB may consider eliminating the maximum of $100,000 as industry consolidation may reduce revenues and for large and complex institutions the maximum fee may not compensate supervision costs, especially with onsite supervision of Panamanian banks in foreign jurisdictions. - Principle 1 (3) Legal Framework - Description: - Article 17.1: Superintendent has faculty to grant banking licenses for operations in Panama. Article 38: reasons to cancel a banking license. - Article 16: faculties of Junta Directiva include power to issue prudential rules (Acuerdos). - Article 54: SB empowered to require banks and Economic Groups information regarding operations and activities. - Assessment: Compliant. Necessary legal framework is in place. - Principle 1 (4) Enforcement Powers - Description: - Banking Law provides SB broad supervisory powers to ascertain compliance and ensure safe and sound operation. - SB has unfettered access to banks’ files and broad powers to require remedial action and impose sanctions. - Assessment: Compliant. SB has extensive powers to address compliance and safety and soundness concerns. - Principle 1 (5) Legal Protection for Banking Supervisor - Description: - Executive Decree 49 of 1998 establishes a veracity presumption in favor of supervisory personnel for their declarations: “Las actuaciones del personal supervisor de la Superintendencia de Bancos en cumplimiento de sus funciones, hacen fe pública y lo que señalen sus declaraciones será considerado como verdadero, correspondiendo la carga de la prueba a quien asegure lo contrario.” - Neither the Banking Law nor the Executive Decree provide for payment of legal expenditures or explicit protection for SB personnel when sued in their official capacity. - Assessment: Largely compliant—efforts to achieve compliance are underway. Current legal framework does not provide adequate statutory protection to the supervisor, which may cause a chilling effect in future lawsuits. - Recommendation: Authorities should consider amending the Banking Law to provide legal protections against civil suits brought against SB employees (including Board members) for actions taken in their official capacity and in good faith. - Principle 1 (6) Sharing Information and Confidentiality - Description: - Article 4 of Law 36 of 1995 authorizes SB to collaborate with the “Unidad de Analisis Financiero”. - Article 264 of Decree Law 1 of 1999: Comisión Nacional de Valores may solicit SB assistance related to securities issues of a bank. - Article 17.29 of the Banking Law authorizes SB to establish cooperation systems with foreign supervisors; Article 31: SB will enter into memoranda of understanding with foreign banking supervisors for consolidated supervision based on reciprocity and confidentiality. - Assessment: Compliant. Banking Law provides authority to share information and require confidentiality. SB has signed memoranda of understanding with four Latin American jurisdictions and is seeking agreements with an additional sixteen jurisdictions where SB is Home or Host supervisor. ### Principles 2–5: Permissible activities, licensing, ownership, investment criteria - Principle 2: Permissible Activities - Description: - Article 3.3 defines “bank”; Article 3.16 defines “business of banking” as capturing financial resources via time or demand deposits or other mechanisms authorized and using funds for loans, investments or other authorized operations. - Banking Law follows a “universal banking” concept; limits investments in individual non-banking businesses to 25 percent of the bank’s capital. - Article 24 limits use of the word “bank”; exceptions for humanitarian or governmental social interest financing. - Article 21: only banks licensed by SB may engage in business of banking (except state banks); taking deposits from the public strictly limited to banks. - Assessment: Compliant. Definitions and protections adequate; see related issue regarding banking powers BCP 5. - Principle 3: Licensing Criteria - Description: - Article 17.1: Superintendent authority to approve issuance of banking licenses. Article 33 provides general criteria for license analysis. Acuerdo 4-81 provides more detailed guidance but is relatively weak. - Superintendent has discretion to reject any license application; SB may cancel a license if false information was included. - Article 23: foreign banks must obtain prior authorization of home supervisor to establish operations in Panama; non-Panamanian applicants must be bank branch, subsidiary or affiliate of a foreign bank group. - Article 42: establishes minimum capital requirements for new banks. - Assessment: Largely compliant—efforts to achieve compliance are underway. Acuerdo 4-81 is obsolete; SB recognizes need to replace it and has issued a new Licensing regulation for public comment. SB needs internal procedures for analyzing license or acquisition applications and for mergers and acquisitions; SB must retain discretion to reject license requests. - Observation: A recent transaction where one Panamanian bank purchased another resulted in a noticeable reduction of capital compared to pre-transaction capital of both entities; SB should implement procedures to consider mergers and acquisitions as part of licensing evaluation. - Principle 4: Ownership - Description: - Article 17.6: Superintendent