## _cr1350 — Executive Summary & Selected FSAP Findings

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### Overview of the financial system
- Assets of the supervised financial system: about 90 percent of GDP at end-2011.
- Credit institutions (mostly banks): about half of financial system assets; nonbanks (largely private pension funds, trust companies and insurance companies): hold the balance.
- Ten large domestic complex conglomerates: hold about 80 percent of total financial sector assets.
- Top banks (banking sector):
  - Top 3 banks (Bancolombia S.A., Banco de la Republica, and Davivienda S.A.): hold about 60 percent of banking system assets (source treats the four banks owned by Grupo Aval as one bank).
  - Banks extend 90 percent of their commercial loans to 7 percent of debtors.
- Financial access and markets:
  - Only one-third of the population has access to the banking system.
  - Equity market capitalization: 60 percent of GDP at end-2011.
  - Non-government fixed income: 4 percent of GDP.
  - Investor base: compulsory individual capitalization pension funds ~20 percent of GDP; insurance companies ~4 percent of GDP; mutual funds ~5 percent of GDP.

### Financial health of credit institutions (end-March 2012 unless noted)
- Funding composition:
  - Customer deposits: 64 percent of assets
  - Bonds and commercial paper of more than one-year maturity: 7 percent of assets
  - Equity: 13 percent of assets
  - Short-term wholesale funding: 11 percent of assets
  - One fifth of assets were claims on government (mostly government securities)
- Asset composition:
  - Roughly half of bank assets were loans to the corporate sector
  - About one third lending to households
- Regulatory capital ratios:
  - Capital adequacy ratio (CAR): 15.3 percent (regulatory minimum of 9 percent)
  - Tier 1 ratio: 12.5 percent
  - CAR excluding the value of goodwill: 14.3 percent
- New capital adequacy regime (decree issued August 2012; phased in by August 2013):
  - Retains minimum CAR of 9 percent and sets minimum Tier 1 capital of 4.5 percent
  - Excludes newly-generated goodwill; existing goodwill grandfathered and fully amortized over the next 14 years
  - Voluntary reserves recognized as part of Tier 2 capital up to a limit of 10 percent of total regulatory capital
  - Deferred tax assets and pension liabilities deducted from regulatory capital
  - Risk weights broadly in line with the Basel I capital framework
  - Estimated system-wide CAR under the new regime (assuming all existing voluntary reserves declared permanent and excluding all goodwill): 13.7 percent as of March 2012 (Tier 1 capital of 8.1 percent)

### Balance sheets of borrowers
- Corporate sector (as of end-2010):
  - Estimated net worth: 65 percent of GDP
  - Total liabilities: 35 percent of GDP
  - Exposure to the financial sector: about 16 percent of GDP
  - Liquid assets well in excess of short-term liabilities
  - Very little exposure to external debt overall; mining and transport sectors rely more on external borrowing
- Households:
  - Gross household debt: 13 percent of GDP as of June 2011
  - Debt service: 15 percent of salaries
  - All household debt in local currency
- Public sector:
  - Gross public debt: 34 percent of GDP at end-2011
  - Duration of public debt: 4.6 years
  - Share of debt in local currency: almost 75 percent
  - CDS spreads on sovereign debt: ranged between 100-200 basis points since 2006

### Key macro-financial risks
- External risk:
  - Main external risk: a protracted global recession that would cut economic growth and weaken loan portfolio quality.
  - Direct effect of deleveraging in Europe: probably little effect on Colombia’s banking system.
- Domestic vulnerabilities:
  - Pace of expansion in bank credit could pose risks, mitigated by strong household and corporate balance sheets and limited exposure to currency risk.
  - High concentration of the commercial loan portfolio: significant risk.
- Market and asset risks:
  - Few signs of asset bubbles in equity or housing prices; lack of depth and liquidity in key asset markets warrants continued vigilance.

### Resilience to shocks
- Strengths:
  - Substantial net interest income cushions against credit risk losses.
  - Reliance on stable deposits guards against liquidity shocks.
  - Low share of bank assets invested in fixed income assets contains market risk.
  - Small interbank exposures keep contagion risk quite low.

### Supervision and regulatory framework: key points
- Financial Superintendency of Colombia (SFC):
  - Exercises broad authority and effective supervision across financial institutions.
  - De facto independence is considerable; de jure independence could be strengthened.
  - Would benefit from legal reform to extend full regulatory and supervisory powers to holding companies of financial institutions.
- Banking supervision:
  - Robust assessment framework for credit risk, asset classification and provisioning.
  - Prudent management of market, liquidity and operational risks enforced.
  - Consolidated supervision of financial conglomerates enhanced since creation of SFC in 2005, but broader legal authority desirable—especially over unregulated bank holding companies.
  - Large exposure and related-party lending limits exist but need simplification and strengthening.
  - Recommendation: adoption of a Basel II, Pillar 2 supervisory framework to tailor prudential norms to risk profiles.

### Nonbank financial intermediaries
- Private pension system:
  - Assets of the fully-funded private pension system: almost 20 percent of GDP by June 2012.
  - Over the past 5 years, private pension funds earned an average nominal return of 13 percent.
- Trust companies: account for an equivalent share of financial system assets and include pension funds for unionized employees and mutual funds.
- Insurance companies:
  - Assets: 4 percent of GDP at end-June 2012.
  - About half of insurance assets held in government securities.
  - Return on these assets rose to 3.0 percent by June 2012.
  - Capital of insurance companies: 13.8 percent by June 2012.
- Broker-dealers and investment administrators: accounted for less than 1 percent of financial system assets at end-June 2012.
- Recommendations:
  - Tighten supervision of broker-dealers and other NBFIs, especially in liquidity management.
  - Adopt more rigorous stress testing of broker-dealers and other NBFIs.

### Financial safety net and crisis management
- System functioning:
  - Liquidity flows fairly smoothly through the system; deposit insurance is effective.
  - Authorities have a wide range of bank resolution tools.
- Enhancement opportunities:
  - Foster a deeper interbank money market.
  - Tighten supervision of broker-dealers and other NBFIs in liquidity management.
  - Separate resolution tools for systemic threats from non-systemic problems.
  - Shorten the time of possession of an intervened institution.
- Financial Stability Monitoring Committee (CCSSF):
  - Handles crisis management and macroprudential policy coordination and works well.
  - Would benefit from greater formality, including a strategic action plan for systemic risk that respects legal mandates and establishes a clear decision-making process.
- Macroprudential policy:
  - Authorities might consider phasing in countercyclical capital buffers, noting the need to understand interaction with the countercyclical loan loss provisioning system.

### Selected FSAP recommendations (selected entries from Table 1)
- Independence of SFC:
  - Include requirement to appoint the superintendent for a fixed term or require a public explanation of reasons for dismissal. (MHCP, High, ST)
- Holding companies of financial conglomerates:
  - Approve law giving SFC supervisory and regulatory powers over holding companies. (MHCP, High, MT)
- Adoption of IFRS and auditor standards:
  - Continue implementation of IFRS. (SFC, Medium, MT)
  - Publish timetable to comply with international auditing standards. (SFC, Medium, MT)
- Bank regulation and supervision:
  - Adopt Basel II, Pillar 2 supervisory framework. (MHCP, High, MT)
  - Introduce specifications for comprehensive risk management of banks and banking groups. (SFC, High, MT)
  - Simplify large exposure limits and ensure related-party lending limits cover all such exposures. (SFC, High, MT)
- Securities regulation:
  - Tighten oversight of broker-dealers and other collective investment schemes. (SFC, Medium, MT)
- Bank resolution framework:
  - Reform legal framework to shorten period of possession and limit reliance on options inconsistent with accepted resolution principles. (MHCP, SFC, Medium, MT)
- Macroprudential structure and money markets:
  - Adopt a more formal structure of CCSSF through an action plan. (MHCP, SFC and BR, Medium, MT)
  - Phase out the financial transaction tax faster than currently planned. (MHCP, Medium, MT)
  - Expand issuance of short-term government securities. (MHCP, Medium, MT)
  - Narrow range of counterparties in open market operations. (BR, Medium, MT)
  - Tighten liquidity standards and adopt more rigorous stress testing for broker-dealers and other NBFIs. (MHCP, High, MT)

*Source: _cr1350 - Executive Summary and selected FSAP findings*

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### 6 — Credit quality is strong and banks are quite profitable

### Credit quality and profitability (end-March 2012 and recent history)
- NPLs: 2.8 percent of total loans at end-March 2012.
- NPL ratios by portfolio:
  - Consumer: 4.8 percent
  - Microfinance: 4.5 percent
  - Commercial: 1.8 percent
  - Housing: 2.5 percent
- Provisions cover 163 percent of total NPLs (one fifth of the provisions come from the countercyclical loan loss provisioning system adopted in 2007).
- Profitability metrics:
  - Return on assets: fluctuated narrowly around 2 percent since 2005.
  - Return on equity: stayed near 26 percent since 2005.
- Market power and costs:
  - H-statistic estimate: 0.78 for Colombia (regional average: 0.77).
  - Administrative costs as a percentage of assets: higher than the regional median and expected level given Colombia’s level of development.
- Classification convention: loans 30 days or more past due are classified as non-performing.