authority to approve acquisition or transfers of shares of banks or shares of Economic Groups that control a bank. - Acuerdo 3-81 requires Panamanian banks to obtain SB approval prior to transferring ownership of shares, independent of concept of control. - For stock exchange transactions, SB requires banks to communicate significant ownership transfers to a limited group to determine whether to ratify the transfer or instruct the bank to purchase the shares. - SB requires communication of changes in ultimate owners, including when controlled by a holding company. - Assessment: Largely compliant—efforts to achieve full compliance are underway. Banking Law and Acuerdo 3-81 establish requirement to obtain approval prior to transferring ownership of shares; SB has legal authority to approve or reject requests. - Gaps: - SB lacks a formal process to consider mergers, acquisitions or changes in control (see BCP 5). - SB may consider issuing guidelines to require approval only for transfers of significant ownership of shares. - Principle 5: Investment Criteria - Description: - Acuerdo 7–2000 of July 19, 2000 requires each bank to have a manual for Investments in Securities including policies and procedures, controls to administer risk, methods for valuation and internal controls. Board of Directors and management responsible for formulating and monitoring execution. Policies must include maximum exposure levels and approval limits. - Article 67: a bank may not invest more than 25 percent of its consolidated capital in any business not related to banking. This allows reinvestment in equity securities without an aggregate limit, though non-financial subsidiaries’ investments are reduced from capital in risk-based capital computation. For investments in equity securities not representing a non-financial subsidiary, required risk-based capital is 8 percent. - Credit concentration limits for lending and investing in debt securities of a single issuer (including Economic Groups) and related parties (directors, officers, affiliates, large shareholders) are clearly established in the Law and Acuerdos. - Assessment: Materially non-compliant—efforts to achieve compliance are underway. - Rationale: - Law and Acuerdos do not set specific parameters for permissible investments; investment portfolios may include a wide variety of instruments. - No aggregate limitation on equity security holdings beyond the 25 percent limit in individual enterprises; banks could purchase substantial amounts of highly volatile instruments and be unduly exposed to market risk. *Source: Principle-by-Principle Assessment (annex) of Panama’s compliance with the core principles regarding supervision of banks by the Superintendency of Banks.* ### 187. The SB’s Capital Regulation, Acuerdo 5-98, requires banks to deduct from capital ### The SB’s Capital Regulation, Acuerdo 5-98, requires banks to deduct from capital ### Capital haircut treatment and recommendations - Finding: Acuerdo 5-98 requires banks to deduct from capital their investments in non-financial subsidiaries. For all other equity investments, there is no capital haircut requirement. - Recommendation: The mission team recommends that the SB consider applying a more consistent treatment for capital haircuts for all types of equity investments. - Clarification: Capital haircuts are not considered necessary for investments in financial subsidiaries and other entities where the value of the investment is guaranteed. - Implementation note: If the SB decides to broaden the capital haircut concept, its implementation should allow a gradual transition. ### Concentration limits and single counterparty risk - Finding: The 25 percent single borrower lending limit and the 25 percent limitation on investments in a single enterprise appear to not be inter-related, which would appear to allow a concentration of 50 percent of the bank’s equity in one counter party (25 percent in debt and 25 percent in equity). - Recommendation: The mission team recommends that the SB analyze this issue in further detail. ### Mergers, acquisitions and supervisory approval - Finding: The Banking Law requires the SB’s authorization prior to transferring ownership of shares. - Observation: In a recent transaction, as part of a bank acquisition there was a noticeable capital reduction. - Recommendation: Such transactions need to be evaluated more carefully prior to issuing the approval. ### Principle 6 — Capital Adequacy (findings and assessment) - Legal minimum: Article 45 of the Banking Law establishes that general license banks must maintain at least an eight percent risk weighted capital. - Framework: Acuerdo 5-98 details the different risk weightings and the procedure for the risk based capital computation, including a risk weighting for off-balance sheet risks; methodology and formula are modeled to a large extent after the Basel Capital Accord and compliance is required from a consolidated perspective. - Scope: Banks operating pursuant to an International license must also comply with the risk-based capital standard, except for branches of foreign banks, which instead are to comply with the capital requirements of their respective Home supervisor. - Powers: The SB may increase the minimum eight percent risk based capital requirement and has broad powers