### Stress tests, resilience, and concentration risk — summary results
- Capital definition used in tests: all existing goodwill subtracted; all voluntary reserves included (assumes shareholders agree to make permanent before new regime takes effect).
  - Under this capital definition, regulatory capital at end-March 2012: 13.7 of risk-weighted assets (Tier 1 CAR of 8.1 percent).
- Credit stress test (macroeconomic crisis = 2.5 standard deviation shock to annual GDP growth):
  - System-wide CAR: falls by 2.3 percent points relative to baseline to 12.9 percent after two years.
  - Medium-sized banks (1–10 percent of system assets): average CAR falls to 10.9 percent.
  - Three non-systemic banks: CAR falls slightly below regulatory minimum of 9 percent (recapitalization required equals 0.1 percent of total assets to bring these banks’ CAR above minimum).
  - Reverse stress test: an immediate and permanent rise in NPLs of 300 percent required to bring system-wide CAR to 9 percent after two years.
- Liquidity stress test:
  - Average LCR for the system: almost 500 percent (sample LCR: 427% for 23 banks).
  - Ratios for two larger banks (accounting for 20 percent of system assets): about 95 percent (slightly below LCR benchmark of 100 percent).
  - NSFR average: about 140 percent (sample NSFR: 244% for 23 banks); some small banks (2 percent of system assets) show deficiencies in stable medium and long term funding.
- Market risk test:
  - A 300 basis point parallel shift in the yield curve: system-wide CAR declines from 13.7 percent to 13.4 percent; no bank falls below minimum.
- Concentration risk test:
  - Downgrade by two grades of loans to the 100 largest private borrowers: aggregate CAR falls from 13.7 percent to 12.3 percent; Tier 1 ratio falls from 8.1 percent to 6.7 percent.
  - One non-systemic bank would fall below the regulatory minimum of 9 percent; three non-systemic banks would have Tier 1 capital fall below the new minimum of 4.5 percent.
  - Policy implication: merit in tightening large exposure limits.
- Interbank contagion and network analysis:
  - As of March 2012, gross asset exposures to each other and other intermediaries: about 5 percent of total banking sector assets; no substantial concentrations; network analysis confirms limited contagion.

### Stress-testing methodology: strengths and suggested improvements
- Strengths:
  - Well-functioning credit risk model linked to a structural macroeconomic model.
  - Market risk assessment in line with international best practices.
- Suggested improvements:
  - Enhance modeling of income statement elements and evolution of risk-weighted assets along FSAP stress-test lines.
  - Include scenarios that allow for access to the countercyclical capital buffer within stress tests, endogenously assessing access criteria.
  - Stress-test exposures to very large borrowers given concentration outcomes.
  - For liquidity: adopt a version of the Basel III Net Stable Funding Ratio (NSFR) for smaller banks; current LRI is a broad adaptation of LCR tailored to Colombian run-off rates.

*Source: _cr1350 - 6. Against this background, credit quality is strong and banks are quite profitable.*

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### Inter-institutional cooperation, supervisory architecture, and safety net

### SFC coordination and legal/governance issues
- Inter-agency cooperation:
  - SFC decides when to resolve a financial institution and works closely with FOGAFIN (deposit insurance and interventions).
  - SFC works with UIAF on AML/CFT.
  - SFC is a member of CCSSF (includes BR, MHCP, FOGAFIN).
  - Footnote: Most recent AML/CFT assessment completed in 2008; authorities agreed to undertake an AML/CFT assessment in Q1 2013.
- Independence and legal protection:
  - SFC has considerable de facto independence; de jure independence limited because President can dismiss the superintendent at any time without cause.
  - SFC and staff lack legal protection for acts carried out in good faith; recommended legal clarifications and legal protection.
- Regulatory perimeter and group supervision:
  - Adopt law extending full regulatory and supervisory powers to holding companies of financial institutions; SFC currently has no regulatory powers over financial holding companies.
  - Law should define financial group and give SFC power to resolve a financial conglomerate as a whole.

### Banking supervision: scope and quality highlights
- Authorization processes: robust for licensing, transfers of ownership and investments; special emphasis on large acquisitions and investments abroad.
- Cross-border supervision: effective cooperation network with other countries; organized supervisory colleges (e.g., Banco de Bogota; Bancolombia).
- Capital regime:
  - Colombia follows many Basel I rules; minimum CAR: 9 percent of RWA.
  - Outgoing regime gaps: inclusion of goodwill and voluntary reserves; limited capital for market risk for foreign subsidiaries.
  - Revised capital regime effective August 1, 2013 incorporates Basel III recommendations: minimum Tier I 4.5 percent; deduction of goodwill with grandfathering; restrictions for voluntary reserves and current profits; amendments on minority interests.
- Risk-based supervision:
  - SFC implemented Integrated Supervisory Framework (MIS) in 2009; need further formal guidance for comprehensive risk management and standards for interest-rate risk in the banking book and country/transfer risks.
- Large exposures and related parties:
  - Rules exist but are complex and permit exceptions; local affiliates not consolidated; available unused credit lines not included in limits; corporate control definition may permit bypassing related party limits.
- Recommendation:
  - Put in place a Basel II, Pillar 2 supervisory framework to provide explicit authority to tailor prudential norms to individual institution risk profiles.

### Securities and market infrastructure supervision
- Securities regulation:
  - Securities Law (2005) and AMV (since 2006) improved customer protection and market abuse combatting.
  - SFC signed IOSCO MoU in May 2012.
  - Extraordinary administrative powers include ability to freeze/seize assets and intervene in market disruption and defaults.
- Key concerns:
  - Tighten oversight of collective investment vehicle operators (broker-dealers) and improve protection of minority shareholders.
- Secondary markets (Principles 33–37):
  - Markets meet international standards on transparency and market abuse rules.
  - Concerns: price reporting fragmentation (multiple voice broking and matching systems); settlement-period exposures; intra-settlement trading risks; need to consolidate price reporting and enhance oversight of order handling and collateralization.

### Financial safety net and liquidity provision
- Role of Banco de la Republica (BR):
  - Central role in liquidity through open market repos and intra-day operations.
  - Interbank money market: very limited.
  - BR plans to extend intra-day repos to market infrastructure institutions (clearing houses).
- Broker-dealer risks:
  - Broker-dealers can take large net intraday exposures exceeding capital/liquidity buffers; two broker-dealers among ten institutions with most payment system interconnections.
  - BR provided intra-day liquidity against corporate securities temporarily after a recent intervention.
  - Recommendation: tighten liquidity requirements for broker-dealers and other NBFIs; more rigorous stress testing.
- Lender of last resort facility:
  - Law requires BR to lend only to credit institutions against a wider range of collateral than government securities.
  - BR may need to lend to broker-dealers, trust companies and clearing houses in a crisis; recommendation to widen eligible collateral.
  - Suggestion: BR be ready to swap dollars from FX reserves for pesos with liquidity-providing banks as back-up for foreign currency clearing house risks.
- Deposit insurance (FOGAFIN):
  - Current coverage limit: about US$11,000 (about 150 percent of per capita income) per depositor per institution.
  - System covers all deposit-taking institutions (mandatory) and covers 98 percent of depositors in full, but only 20 per cent of the total value of deposits, with no coinsurance.
  - Funded by annual premiums and investment income.
  - FOGAFIN’s board and staff lack legal protection for actions in good faith.
  - FOGAFIN relies on SFC for assessment; SFC agreed to inform FOGAFIN when an institution is at significant risk of intervention.
  - With SFC support, banks required to begin reporting detailed deposit information directly to FOGAFIN starting in 2014.

### Bank resolution framework: powers and suggested legal reforms
- Preventive and corrective powers: moral suasion, administrative orders, cease and desist orders and sanctions; enhanced surveillance; ordering recapitalization; fostering transfer/sale/merger; ordering recovery plans.
- Legal options and suggested improvements:
  - Excessively long period of possession: FOGAFIN has two months (extendable) to decide resolution option after intervention; recommendation: shorten this period.
  - Too much flexibility in choice of options: may favor shareholders; authorities preparing a protocol (decision tree) to separate systemic from non-systemic cases and identify options that should be embedded in legal framework.
  - Protocol should incorporate resolution principles: least cost, minimize contagion, shareholders first loss, transparency and fairness, prefer private solutions, quick response, and be public.