to require banks to take steps to fully comply; the SB may intervene a bank whose risk-based capital is below the minimum legal requirement. - Reporting: The SB requires banks to report their risk based capital computation (from a consolidated perspective) on a quarterly basis. - Assessment: Compliant. The capital standards included in the Banking Law and Acuerdos are consistent with the Basel Capital Accord. ### Principle 7 — Credit Policies (findings and assessment) - Requirement: Acuerdo 6-2000 requires each General license bank to adopt an adequate system for credit administration, including a credit manual covering (i) initial analysis and disbursement, (ii) credit administration and (iii) recovery procedures; policies to be approved by the Board of Directors and/or management. - Independence: The SB requires that a unit, independent from the loan origination functions, be responsible for the evaluation and classification of loans. - Classification: Acuerdo 6-2000 requires banks to classify their loan portfolio within five categories (Normal, Special Mention, Substandard, Doubtful and Loss); details reported to the SB on a quarterly basis. - Investments in securities: Acuerdo 7–2000 requires each bank to have a manual for Investments in Securities covering (i) policies and procedures, (ii) controls to administer the risk, recording and classification of investment securities, (iii) methods and procedures for valuation and (iv) internal controls to monitor and verify compliance. - Supervision: The SB’s onsite supervision program reviews banks’ Credit and Investment policies and procedures and verifies compliance. - Assessment: Compliant. The SB’s Acuerdos and onsite supervision program cover the essential requirements of this principle. (Note: As to investments in equity securities, refer to BCP 5. Also, refer to BCP 14 regarding recommendations as to Corporate Governance.) ### Principle 8 — Loan Evaluation (findings and assessment) - Classification and provisioning rules: - Acuerdo 6-2000 requires loan classification into five categories (Normal, Special Mention, Substandard, Doubtful and Loss) with clear guidelines and specific minimum reserves for each classification. - Classifications are based on (i) the borrower’s financial condition and repayment capacity, (ii) assessment of the borrower’s operational cash flow, (iii) market value of the collateral and its potential realizable value and (iv) delinquency. - Special provisions apply to renegotiated loans to prevent immediate upgrade in classification. - Reserve requirement: Banks are required to have reserves amounting to the higher of (i) the result of categorizing the loans in the five groups and applying the reserves required per group, or (ii) 1 percent of total loans. The SB may require higher reserves as circumstances dictate. - Reporting and review: Banks must review their loan portfolio at least quarterly and report its classification and calculation for reserves for loan losses to the SB within the first ten days following the quarter end. - Non-performing and provisioning rules: - Acuerdo provides for reporting of loans as past due (morosos) and non-performing (vencidos) and guidelines for non-accrual status. - Article 16 of Acuerdo 7–2000 requires provisions for doubtful accounts on investment securities when (i) delinquent, (ii) high probability issuer default, or (iii) important deterioration as to foreign exchange and/or country risk. - Operational improvements: The SB is implementing a “Central de Riesgos” scheduled to be fully operational by the end of the first quarter 2002; it will include details of each individual loan in the banking system. - Assessment: Largely compliant—efforts to achieve full compliance are underway. The Acuerdos are generally consistent with international standards, but: - The SB lacks examination guidelines for specialized credit risks (commercial real estate, agriculture, finance companies, among other). - The Acuerdos do not cover off-balance credit risk such as financial guarantees and undisbursed lines of credit. - Recommendation: The “Central de Riesgo” is expected to be a very powerful supervisory tool and should greatly enhance credit risk monitoring by the SB. ### Principle 9 — Large Credit Exposure Limits (findings and assessment) - Legal limit: Banking Law (DL 9/98–Article 63) and SB regulation (Acuerdo 1/99) establish a credit exposure limit to a single borrower and its related economic group at 25 percent of the consolidated bank capital. - Definition: The definition of economic group includes individuals or firms whose interests are interrelated to the level that they can be understood as a single entity; the by-law provides detailed definition, requirements of internal control of the exposures and restrictions. - Monitoring: Quarterly collection of information of loans to economic groups and related parties for off-site analysis; credit portfolio examined during onsite inspections. - Assessment: Compliant. The exposure limit for a single borrower, issuer or a group related borrowers or issuers is appropriate and monitored both offsite and through the on-site inspection process. The SB has discretion to determine additional inclusions in an economic group on a case-by-case basis. - Enhancement: The credit risk information center will improve the SB’s ability to monitor large credit exposures. ### Principle 10 — Connected Lending (findings and recommendations) - Limits: Article 64 of the Banking Law establishes clear credit exposure limitations for transactions with related parties: an individual limit of 5 percent of capital and an aggregate limitation of 75 percent of capital. Related parties include directors, officers, entities where a director owns more than 5 percent of common shares, shareholders that own 5 percent or more of the bank, spouses of related parties, among other. - SB authority: Via Article 7 of Acuerdo 2-99, the SB may declare the existence of a related party when the substance of the transaction indicates the real beneficiary is a related party. - Reporting: The SB requires quarterly reports detailing related party transactions, including details of the Economic Groups of the related party. - Gaps: Neither the Banking Law nor the Acuerdos prohibit providing preferential treatment to related parties. The Banking Law does not require Board of Directors approval for transactions with related parties. - Assessment: Largely compliant—efforts to achieve full compliance are underway. The SB monitors related party transactions via quarterly offsite reporting and onsite inspections. - Recommendation: The mission team recommends that the SB consider requiring that all related party transactions be extended on arm’s-length terms and requiring Board of Directors to approve related party loans and investments above a certain amount. ### Principle 11 — Country Risk (findings and assessment) - Context: Country risk exposure by Panamanian banks is lower because exposure is largely limited to (i) short-term trade and bank credit, and (ii) exposures by the local office to borrowers in its home country. - Regulation: Resolution 7–2000 requires banks to have policies and procedures for identifying, managing, quantifying and controlling country risk exposures; responsibilities for boards and management; policies must define geographical distribution, levels for credit exposures and criteria for evaluating country risk based on international credit risk agencies, and provisioning policies. - Monitoring: Reporting requirement allows the SB to monitor country exposure information for offsite analysis; compliance is reviewed during on-site examinations with emphasis on policies and limits. - Assessment: Compliant. The regulation establishes minimum requirements and the onsite inspection process reviews adequacy and implementation. ### Principle 12 — Market Risks (findings, gaps, and recommendations) - Definition: Market risk is the risk of loss of value of financial instruments due to changes in market prices; fluctuations in interest rates and foreign exchange rates are most significant. - Authority: The Junta Directiva may require reserves to cover credit and market risk per article 16 of the Banking Law. - Investments guidance: Acuerdo 7–2000 requires banks to have an Investments in Securities manual covering policies, controls, valuation methods and internal controls. - Interest rate risk regulation: - General Resolution 2–2000 regulates interest rate risk management using a gapping method; requires an Asset Liability Management Committee. - Assets and liabilities subdivided into eight categories by repricing terms. - Banks must estimate effect on net interest income assuming a 100 and a 200 basis point increase and decrease in interest rates. - If net interest income for one or more categories varies, as compared to the prior semester, by more than 10 percent of capital, the Bank must adopt corrective measures indicated by the Superintendent. - Forward-looking gap: The SB recognizes the 10 percent trigger is focused on historical experience and is preparing guidance to mandate additional analysis using other risk measurement methods. - Data systems: New information system, expected fully implemented by the first quarter 2002, will include detailed interest-generating asset and liability data to run multiple interest rate models from quarterly regulatory information. - Foreign exchange risk: The Superintendency believes exposure is limited to very small amounts and only in a few banks; recurring regulatory reporting currently does not require detailed information on financial instruments in foreign currencies, so the Superintendency lacks such information and believes a regulatory standard is not needed given current small exposures. - Supervision: On-site examinations review market risk policies and procedures and verify compliance with Superintendency guidance and bank internal procedures. - Assessment: Largely compliant—efforts to achieve full compliance are underway. - Mission team recommendations: - Develop and implement flexible guidelines considering banks’ individual asset-liability characteristics, addressing (i) policies and procedures to control interest rate risk, specifying risk limits and lines of authority; (ii) requirement for risk measurement and monitoring; and (iii) a system of internal controls, review and audit. - Obtain periodic information to carry out surveillance and analyze bank and system exposures to market risk. - Require regulatory information as to financial instruments that result in foreign exchange exposure so current information will alert the SB of a change in the profile of banks regarding foreign exchange risk. ### Principle 13 — Other Risks (authority) - Authority: The Banking Superintendent has the legal authority to establish operating standards for banks to develop adequate risk parameters, including establishing prudent limits that banks must observe (Article 17.32 of the Banking Law). *Assessment and recommendations by the mission team.