*Source: IMF staff report excerpts contained in the provided content unit.*

---

### CCSSF, macroprudential tools, and sectoral statistics

### CCSSF role and recommended reforms
- CCSSF seeks to ensure coordination among SFC, BR, MHCP and FOGAFIN; meets at least four times per year.
- Strengths: fosters information exchange and discussion of macroprudential policy.
- Recommended enhancements:
  - Greater formality; introduce a strategic action plan for systemic risk that respects legal mandates.
  - Develop a long-term work plan with agreed methodology to identify and monitor systemic risk and establish a perimeter for measuring systemic risk.
  - In systemic crises, CCSSF should coordinate systemic measures and a clear decision-making process.

### Macroprudential instruments and suggestions
- Existing instruments used since 1999 include:
  - legal limits on loan to value and debt service to income;
  - marginal reserve requirements;
  - changes in provisioning and collateral for consumer credit;
  - limits on derivative exposures and net open FX positions;
  - unremunerated reserve requirement on capital inflows (used in 2007).
- Suggested refinements:
  - Extend provisioning requirements on consumer credit to unused portion of credit lines.
  - Tailor provisioning rates to borrower debt service ratio.
  - Consider phasing in countercyclical capital buffers; study interactions with the countercyclical loan loss provisioning scheme.
- Countercyclical provisioning observation:
  - System allows creation of additional loan loss reserves in good times; staff simulations show buffer may not be fully depleted in a moderately severe downturn due to asymmetry between accumulation and drawdown rules; effective as microprudential tool; coordination with countercyclical capital buffer crucial.

### Financial system structure (selected figures, end-2011)
- System-wide totals:
  - Total number of entities: 171
  - Total assets: 542,910,114 (COP mn)
  - Percent of total assets: 100.0
  - Percent of end–2011 GDP: 89.5
- Banks (23):
  - Total assets: 295,954,567 (COP mn)
  - Percent of total assets: 54.5
  - Percent of end–2011 GDP: 48.8
  - Domestic private banks (13): 222,249,352 (COP mn); 40.9 percent of total assets; 36.6 percent of end–2011 GDP
  - Domestic public banks (1): 16,336,151 (COP mn); 3.0 percent of total assets; 2.7 percent of end–2011 GDP
  - Foreign private banks (9): 57,369,064 (COP mn); 10.6 percent of total assets; 9.5 percent of end–2011 GDP
- Other sectors (end–2011):
  - Collective investment funds: 28,364,982 (COP mn); 5.2 percent of total assets; 4.7 percent of end–2011 GDP
  - Value of obligatory pension funds: 91,473,158 (COP mn); 16.8 percent of total assets; 15.1 percent of end–2011 GDP
  - Life insurance companies (19): 22,352,096 (COP mn); 4.1 percent of total assets; 3.7 percent of end–2011 GDP

### Selected economic and financial indicators (high-level)
- Population (millions), 2011: 46.1
- GDP per capita (US$), 2011: 7,114
- GDP, in billions of Col$: 615,727
- Unemployment rate, July 2012 (percent): 10.9
- Public Debt (in percent GDP), 2011: 34.2
- Real GDP growth (%) by year:
  - 2007: 6.9; 2008: 3.5; 2009: 1.7; 2010: 4.0; 2011: 5.9; 2012: 4.3; 2013: 4.4
- Credit to the private sector (percent change):
  - 2007: 25.6; 2008: 14.0; 2009: 0.9; 2010: 16.8; 2011: 22.9; 2012: 12.9; 2013: 13.5
- Regulatory minimum (CAR): total capital (own funds) 9 percent of RWA

### Risk assessment matrix (selected threats)
- Sudden stop in capital inflows: Overall Level of Concern: medium; Likelihood: medium; Expected impact: domestic asset prices decline, higher market risk, slowdown in GDP could raise NPLs.
- Sharp rise in U.S. interest rates: Overall Level of Concern: low; Likelihood: medium; Expected impact: higher borrowing costs, portfolio quality decline, authorities have less room.
- Terms of trade shock/reduction in net exports: Overall Level of Concern: low; Likelihood: medium; Expected impact: deteriorate energy sector lending; general slowdown.
- Distress in large borrower: Overall Level of Concern: low; Likelihood: high; Expected impact: reduction in profits/increased NPLs/liquidity shortages.
- Deterioration of consumer lending portfolio: Overall Level of Concern: low; Likelihood: medium; Expected impact: increased NPLs; banks deleverage.
- Housing price collapse: Overall Level of Concern: low; Likelihood: medium; Observations: Mortgages NPL ratio: 8.3 percent; Mortgage lending: 8 percent of total lending; late 1990s crisis saw mortgage NPLs reach 40 percent.

*Source: CCSSF and FSAP tables and risk assessments in the provided content.*

---

### Insurance sector: structure, supervision, and recommendations

### Market overview and key statistics (2011 and recent years)
- Colombia is Latin America’s fourth largest economy and sixth largest insurance market.
- Total industry premiums: 2.3 percent of GDP.
- Total industry assets: 5.5 percent of GDP.
- Average Colombian spends approximately $140 dollars per year on insurance.
- Gross premiums written: COP 6,520 bn. in 2005 and COP 14,162 bn. in 2011.
- Average annual growth of gross premiums written (2005–2011): approximately 13.8 percent.
- Insurance penetration increased from 1.91 percent to current level (current level not numerically restated).
- Market composition (2011, excluding Personal Accident and Healthcare):
  - Non-life: ~49 percent of gross premiums written.
  - Life: ~43 percent of gross premiums written.
- Personal Accident and Healthcare: ~9 percent of premiums written or COP 1206 bn.
- Market concentration:
  - Non-life: five largest account for ~48 percent of premiums; ten largest account for 77 percent.
  - Non-life HHI: ~727 (un-concentrated).
  - Life: five largest insurers account for 67 percent of total assets; ten largest for ~91 percent.
  - Life HHI: ~1123 (moderate concentration).
- Ownership:
  - Insurers associated with Colombian financial conglomerates: >36 percent of gross premiums written.
  - Companies ultimately foreign controlled: ~40 percent of gross premiums written.
- Investments:
  - Composition: ~51 percent government securities; 29 percent corporate securities; 12 percent equities; others <8 percent.
- Distribution:
  - Agents account for perhaps 60 percent of business.
  - Bancassurance distributes ~20 percent of life insurance products.

### Supervisory structure and capacity
- SFC supervises insurers, reinsurers, savings companies, and intermediaries; SFC has approximately 790 staff.
- Insurance-specific staffing: 60 staff dedicated solely to insurance in Institutional Supervision; 216 staff in risk supervision areas; research and development: 49 staff.
- Regulatory advances in last five years:
  - Strengthened solvency requirements; risk management and internal control requirements; improved investment regulations; new mortality tables; revised insolvency and liquidation procedures; stronger consumer protection.
- Actuarial capacity: perhaps 120 trained actuaries; actuaries currently lack self-regulatory professional standing.

### Key supervisory and regulatory challenges and recommendations
- Institutional independence and governance:
  - Strengthen SFC independence—appointment/dismissal procedures and consider fixed term (e.g., five to seven years).
- Legal clarity and licensing:
  - Consider clear statutory definition of insurance business to address "near insurance" products.
- Solvency and risk-based supervision:
  - Further enhancements to align solvency requirements with international standards (reserving practices and capital requirements).
  - Implement stronger enterprise risk management and governance; consider mandatory risk management committees and ALM policies.
- Actuarial capacity:
  - Low actuarial capacity; recommend fuller actuarial programs at local universities and establishment of a self-regulating actuarial profession.
- Consumer protection and intermediaries:
  - Improve oversight of insurance agents: licensing/registration, code of conduct, minimum educational standards, public database of disciplined agents; consider industry-based SRO model with SFC oversight.
- Group supervision:
  - Strengthen regulatory framework to extend supervision to financial holding companies and industrial members to enable consolidated reporting and consolidated risk management.
- Crisis management and cross-border cooperation:
  - Complete crisis plans for insurers and strengthen cross-border cooperation; consider supervisory colleges and other mechanisms.