* ### 242. The SB has issued clear parameters that limit and/or require management to actively ### The SB has issued clear parameters that limit and/or require management to actively identify, measure and monitor various types of risk ### Risk parameters and standards - Credit risk - Standards include limitations on credit concentration, exposure to affiliates, classifying and providing reserves for credit exposure and risk based capital. - Standards are generally modeled after international standards. (Refer to Principles 6, 7, 8, 9, 10) - Liquidity risk - Acuerdo 2-2000: deposits require 30 percent in liquid assets that mature within 176 days (deposits from affiliates are excluded). - Interest rate and market risk - Guidance has been issued. (Refer to Principle 12) - Operational risk - More guidance is required. (Refer to Principle 14) - Foreign exchange risk - No guidance has been issued. (Refer to Principle 12) ### Supervision, verification, and monitoring - On-site supervision - The SB verifies compliance with the above standards and performs a limited review and a walk-through of internal controls of the bank. - Off-site verification - Quarterly verification of compliance with the mathematical standards is performed by the Directorate of Financial Analysis and Economic Studies. - Recent implementation - Most standards were put in place relatively recently and represent an important improvement over the previous regulatory scheme. ### Liquidity requirement specifics and recommendation - Acuerdo 2-2000 stipulates that deposits, excluding those from affiliates, require 30 percent in liquid assets. - Recommendation: re-evaluate the exclusion of deposits from affiliates from the formula, or at minimum give special attention to institutions for which this exclusion applies for additional liquidity analysis. ### Overall assessment of risk-standards framework - Assessment: Largely compliant—efforts to achieve full compliance are underway. - Rationale: - Most important risks are covered by reasonable prudential standards and are monitored via on-site and off-site supervision. - Current approach focuses on establishing internationally accepted financial standards and ascertaining compliance on a piecemeal basis. - A more holistic approach to comprehensive risk management, combined with detailed prudential requirements, is preferable. ### Planned regulatory developments - The SB intends to issue a regulation on Corporate Governance during the latter part of this year (a draft has been issued for public comment). - The regulation will require Boards of Directors and management of banks to establish clear systems of risk management to identify, measure, monitor and control risk. - Existing standards already address Board and management responsibility for credit, interest rate and market risks. ### Internal control and audit (Principle 14) - Purpose (Basle Core Principles): ensure banking business is conducted prudently in accordance with board policies, transactions entered with appropriate authority, assets safeguarded, liabilities controlled, records accurate and timely, and management can identify, assess, manage and control risks. - Current status and requirements - The SB is drafting a regulation on internal controls and corporate governance. - SB requires each bank to nominate compliance officers for specific risk areas. - Specific guidance for Corporate Governance (draft issued for public comment) will address this Core Principle. - Shortcomings and recommendations - Existing compliance officer requirement leaves many areas unattended; a clear internal control standard should detail legal responsibilities of Board and management and establish procedures for independent verification and reporting to the Board. - Assessment: Largely compliant—efforts to achieve compliance are underway. - To be fully compliant, the SB must require banks to structure and maintain an appropriate internal control framework, clearly establish responsibilities of Board and management, and set procedures for independent verification and reporting to the Board. ### Money laundering (Principle 15) - Legal framework and requirements - Law No. 42 of 2000 requires banks operating in Panama to implement internal controls to prevent money laundering. - Acuerdo 9-2000 implements “know-your-customer” rules, requires reporting of currency and suspicious transactions to the Financial Analysis Unit, requires client profiles for business relationships exceeding B/.10,000, and requires employee training. - Acuerdo 9-2000 stipulates fines ranging from B/.5,000 to B/.1 million for non-compliance. - Acuerdo 10-2000 (issued on December 15, 2000) requires each bank to have an anti-money laundering compliance program commensurate with its structure, resources and complexity, and to designate at least one Compliance Officer. - Enforcement focus - Onsite supervision dedicates 20-30 percent of