### ICP-specific observations (selected)
- ICP 2 (Supervisor): operational independence should be strengthened; staff legal protection prioritized.
- ICP 8 (Risk Management): need for functioning actuarial profession and internal actuarial function.
- ICP 14 (Valuation): implement new reserving decree and transition to IFRS to improve valuation.
- ICP 17 (Capital Adequacy): continue development of capital requirements for operational risk; consider group-level capital requirements.
- ICP 18 (Intermediaries) and ICP 19 (Conduct): establish and resource intermediary oversight and conduct requirements.
- ICP 21 (Fraud): develop joint SFC/industry fraud strategy.
- ICP 23 (Group-wide Supervision): extend supervision to relevant group entities; strengthen SFC powers.
- ICP 24 (Macro-prudential Surveillance): continue development of CCSSF role and systemic assessment.
- ICP 26 (Cross-border Crisis Management): finalize details and supervisory plans for cross-border crisis coordination.

*Source: IMF staff report excerpts on insurance sector (content unit _cr1350 - 142 and related paragraphs).*

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*Italic: Source — IMF staff report (content unit: _cr1350).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview of the financial system
- Assets of the supervised financial system reached about 90 percent of GDP at end-2011.
- Credit institutions (mostly banks) account for about half of financial system assets; nonbanks (largely private pension funds, trust companies and insurance companies) hold the balance.
- Ten large domestic complex conglomerates hold about 80 percent of total financial sector assets.
- In the banking sector, the top 3 banks (Bancolombia S.A., Banco de la Republica, and Davivienda S.A.) hold about 60 percent of banking system assets (note: the source treats the four banks owned by Grupo Aval as one bank).
- Banks extend 90 percent of their commercial loans to 7 percent of debtors.
- Only one-third of the population has access to the banking system.
- Colombia’s capital markets: equity market capitalization reached 60 percent of GDP at end-2011; non-government fixed income is 4 percent of GDP.
- Investor base: compulsory individual capitalization pension funds ~20 percent of GDP, insurance companies ~4 percent of GDP, mutual funds ~5 percent of GDP.

### Financial health of credit institutions
- Funding composition (end-March 2012):
  - Customer deposits: 64 percent of assets
  - Bonds and commercial paper of more than one-year maturity: 7 percent of assets
  - Equity: 13 percent of assets
  - Short-term wholesale funding: 11 percent of assets
  - One fifth of assets were claims on government (mostly government securities)
- Asset composition (end-March 2012):
  - Roughly half of bank assets were loans to the corporate sector
  - About one third lending to households
- Regulatory capital ratios (end-March 2012):
  - Capital adequacy ratio (CAR): 15.3 percent (regulatory minimum of 9 percent)
  - Tier 1 ratio: 12.5 percent
  - CAR excluding the value of goodwill: 14.3 percent
- New capital adequacy regime (decree issued August 2012; phased in by August 2013):
  - Retains minimum CAR of 9 percent and sets minimum Tier 1 capital of 4.5 percent
  - Excludes newly-generated goodwill; existing goodwill grandfathered and fully amortized over the next 14 years
  - Voluntary reserves recognized as part of Tier 2 capital up to a limit of 10 percent of total regulatory capital
  - Deferred tax assets and pension liabilities deducted from regulatory capital
  - Risk weights broadly in line with the Basel I capital framework
  - Estimated system-wide CAR under the new regime (assuming all existing voluntary reserves declared permanent and excluding all goodwill) would have declined to 13.7 percent as of March 2012 (Tier 1 capital of 8.1 percent).

### Balance sheets of borrowers
- Corporate sector (as of end-2010):
  - Estimated net worth: 65 percent of GDP
  - Total liabilities: 35 percent of GDP
  - Exposure to the financial sector: about 16 percent of GDP
  - Liquid assets well in excess of short-term liabilities
  - Very little exposure to external debt overall; mining and transport sectors rely more on external borrowing
- Households:
  - Gross household debt: 13 percent of GDP as of June 2011
  - Debt service: 15 percent of salaries
  - All household debt in local currency
- Public sector:
  - Gross public debt: 34 percent of GDP at end-2011
  - Duration of public debt: 4.6 years
  - Share of debt in local currency: almost 75 percent
  - CDS spreads on sovereign debt have ranged between 100-200 basis points since 2006

### Key macro-financial risks
- Main external risk: a protracted global recession that would cut economic growth and weaken loan portfolio quality.
  - Direct effect of deleveraging in Europe would probably have little effect on Colombia’s banking system.
- Domestic vulnerabilities:
  - Pace of expansion in bank credit could pose risks, although mitigated by strong household and corporate balance sheets and limited exposure to currency risk.
  - High concentration of the commercial loan portfolio presents more significant risks.
- Market and asset risks:
  - Few signs of asset bubbles in equity or housing prices, but lack of depth and liquidity in key asset markets warrants continued vigilance.

### Resilience to shocks
- Banks benefit from substantial net interest income, which cushions against credit risk losses.
- Reliance on stable deposits for funding helps guard against liquidity shocks.
- Low share of bank assets invested in fixed income assets contains market risk.
- Small exposures in the interbank market keep contagion risk quite low.

### Supervision and regulatory framework
- Financial Superintendency of Colombia (SFC):
  - Exercises broad authority and effective supervision across financial institutions.
  - De facto independence is considerable; de jure independence could be strengthened.
  - Would benefit from legal reform to extend full regulatory and supervisory powers to holding companies of financial institutions.
- Banking supervision:
  - Robust framework for assessment of credit risk and asset classification and provisioning.
  - Prudent management of market, liquidity and operational risks enforced.
  - Thorough authorization processes (licensing, transfers of ownership and investments).
  - Consolidated supervision of financial conglomerates enhanced since creation of SFC in 2005, but broader legal authority is desirable—especially to oversee unregulated bank holding companies and to force changes in a group’s structure.
  - Large exposure limits exist but need to be more comprehensive and streamlined.
  - Related party lending limits need strengthening.
  - SFC would benefit from adoption of a Basel II, Pillar 2 supervisory framework to permit tailoring prudential norms to the risk profile of each institution.

### Nonbank financial intermediaries
- Private pension system:
  - Assets of the fully-funded private pension system reached almost 20 percent of GDP by June 2012.
  - Over the past 5 years, private pension funds earned an average nominal return of 13 percent.
- Trust companies account for an equivalent share of financial system assets and include pension funds for unionized employees and mutual funds.
- Other NBFIs (insurance companies, broker-dealers, investment administrators) hold a small share of financial system assets.
- Recommendations:
  - Tighten supervision of broker-dealers and other NBFIs, especially in liquidity management.
  - Adopt more rigorous stress testing of broker-dealers and other NBFIs.

### Financial safety net and crisis management
- Overall assessment:
  - Liquidity flows fairly smoothly through the system.
  - Deposit insurance is effective.
  - Authorities have a wide range of bank resolution tools.
- Enhancement opportunities:
  - Foster a deeper interbank money market.
  - Tighten supervision of broker-dealers and other NBFIs in liquidity management.
  - Separate resolution tools for systemic threats from those for non-systemic problems.
  - Shorten the time of possession of an intervened institution.
- Financial Stability Monitoring Committee (CCSSF):
  - Handles crisis management and macroprudential policy coordination and works well.
  - Would benefit from greater formality, including introduction of a strategic action plan for systemic risk that respects legal mandates and establishes a clear decision-making process.
- Macroprudential policy:
  - Authorities might consider phasing in countercyclical capital buffers to address systemic shocks, noting the need to understand interaction with the current system of countercyclical loan loss provisioning.

### Key FSAP recommendations (selected from Table 1)
- Independence of SFC:
  - Include requirement to appoint the superintendent for a fixed term or require a public explanation of reasons for dismissal. (MHCP, High, ST)
- Holding companies of financial conglomerates:
  - Approve law giving SFC supervisory and regulatory powers over holding companies. (MHCP, High, MT)
- Adoption of IFRS and auditor standards:
  - Continue implementation of IFRS. (SFC, Medium, MT)
  - Publish timetable to comply with international auditing standards. (SFC, Medium, MT)
- Bank regulation and supervision:
  - Adopt Basel II, Pillar 2 supervisory framework. (MHCP, High, MT)
  - Introduce specifications for comprehensive risk management of banks and banking groups. (SFC, High, MT)
  - Formulate guidelines to undertake ICAAP reviews at individual bank and conglomerate level. (SFC, High, MT)
  - Simplify large exposure limits and ensure related-party lending limits cover all such exposures. (SFC, High, MT)
- Securities regulation:
  - Require earlier notification of public meetings and extraordinary actions to improve protections for minority shareholders. (SFC, Medium, ST)
  - Tighten oversight of broker-dealers and other collective investment schemes. (SFC, Medium, MT)
- Bank resolution framework:
  - Reform legal framework to shorten period of possession and limit reliance on options inconsistent with accepted resolution principles. (MHCP, SFC, Medium, MT)
- Macroprudential structure and money markets:
  - Adopt more formal structure of CCSSF through an action plan to manage a systemic crisis. (MHCP, SFC and BR, Medium, MT)
  - Phase out the financial transaction tax faster than currently planned. (MHCP, Medium, MT)
  - Expand issuance of short-term government securities. (MHCP, Medium, MT)
  - Narrow range of counterparties in open market operations. (BR, Medium, MT)
  - Tighten liquidity standards and adopt more rigorous stress testing for broker-dealers and other NBFIs. (MHCP, High, MT)

*Source: _cr1350 - Executive Summary*

### 6.      Against this background, credit quality is strong and banks are quite profitable.

### _cr1350 - 6.      Against this background, credit quality is strong and banks are quite profitable.

### Credit quality and bank profitability
- Nonperforming loans (NPLs) were manageable at 2.8 percent of total loans at end-March 2012.
- NPL ratios by portfolio:
  - Consumer: 4.8 percent
  - Microfinance: 4.5 percent
  - Commercial: 1.8 percent
  - Housing: 2.5 percent
- Provisions cover 163 percent of total NPLs (one fifth of the provisions come from the countercyclical loan loss provisioning system adopted in 2007).
- Profitability metrics:
  - Return on assets has fluctuated narrowly around 2 percent since 2005.
  - Return on equity has stayed near 26 percent since 2005.
- Profit drivers and structural notes:
  - Profits arise mostly from a wide net intermediation margin.
  - Strong profitability may reflect concentration of the banking system, which can restrict competition and efficiency.
  - Non-structural estimates of market power (H-statistic) indicate a degree of monopolistic competition similar to regional averages: an estimate for the H-statistic was 0.78 for Colombia, similar to the regional average of 0.77.
  - Administrative costs as a percentage of assets are higher than the regional median and the expected level given Colombia’s level of development.
- Classification convention:
  - In Colombia, loans that are 30 days or more past due are classified as non-performing.

### Nonbank financial intermediaries
- Private pension funds:
  - Manage IRA-type pensions with total assets equivalent to almost 20 percent of GDP.
  - Asset allocation: largest share in government securities, followed by corporate securities, foreign assets, and to a much lesser extent deposits and equity in other financial institutions.
  - Over the past 5 years, private pension funds have earned an average nominal return of 13 percent.
  - Co-exist with a public pay-as-you-go (PAYGO) system; individuals may switch regimes once every five years, making their last choice ten years before retirement.
  - Implication: risk of poor investment returns on pension funds tends to be borne by the government as well as those individuals who retire under the private system.
- Other non-bank intermediaries:
  - Trust companies and related institutions (including pension funds for unionized employees and mutual funds) together had assets amounting to 20 percent of GDP at end-June 2012; investments concentrated in fixed-income local currency private instruments, public debt and to a lesser extent domestic equity.
  - Insurance companies:
    - Assets amounted to 4 percent of GDP at end-June 2012.
    - About half of insurance assets held in government securities.
    - By June 2012, the return on these assets rose to 3.0 percent.
    - Capital of insurance companies reached 13.8 percent by June 2012.
  - Broker-dealers and investment administrators accounted for less than 1 percent of financial system assets at end-June 2012.

### Key macro-financial risks for the banking system
- Outlook and macro context:
  - Growth over the medium term is projected to stay at about 4.5 percent.
  - Inflation projected to remain in the central bank’s 2–4 percent target range.
  - Fiscal consolidation will continue under the recently approved fiscal rule.
  - Colombia’s current account deficit is projected to remain relatively low, financed by continued high FDI inflows.
- Global risks:
  - Main risk: a protracted global recession that would cut economic growth and weaken loan portfolio quality.
  - Possible triggers: adverse developments in Europe, a decline in U.S. growth, or a hard landing in China—would reduce commodity exports (about 80 percent of total merchandise exports), remittances or foreign direct investment.
  - A sharp rise in global risk aversion could tighten Colombian financial conditions via less access to external financing and upward pressure on local funding costs.
- Direct external exposure:
  - Banks’ outstanding borrowing from foreign sources accounts only for 2.5 percent of GDP.
  - Foreign banks have 19 percent of banking assets in Colombia.
  - BBVA has 9 percent of banking system assets; Santander has 3 percent.
  - In 2012, Santander sold 51 percent of its equity to Corbanco of Chile (reported with no impact on the domestic market).
  - Foreign subsidiaries fund themselves almost entirely through domestic retail deposits.
  - Foreign borrowing by Colombian banks or non-financial corporations, especially from the Euro area, is small.

### Domestic credit growth, asset prices, and vulnerabilities
- Credit expansion:
  - Credit to the private sector has been growing at an average of 14 percent a year in real terms in recent years.
  - Non-mortgage consumer loans now account for almost 30 percent of total credit (up from 18 percent in 2004).
  - Increase in loan size has been noted rather than a growing number of borrowers.
  - Interest rate vulnerability: half of all loans are contracted at a floating interest rate.
    - Note: Almost 80 percent of business loans are contracted at floating rate, while most consumption and microcredit loans are at fixed rates. Mortgages can be prepaid or restructured free of charge.
  - Currency risk mitigation: strict limits on currency and liquidity mismatches in foreign currency and over 90 percent of lending is in domestic currency.
- Asset bubbles and market depth:
  - Few signs of asset bubbles in equity or housing prices, but lack of depth and liquidity in key asset markets calls for continued vigilance.
  - Equity market characteristics:
    - Illiquid with low trading volumes and a small free float.
    - Ecopetrol accounts for 40 percent of market capitalization and almost one-third of trading.
    - Over 1 million individual accounts held by retail investors.
  - Household balance sheet indicator:
    - Average debt-to-net wealth of households fell to 12 percent in 2011 (down from 19 percent in 2010), which could, if housing prices hike and persist, fuel a consumption credit boom.

### Stress tests, resilience, and concentration risk
- General resilience findings:
  - High profitability, low credit risk and conservative business models make Colombian banks resilient to a variety of shocks.
  - Net interest income provides cushion against credit losses; reliance on stable deposits helps guard against liquidity shocks.
  - Market risk contained due to low share of bank assets invested in government and other fixed income assets.
  - Small interbank market exposures keep contagion risk quite low.
  - Significant risk arises from high concentration of the commercial loan portfolio.
- Capital definition used in tests:
  - All existing goodwill was subtracted, and all voluntary reserves were included, assuming shareholders would agree to make this permanent before the new regime takes effect.
  - Under this capital definition, regulatory capital at end-March 2012 would amount to 13.7 of risk-weighted assets (Tier 1 CAR of 8.1 percent).
- Credit stress test results:
  - Under a macroeconomic crisis scenario representing a 2.5 standard deviation shock to annual GDP growth, the system-wide CAR would fall by 2.3 percent points relative to the baseline to 12.9 percent after two years.
  - Medium-sized banks (between 1 and 10 percent of system assets) would be hardest hit, with average CAR falling to 10.9 percent.
  - The CAR of three non-systemic banks would fall slightly below the regulatory minimum of 9 percent (the equivalent of 0.1 percent of total assets would be required to bring these banks’ CAR above the minimum).
  - The dynamic provisioning system provided a significant buffer to a number of banks to help absorb increased provisioning costs.
  - Reverse stress test: an immediate and permanent rise in NPLs of 300 percent would be required to bring the system-wide CAR to 9 percent after two years.
- Liquidity stress test results:
  - Average LCR for the system is almost 500 percent.
  - Ratios for two larger banks (accounting for 20 percent of system assets) are about 95 percent, slightly below the LCR benchmark of 100 percent.
  - NSFR averages about 140 percent, although some small banks (accounting for just 2 percent of system assets) show deficiencies in stable medium and long term funding.
- Market risk test:
  - A 300 basis point parallel shift in the yield curve leads to a slight decline in the system-wide CAR from 13.7 percent to 13.4 percent; no bank falls below the minimum.
  - Analysis includes domestic sovereign bonds in held-to-maturity portfolio, marked-to-market in stress scenario.
- Concentration risk test:
  - Hypothetical scenario: credit ratings of loans to the 100 largest private borrowers downgraded by two grades under the loan classification system.
  - Result: aggregate CAR falls from 13.7 percent to 12.3 percent; Tier 1 ratio falls from 8.1 percent to 6.7 percent.
  - One non-systemic bank would fall below the regulatory minimum of 9 percent; three non-systemic banks would have Tier 1 capital fall below the new minimum of 4.5 percent.
  - Policy implication: merit in tightening the limit on large exposures to manage concentration risk.
- Interbank contagion and network analysis:
  - As of March 2012, banks’ gross asset exposures to each other and other intermediaries represented only about 5 percent of total banking sector assets and showed no substantial concentrations.
  - Network analysis confirmed limited contagion effects.