examination resources to anti-money laundering compliance exams. - Assessment: Compliant. - The Republic of Panama’s statute and the enforcement thereof are consistent with internationally accepted standards. ### On-site and off-site supervision (Principle 16) - Structure - Off-site surveillance: information collected from banks is handled and analyzed. - On-site supervision: exams and inspections are carried out. - Reporting frequency and content - Banks and affiliated entities report on a weekly, monthly, quarterly, semi-annual and annual basis according to activity type. - Liquidity information is received and analyzed weekly; composition of investment portfolios, connected lending and large exposures monthly; consolidated information and capital requirements quarterly. - On-site exam program - Annual program aims to examine each bank at least once every two years. - Three basic examination types: General Inspection, Money Laundering Procedures Inspection, and FECI Examination; ad hoc exams when off-site surveillance identifies issues. - A General Inspection may include bank subsidiaries and consolidated economic group information. - Limitations identified - SB lacks an adequate offsite supervision manual and an early warning system. - Analysis process depends on individual analysts’ experience; an indicators system and peer group distribution project is underway. - On-site inspection manual is rough and focuses on information forms and standardized work-paper sheets. - Examiners lack specialization for assessing information systems and complex operations (treasury, derivatives). - Unsubstantiated assets or deficiencies in provisions identified in exams are not considered in overall analysis until corrected by the bank or in the next examination. - No rating system of banks has been implemented and no special arrangements exist for closely monitoring distressed banks. - A substantial portion of on-site activity is dedicated to money laundering inspections due to international pressure and FATF listing; SB also enforces FECI tax collection. - Recommendations - Improve effectiveness of off-site analysis by reviewing regulatory reporting requirements to focus on important risk-related information. - Implement information system to standardize and automate analysis, including definitions and guidelines for analysis procedures and special monitoring actions for distressed institutions. - Reorient scope of examinations towards risk for a forward-looking approach, assessing bank continuity, growth, market share, management professionalism and succession. - Coordinate balance confirmations with internal and external auditors to free supervisory resources for in-depth risk analysis. - Plan money laundering and FECI examinations so they do not detract from general risk-oriented inspections. - Improve the examination manual and provide training to develop specialized staff for complex operations and information systems assessments. - Assessment: Materially non-compliant—efforts to achieve compliance are underway. - Given the short existence of the SB, progress is remarkable, but further developments and staff training are necessary to reach adequate compliance in off-site supervision. ### Bank management contact (Principle 17) - Practice - SB examiners meet senior management at the start and close of inspections; SB initiates meetings when off-site surveillance raises clarification needs or relevant technical issues. - Shortcomings and recommendations - Contact has been mainly technical; recommend establishing a policy for regular high-level contacts to discuss strategic subjects in the context of risk-focused supervision. - Recommend senior SB personnel and key examination staff formally present on-site examination results to Boards of Directors for larger Panamanian banks and any bank with significant deficiencies to communicate areas of concern and discuss Board oversight responsibilities. - Assessment: Largely compliant—efforts to achieve full compliance underway. ### Offsite data collection and analysis (Principle 18) - Legal authority and accounting standards - Article 54 of the Banking Law authorizes the SB to request documents and reports from any bank or Economic Group; lack of timely compliance may result in fines. - Article 16.10 allows the Junta Directiva to establish accounting rules; Acuerdo 3-98 requires International Accounting Standards; Acuerdo 4-99 allows U.S. GAAP as an additional accepted accounting standard. - Standards call for consolidated financial statements. - Reporting regime and system development - SB requires detailed financial information monthly and quarterly; monthly for systemic trend analysis, quarterly for bank reports. - For the quarter ended December 31, 2000, the SB began collecting quarterly consolidated financial information and analyzes banks on a solo and consolidated basis. - SB is developing a new information system that will include detailed information on each investment security, loan and liability to enable sophisticated off-site analysis. - Recommendations and assessment - More in-depth analysis of a core group of indicators is necessary to achieve more effective banking supervision. - Assessment: Largely compliant—efforts to achieve full compliance are underway. *Source: IMF assessment of the Superintendency of Banks (SB), annex paragraphs 242–286.