### Stress-testing methodology and suggested improvements
- Strengths:
  - Authorities have a well-functioning credit risk model linked to a structural macroeconomic model.
  - Assessment of market risks is in line with international best practices.
- Areas for enhancement:
  - Enhance modeling of some elements of the income statement and evolution of risk-weighted assets along FSAP stress-test lines.
  - Include scenarios that allow for access to the countercyclical capital buffer within stress tests, preferably by endogenously assessing whether banks meet access criteria.
  - Stress-test banks’ exposures to very large borrowers given concentration test outcomes.
  - For liquidity stress testing, while the LRI is a broad adaptation of the LCR under Basel III tailored to Colombian run-off rates and projected inflows, authorities should adopt a version of the Basel III Net Stable Funding Ratio to safeguard prudent longer-term funding at smaller banks.

### Supervisory architecture and regulatory process
- Supervisory responsibilities:
  - The Superintendencia Financiera de Colombia (SFC) supervises all financial institutions except non-deposit taking cooperatives (supervised by the Department of Economic Solidarity).
  - SFC mandates include preservation of stability, safety and confidence of the financial system; organization and development of Colombian capital markets; protection of investors, depositors, insurance policy holders, and consumers of other financial services.
- Institutional roles:
  - The ministry of finance (MHCP) leads in issuing prudential regulations; SFC plays a critical role in proposing, generating and commenting on decrees and regulations.
  - SFC has authority to issue mandatory instructions on risk management, loan classification and provisioning, accounting and reporting.
  - Government created the Financial Regulation Unit (URF) to promote coordination between SFC and MHCP to address concerns that regulatory process was too slow and prescriptive.
  - No evidence of political interference; regulations followed technical considerations.
  - Continued excellent coordination between SFC and MHCP is required to ensure SFC plays a key role in the regulatory process.
- Capacity building:
  - SFC has worked with the Toronto Center to streamline management structure and promote stronger capacity for consolidated supervision and comprehensive risk assessment.

*Italic: Source — IMF staff report (content unit: _cr1350 - 6. Against this background, credit quality is strong and banks are quite profitable.)*

### 24.      The SFC works with other institutions in many areas. On bank resolution, the SFC

### The SFC works with other institutions in many areas

### Inter-institutional cooperation and roles
- The SFC decides when to resolve a financial institution and works closely with the Guarantee Fund for Financial Institutions (FOGAFIN), which manages the deposit insurance system and administers intervened financial institutions.
- On anti-money laundering, the SFC works closely with the Unit for Financial Information and Analysis (UIAF)—a unit located in the ministry of finance that leads the country’s AML/CFT efforts—to ensure financial system compliance with international norms in this area.
- The SFC is a member of the Financial Stability Monitoring Committee (CCSSF), which includes the Banco de la Republica (BR), the MHCP as well as FOGAFIN.
- Footnote: The most recent AML/CFT assessment was completed in 2008 and the authorities have agreed to undertake an AML/CFT assessment in the first quarter of 2013.

### Cross-cutting supervisory issues applying to all financial institutions
- Strengthening independence
  - The SFC has considerable de facto independence and the supervisor carries out functions with no political interference.
  - Jure independence issues: the President can dismiss the superintendent at any time without cause.
  - Possible reforms: require appointment of the superintendent for a fixed term or require a public explanation of reasons for dismissal.
- Strengthening legal protections
  - The SFC and its staff lack legal protection for acts carried out in good faith performance of official duties.
  - Suggested legal clarifications: define liability for failure to perform the regulatory mandate in good faith as equivalent to acting in bad faith; allow judicial authorities to limit circumstances in which private parties would have standing to sue.
- Regulatory perimeter and group supervision
  - Adopt a law extending full regulatory and supervisory powers to holding companies of financial institutions; the SFC currently has no regulatory powers over financial holding companies.
  - Such a law should provide a clear definition of financial group and give the SFC powers to resolve a financial conglomerate as a whole; currently the SFC can resolve supervised members only on an individual basis.
- Accounting and audit standards
  - Adopt IFRS: the SFC published a timetable for full adoption of IFRS by end-2015.
  - Strengthen standards for external audits: while the SFC can oversee external auditors, it needs more rigorous standards for independence and to publish the timetable to comply with international accounting and auditing standards.

### Banking supervision: scope and quality
- The SFC exercises effective oversight of the banking system and enforces a robust framework for assessment of credit risk, asset classification and provisioning, and prudent management of market, liquidity and operational risks.
- Authorization processes (licensing, transfers of ownership and investments) are well rounded and thorough; special emphasis on authorization of large acquisitions and investments as Colombian banking groups expand abroad.
- Cross-border supervision: the SFC has established an effective network of cooperation with other countries to exercise effective cross-border supervision of banking groups.
- Capital regime
  - New capital regime represents an important step forward from the outgoing capital adequacy rules.
  - Minimum capital adequacy ratio is 9 percent.
  - The outgoing regime contains gaps (inclusion of goodwill, all voluntary reserves and investments in unregulated subsidiaries); the BCP assessment evaluated the outgoing regime.
- AML/CFT
  - Colombia has a robust framework for AML/CFT and addressing criminal activities.
  - The UIAF leads monitoring; the SFC’s legal and regulatory framework provide guidance for oversight of suspicious activity reporting by banks.
  - Some scope exists to improve SFC’s monitoring of implementation by banks.
- Risk-based supervision
  - The SFC is progressing to more comprehensive risk management and implemented the Integrated Supervisory Framework (MIS) in 2009 with support from the Toronto Center.
  - Need for further formal written guidance on comprehensive risk management for banks and banking groups.
  - No standards currently for management of interest rate risk in the banking book and country and transfer risks.
  - Full adoption of reforms will take several more years; once in place, will ensure full implementation of a comprehensive risk-based approach.
- Large exposures and related parties
  - Rules exist but could be simpler and allow fewer exceptions.
  - Local affiliates are not consolidated and available unused credit lines are not taken into account in calculating large exposure limits nor related party lending.
  - Definition of corporate control may create opportunities to bypass related party limits.
- Consolidated supervision of financial conglomerates
  - Significantly enhanced since creation of the SFC: empowered to conduct onsite exams and obtain information from unsupervised members, order consolidation of financial statements, exchange information with foreign supervisors and authorize investments in foreign entities.
  - Dedicated team and supervisory procedures in place; scope covers financial conglomerate and broader mixed conglomerate.
  - SFC would benefit from broader legal authority to oversee unregulated bank holding companies and to force changes in a group’s structure.
- Supervisory cooperation
  - No legal limitations for supervisory cooperation.
  - SFC has signed MoU with most home and host supervisors and engages in regular exchanges of information.
  - Organized a college of supervisors for Banco de Bogota with participation of six foreign supervisory agencies; first meeting in January 2012.
  - SFC became a member of the Central American Council of Banking Supervisors (CCSB).
- Recommendation
  - Put in place a Basel II, Pillar 2 supervisory framework to give the SFC explicit authority to tailor prudential norms to the risk profile of each financial institution, especially systemically important ones.

### Securities regulation and supervision
- The regulatory and supervisory regime for securities is highly transparent and comprehensive and provides substantial authority to the SFC to oversee supervised entities.
- Securities Law adopted in 2005, with subsequent amendments, has enhanced customer protection and ability to combat market abuse.
- In 2006 the AMV, a self-regulatory authority, became the front-line authority for oversight and sanctioning of market conduct.
- The SFC has worked to meet international standards, including signing the IOSCO MoU in May 2012 and working to meet IOSCO principles adopted in June 2010.
- Extraordinary administrative powers in the securities sector include the ability to freeze and seize assets (including assets of non-supervised entities and parties) and to intervene in market disruption and defaults.
- Areas for improvement
  - Tighten oversight of operators of collective investment vehicles, including broker-dealers, to strengthen investor protection and improve management of uncollateralized risks.
  - Develop better system for protection of minority shareholder rights, given complexity of Colombian corporations.