* ### 287. Banking supervisors must have a means of independent validations of supervisory ### 287. Banking supervisors must have a means of independent validations of supervisory information either through on-site examinations or use of external auditors ### Independent validation of supervisory information - Description: Step 3.1 of the on-site examination program is to verify that the information provided to the Directorate of Financial Analysis and Economic Studies matches with the information in the accounting records of the bank. - Practice: The Directorate of Financial Analysis and Economic Studies ascertains that all banks file audited financial statements within the time period established by law (three months) and verifies that such information is consistent with the regulatory information received. - Encouragement: Banks are encouraged to have their external auditors review the quarterly consolidated information prior to submittal to the Banking Superintendency. - Legal authority: The SB has the legal authority to request and obtain all documents and reports relating to banks and economic groups to which the banks belong. - Assessment: Largely compliant—efforts to achieve full compliance are underway. - Recommendation from mission: Personnel of the SB validate the information on a regular basis. The SB is encouraged to emphasize more on the qualitative aspects of the information and less on the volume of information. ### Principle 20: Consolidated Supervision - Objective: Supervisors must be able to supervise the banking group on a consolidated basis. - Description: Regulation defines economic groups and requires financial consolidation of subsidiaries for regulatory (including capital adequacy purposes) and financial reporting purposes. - Data collection: The SB collects on a quarterly basis consolidated financial information concerning the operations of economic groups and the inter-relations among firms in the same group. - Current practice gap: The structure of analysis, monitoring and examination is substantially oriented to monitor banks only on a solo basis; consolidated information is used as an additional set of data for secondary purposes. Example: consolidated statements had not been considered in the project drafted for the ratios systems. - Assessment: Largely compliant—efforts to achieve full compliance underway. - Findings and recommendations: - The legal framework is satisfactory for economic group definition and scope of consolidation. - Information is collected with adequate frequency but is not analyzed as a priority tool to identify systemic risk or contagion from non-bank activities. - Given that the collection of certain information modules just started in the beginning of the current year, receiving and reviewing consolidated data is a relatively new process. - The mission team recommends that consolidated statements become the key tool for supervision surveillance and that analysis be oriented to understand the economic group as a single organization, with effects of non-financial activities considered in the banking system overall assessment. ### Principle 21: Accounting - Requirement: Supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices, enabling a true and fair view of financial condition and profitability; banks must publish financial statements that fairly reflect condition. - Legal framework: - Article 16.10 of the Banking Law: Junta Directiva may establish accounting rules that banks are to follow. - Acuerdo 3-98 of September 23, 1998: establishes that all banks will utilize International Accounting Standards. - Acuerdo 4-99 of November 5, 1999: amends Acuerdo 3-98 allowing the use of U.S. GAAP as an additional accepted accounting standard for banks operating in Panama. - Supervisory practice: - The SB performs periodic onsite exams to verify adequacy of accounting records. - Article 55: banks must present audited financial statements within three months of completion of the bank’s fiscal year end. - Article 60: financial statements must be read at the annual shareholders’ meeting. - Article 56: all banks established in Panama must exhibit audited financial statements in each branch and publish audited financial information in a national newspaper within three months of the closing of the fiscal year. - Assessment: Compliant. - Conclusion: Banks must utilize International Accounting Standards or U.S. GAAP, are subject to yearly audits by independent public accountants, and must publicize financial information. The SB is in compliance with BCP 21. ### Principle 22: Remedial Measures - Requirement: Supervisors must have adequate supervisory measures to bring about timely corrective action, including the ability to revoke the banking license in extreme circumstances. - Legal framework and powers: - Article 17.27: the Banking Superintendent may declare an intervention, reorganization or liquidation of a bank. - Article 17.9: the Superintendent may instruct a board of directors to remove directors or executive personnel if merited. - Article 137: sanctions range from oral reprimand (private or public) to civil penalties up to $50,000; additional sanctions may be imposed for certain specific violations. - Article 38: establishes reasons for cancellation of a banking