### Insurance sector regulation
- Important regulatory reforms introduced in the last five years to improve regulation and supervision of the insurance industry.
- Solvency position strengthened through more risk-based and improved capital and solvency provisions, though not yet Solvency II.
- Requirements for risk management and internal control systems established; investment requirements improved.
- Public disclosure of financial information is strong.
- New mortality tables for life insurance developed and introduced.
- Revised insolvency and liquidation procedures are being developed; stronger consumer protection regime crafted.
- Areas for continued improvement
  - Further enhancements to align solvency requirements with international standards, especially reserving practices and capital requirements.
  - Actuarial capacity in Colombia is low (perhaps less than 120 professionals); fuller actuarial programs at local universities may help.
  - Develop plan to establish a self-regulating actuarial profession for standards, accreditation and discipline.
  - Policyholders with outstanding claims need clear legal priority in liquidation.

### Financial safety net: Systemic liquidity provision
- Liquidity generally flows smoothly through the Colombian financial system; the interbank interest rate typically trades virtually in line with the policy interest rate.
- The Banco de la Republica (BR) plays a central role, adjusting liquidity through open market repurchase operations against government securities with all financial institutions and intra-day repurchase operations to payments system participants.
- The BR plans to extend access to intra-day repos to market infrastructure institutions, such as clearing houses, which are becoming systemic.
- The interbank money market is very limited.
- Broker-dealer risks
  - Recent intervention of a broker-dealer highlights potential for liquidity and other risks to disrupt the payment system.
  - Broker-dealers can take large net intraday exposures that vastly exceed their capital and liquidity buffers; two broker-dealers are among the ten financial institutions with the most interconnections in the payments system.
  - The BR is prepared to provide intra-day liquidity to broker-dealers to contain contagion; liquidity limited by eligible collateral holdings (government securities). After the recent intervention the BR provided liquidity to other broker-dealers against corporate securities temporarily.
  - Recommendation: tighten liquidity requirements for broker-dealers and other NBFIs and undertake more rigorous stress testing of these institutions.
- Strengthening the interbank market
  - Options: narrow range of counterparties for open market operations to banks and primary dealers in government securities; raise cost of excessive use of overnight credit; phase out the financial transactions tax more quickly than planned; expand issuance of short-term government securities.
- Lender of last resort facility
  - Current law requires BR to lend only to credit institutions, though against a wider range of collateral than government securities.
  - BR may need to lend to broker-dealers, trust companies and clearing houses in a crisis when traditional liquidity channels break down.
  - The intra-day repo facility and facility to convert intra-day repos to overnight repos gives BR ability to lend to such companies if they have eligible collateral.
  - Recommendation: widen the range of eligible collateral to improve BR’s crisis management capacity.
  - Foreign currency clearing house risks: could experience liquidity problems if members fail to complete transactions; desirable for BR to be ready to swap dollars from foreign exchange reserves for pesos with liquidity-providing banks as a back-up.

### Financial safety net: Deposit insurance
- FOGAFIN manages a sound system of deposit insurance.
- Current coverage limit is about US$11,000 (about 150 percent of per capita income) per depositor per institution.
- The system covers all deposit-taking financial institutions (mandatory participation) and covers 98 percent of depositors in full, but only 20 per cent of the total value of deposits, with no coinsurance.
- Deposit insurance is funded by annual premiums collected from member institutions and investment income.
- FOGAFIN also provides open bank assistance and conducts modified purchase and assumption transactions with exclusion of assets and liabilities.
- FOGAFIN’s board and staff have no legal protection for actions carried out in good faith execution of official responsibilities (as is the case with the SFC).
- Information sharing
  - FOGAFIN relies on the SFC to assess financial soundness of credit establishments, highlighting importance of information sharing.
  - Recently the SFC agreed to inform FOGAFIN when a financial institution is at significant risk of being intervened.
  - With SFC support, banks have been required to begin reporting detailed information on their deposits directly to FOGAFIN starting in 2014.

### Financial safety net: Bank resolution
- Preventive and corrective powers
  - The SFC has a broad range of preventive and corrective powers: moral suasion, administrative orders, cease and desist orders and sanctions.
  - Specific measures include enhanced surveillance, coordinating actions with deposit insurance, fostering fiduciary administration by another authorized institution, ordering recapitalization, fostering partial or total transfer of assets/liabilities/contracts or sale of commercial establishments to another institution, ordering merger, and ordering adoption of a recovery plan.
- Legal options and suggested improvements
  - Excessively long period of possession: once a financial institution has been intervened, FOGAFIN has a period of two months (which can be extended) to decide on the best resolution option. Recommendation: shorten this period to reduce risks of shareholder lawsuits and further loss of confidence.
  - Too much flexibility in choice of options: wide latitude can open door to pressure to select options favoring shareholders or certain creditors.
    - Authorities are preparing a protocol organizing resolution options using a decision tree to separate systemic from non-systemic cases and identify applicable resolution options.
    - It would be important that the protocol incorporate essential resolution principles: selection of the least cost option, minimize contagion risks, first losses to shareholders, transparency and fairness, prefer private solutions and quick response, and be public.
    - Embedding this protocol in the legal framework is advantageous to limit risks to the resolution process.

*Source: IMF country report content provided in the input.*

### 46.      The CCSSF—formed in the aftermath of the 1999 financial crisis—seeks to ensure

### The CCSSF—formed in the aftermath of the 1999 financial crisis—seeks to ensure

### CCSSF: role, strengths, and recommended reforms
- Role and recent performance
  - The CCSSF seeks to ensure close coordination among the SFC, BR, MHCP and FOGAFIN, especially during a crisis.
  - It allows for discussion of proposed regulations and macroprudential policies.
  - While respecting the autonomy and mandates of each institution, the CCSSF has fostered an exchange of information and stimulated discussion about certain policy actions in support of financial stability, particularly in recent years.
- Identified shortcomings and recommended enhancements
  - The CCSSF’s effectiveness would benefit from a greater degree of formality.
  - Important to introduce a strategic action plan for dealing with systemic risk that respects the legal mandates of each institution.
  - The CCSSF should develop a long-term work plan to investigate key issues, such as:
    - an agreed methodology to identify and monitor systemic risk; and
    - establishing the perimeter for measuring systemic risk.
  - In the case of systemic crises, the CCSSF should coordinate systemic measures, including action plans and a clear process for decision making.
  - The action plan should be comprehensive enough to deal with and possibly resolve SIFIs, financial conglomerates and large non-bank financial institutions.

### Macroprudential tools and policy stance
- Existing instruments and historical usage
  - Structural measures in place since the 1999 crisis include legal limits on loan to value and debt service to income.
  - Measures used to contain systemic risks have included:
    - marginal reserve requirements;
    - changes in provisioning and collateral requirements for consumer credit;
    - limits on the exposure of financial institutions in derivative operations;
    - limits on net open foreign exchange positions of financial institutions and a requirement to match the maturity structure of net foreign exchange positions;
    - an unremunerated reserve requirement on capital inflows most recently used as 2007.
- Suggested policy refinements
  - Benefits from extending provisioning requirements on consumer credit to the unused portion of credit lines.
  - Tailor provisioning rates to the debt service ratio of the borrower.
  - Consider phasing in countercyclical capital buffers to address systemic shocks, but study interactions with the countercyclical loan loss provisioning scheme.
- Countercyclical loan loss provisioning observations
  - The system allows each credit institution to create an additional buffer of loan loss reserves in good times to cushion rising provisioning costs in downturns.
  - Staff simulations show the countercyclical buffer may not be depleted fully during a moderately severe downturn episode, owing in part to an asymmetry between rules for accumulation and drawing down.
  - The scheme is more effective as a microprudential mitigation tool; coordination with any countercyclical capital buffer is crucial.