license. - Article 95: the SB may intervene (take control) of a bank for reasons including (i) lack of compliance with capital requirements, (ii) the continuance of operation of the bank endanger the interests of the depositors and (iii) lack of compliance with liquidity requirements. - Assessment: Largely compliant—efforts to achieve full compliance are underway. - Gap: The SB lacks general guidelines for remedial actions and contingency plans in the event of a significant bank failure. ### Principle 23: Global Consolidated Supervision - Requirement: Supervisors must practice global consolidated supervision over internationally-active banking organizations, monitoring and applying prudential norms to all aspects of worldwide business. - Legal basis: - Banking Law (DL 9/98–Article 30): establishes SB ability to supervise foreign branches and subsidiaries abroad on a consolidated basis. - Article 40: requires banks to obtain authorization from the SB prior to opening or closing an office, branch, or agency. - Practice and gaps: - Operations booked in branches and subsidiaries abroad are consolidated and capital requirements are demanded from a consolidated perspective. - The SB does not collect detailed information that would allow monitoring across individual branches and subsidiaries located in different countries. - Without off-site reporting subdivided by country, analysis of repercussions from operations in distressed or less cooperative jurisdictions is possible only through on-site examinations at the head office. - On-site examinations of branches and subsidiaries abroad are limited and incipient. - Assessment: Largely compliant—efforts to achieve full compliance underway. - Recommendations: - Consider collecting data regarding branches and subsidiaries of Panamanian banks operating abroad, subdivided by individual countries, to monitor concentrations or movements to undesired or riskier locations. - Analysis of such data may prompt on-site examinations, requests for additional reports or limiting the volume of operations in a given jurisdiction. - Implement a program of on-site exams of branches and subsidiaries abroad and develop closer contact with host supervisors to ensure safe and sound operations in other countries. ### Principle 24: Cooperation with Host Country Supervisors - Requirement: Consolidated supervision requires contact and information exchange with host country supervisory authorities. - Legal basis: Banking Law (DL 9/98–Article 31) requires the SB to establish memoranda of understanding with host country supervisors for appropriate information sharing on overseas operations. - Practice: - The SB has dedicated substantial efforts to reach consensus for memoranda of understanding with countries where there is common interest. - The SB has signed memoranda with four countries: Peru, Costa Rica, Equator and El Salvador. - The SB is negotiating agreements with sixteen other countries, including the most relevant jurisdictions in terms of assets and operational volume related to Panama. - Assessment: Compliant. - Note: Completion of formal agreements depends largely on the interest of other countries and on the evolution of Panama’s reputation relating to anti-money laundering efforts. ### Principle 25: Equal Treatment of Foreign Banks - Requirement: Local operations of foreign banks must be conducted to the same high standards as domestic institutions; supervisors must have powers to share information needed by home country supervisors for consolidated supervision. - Legal framework and practice: - Article 28: foreign banks with General licenses are to be supervised by their Home supervisors, without prejudice to complying with the Banking Law; foreign banks are covered by the Panamanian Banking Law in the same manner as local banks. - Article 27: all foreign banks with International licenses (branches and subsidiaries) are subject to SB authority and must abide by the Banking Law and applicable regulations. For International license banks operating under a branch structure, such branch will comply with liquidity, capital adequacy and other technical conditions in accordance with its Home country legislation, and its Home country supervisor will exercise corresponding consolidated supervision. - As a pre-condition to grant a license to any foreign bank, the SB must receive a “no-objection” from its Home supervisor and a representation that the Home supervisor practices consolidated supervision. - Article 29: the SB may share information with Home supervisors of foreign banks with an agreement that the foreign supervisor will maintain such information confidential. - Home country supervisors may conduct onsite exams of their banks with prior approval of the SB, and the SB usually performs a joint examination with the foreign supervisor. - The SB informs the Home supervisor on a systematic basis of substantial corrective measures adopted for the bank operating in Panama. - Assessment: Compliant. - Conclusion: The legal framework is appropriate; foreign banks are subject to substantially the same high standards as domestic banks. The SB has powers to share information with Home supervisors and has actively pursued memoranda of understanding with multiple jurisdictions. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/083101.pdf_