### Financial system structure (selected figures)
- System-wide totals (end–2011)
  - Total number of entities: 171
  - Total assets: 542,910,114 (COP mn)
  - Percent of total assets: 100.0
  - Percent of end–2011 GDP: 89.5
- Banks (23)
  - Total assets: 295,954,567 (COP mn)
  - Percent of total assets: 54.5
  - Percent of end–2011 GDP: 48.8
  - Domestic private banks (13): 222,249,352 (COP mn); 40.9 percent of total assets; 36.6 percent of end–2011 GDP
  - Domestic public banks (1): 16,336,151 (COP mn); 3.0 percent of total assets; 2.7 percent of end–2011 GDP
  - Foreign private banks (9): 57,369,064 (COP mn); 10.6 percent of total assets; 9.5 percent of end–2011 GDP
- Other selected sectors (end–2011)
  - Collective investment funds: 28,364,982 (COP mn); 5.2 percent of total assets; 4.7 percent of end–2011 GDP
  - Value of obligatory pension funds: 91,473,158 (COP mn); 16.8 percent of total assets; 15.1 percent of end–2011 GDP
  - Life insurance companies (19): 22,352,096 (COP mn); 4.1 percent of total assets; 3.7 percent of end–2011 GDP

### Selected economic and financial indicators (high-level highlights)
- Social and demographic (selected)
  - Population (millions), 2011: 46.1
  - GDP per capita (US$), 2011: 7,114
  - GDP, in billions of Col$: 615,727
  - Unemployment rate, July 2012 (percent): 10.9
  - Public Debt (in percent GDP), 2011: 34.2
- Macroeconomic time series (percentage changes unless otherwise indicated): Real GDP
  - 2007: 6.9
  - 2008: 3.5
  - 2009: 1.7
  - 2010: 4.0
  - 2011: 5.9
  - 2012: 4.3
  - 2013: 4.4
- Financial aggregates and ratios (selected)
  - Credit to the private sector (percent change): 2007: 25.6; 2008: 14.0; 2009: 0.9; 2010: 16.8; 2011: 22.9; 2012: 12.9; 2013: 13.5
  - Regulatory minimum (CAR): total capital (own funds) 9 percent of RWA

### Risk assessment matrix (selected threats and assessments)
- Sudden stop in capital inflows
  - Overall Level of Concern: Staff assessment: medium
  - Likelihood of Severe Realization in the Next 1–3 Years: Staff assessment: medium
  - Expected Impact on Financial Stability if Realized:
    - Domestic asset prices would decline.
    - Banks’ portfolios exposed to higher market risk due to increased capital market volatility.
    - Slowdown in real GDP growth could raise NPLs.
- Sharp rise in U.S. interest rates
  - Overall Level of Concern: Staff assessment: low
  - Likelihood: Staff assessment: medium
  - Expected Impact:
    - Banks face higher borrowing costs; portfolio quality will decline as consumers face higher interest rates and real GDP growth slows.
    - Authorities have less room for policy maneuver.
- Terms of trade shock/reduction in net exports
  - Overall Level of Concern: Staff assessment: low
  - Likelihood: Staff assessment: medium
  - Expected Impact:
    - Reduced revenue and demand in the energy sector could deteriorate lending portfolios to this sector.
    - General economic slowdown could deteriorate overall lending portfolios and lower revenues.
- Distress in large borrower
  - Overall Level of Concern: Staff assessment: low
  - Likelihood: Staff assessment: high
  - Expected Impact:
    - Banks could experience reduction in profits/increased NPLs/liquidity shortages depending on severity.
- Deterioration of consumer lending portfolio
  - Overall Level of Concern: Staff assessment: low
  - Likelihood: Staff assessment: medium
  - Expected Impact:
    - Increased NPLs; banks deleverage, further deflating domestic economic activity.
- Housing price collapse
  - Overall Level of Concern: Staff assessment: low
  - Likelihood: Staff assessment: medium
  - Observations:
    - Mortgages have the highest NPL ratio across lending portfolios (8.3 percent).
    - Mortgage lending represents only 8 percent of total lending.
    - After the late 1990s banking crisis, NPLs in the mortgage segment reached 40 percent.

### Stress testing: solvency and liquidity highlights
- Solvency stress test (top-down by FSAP Team; 23 banks; horizon: 2 years (8 quarters))
  - Scenarios:
    - Baseline scenario according to BR forecasts.
    - Terms of Trade Shock: decrease in terms of trade induced by reduction of Colombia’s exports plus 2.5 percentage points growth shock to Colombia’s most important regional trading partners (Brazil, Chile, Ecuador, and Venezuela).
    - Macroeconomic Crisis scenario: (2.5 standard deviations in GDP growth from trend growth during two years), internal and external shocks.
  - Key outputs (Constant Balance Sheet)
    - Baseline: CAR (t8) 15.2%; NPL Ratio (t8) 4.2%; No. Banks <9% 10.7%; % of system's TA < 9% 0.002% (Recap in % of Annual GDP)
    - Terms of Trade Shock: CAR (t8) 15.0%; NPL Ratio (t8) 4.4%; No. Banks <9% 10.7%; % of system's TA < 9% 0.004%
    - Macroeconomic Crisis: CAR (t8) 12.9%; NPL Ratio (t8) 5.0%; No. Banks <9% 3; % of system's TA < 9% 15.0%; Recap in % of Annual GDP 0.100%
- Liquidity stress testing
  - Institutions included: 23 banks (sample)
  - Methodologies:
    - Deposit run-off test measured through SFC’s Liquidity Risk Indicator (LRI) with more severe stress scenarios aligned with recent FSAP assessments (higher outflow rates).
    - Estimation of Basel III ratios (LCR, NSFR) using reporting data (Basel III ratios are neither regulatory standards nor to be introduced in the foreseeable future).
  - Liquidity Risk: Ratios (sample of 23 banks)
    - LCR: 427% (sample)
    - NSFR: 244% (sample)
    - 30d long term: 188% (sample)
    - SFC LRI: 135%
    - Number Banks < 100%: LCR 0; NSFR 0; 30d long term 2; long term SFC LRI unspecified in table
    - Share of Total Assets < 100%: LCR 0%; NSFR 0%; 30d long term 20%; SFC LRI 2%

### Basel Core Principles (BCP) assessment: context and main findings
- Assessment context
  - Conducted as part of an IMF / World Bank Observance of Standards and Codes (ROSC) mission.
  - The assessment was conducted from May 28 to June 12, 2012 and reflects SFC banking supervision practices as of May 2012.
  - Sources for the assessment included a complete self-assessment prepared by the SFC, SFC questionnaire responses, presentations and interviews, review of laws/regulations/documentation, and meetings with banks, banking association, MoF and external auditors.
  - Assessment followed the CPs Methodology and assessed compliance with the “essential” criteria (EC) only (detailed assessment includes additional criteria (AC)).
- Summary finding (main findings)
  - Since the last FSAP update in 2004, Colombia has strengthened bank regulation and supervision in various respects.
  - The merger to establish the SFC as an integrated supervisor facilitated a common supervisory framework and access to information for supervising banking groups.
  - A framework for regulation and supervision of most risks (SAR) has been implemented.
  - Specialized risk units (including AML) supervise banks, insurance and securities companies; a specialized unit supervises financial conglomerates and corporate governance.
  - Shortcomings to be addressed include:
    - the independence of the SFC;
    - legal protection of supervisors;
    - the capital adequacy framework;
    - risk management;
    - the supervisory approach;
    - external audit; and
    - consolidated supervision.

*Italic: IMF staff report content (selected excerpts) contained in _cr1350 - 46.      The CCSSF—formed in the aftermath of the 1999 financial crisis—seeks to ensure*

### 56.      The SFC has operational autonomy within a general framework established by the

### _cr1350 - 56.      The SFC has operational autonomy within a general framework established by the

### Independence and governance of the SFC
- The SFC has operational autonomy within a general framework established by the government and can:
  - define its supervisory plans and methodologies;
  - make major supervisory decisions and impose sanctions on supervised entities without prior authorization of other authorities;
  - define its budget, within the limits of the general public sector policies.
- Limitation on independence:
  - There are no procedures for the appointment and dismissal of the Financial Superintendent.
  - The Financial Superintendent can be removed by the President without disclosure of the reasons, a limitation that may make him vulnerable to political pressure.

### Regulatory allocation, coordination, and the URF
- Allocation of regulatory powers:
  - Main prudential regulations (capital, exposure limits, operations of financial institutions and corrective action and resolution framework) and the regulations on the organization of the SFC are issued through Presidential decrees processed by the MoF.
  - The SFC can issue instructions of mandatory compliance on a broad range of issues including risk management, loan classification and provisioning, accounting and reporting.
  - This arrangement demands excellent coordination between the MoF and the SFC and a proper framework to ensure regulations are grounded in international best practice, free of political interference and updated as frequently as necessary.
- Recent institutional reform:
  - The recent creation of the URF seeks to enhance the autonomy of the regulatory process and the opportunity of its response to regulatory needs.
  - Suggested improvements to the URF framework:
    - (i) the selection process of all the board members of the URF, not only the independent ones, ensure that they are technically fit and free of conflict of interest;
    - (ii) all Board members are appointed for a fixed term in office and the reasons for their removal should be clearly stipulated in the decree;
    - (iii) a formal understanding is developed to ensure an adequate balance between the regulations issued by the MoF, which should be generally principled based, and those issued by the SFC, which should cover areas that are more likely to require more frequent revision and deep knowledge of supervisory practice;
    - (iv) some language is introduced in the URF decree to ensure that the SFC has a key role in the regulatory process, so that regulations can be effectively supervised.

### Legal protection for supervisors
- The law does not provide legal protection to the Superintendent and staff of the SFC against lawsuits for actions taken and/or omissions made while discharging their duties in good faith.
- Recommended legal change:
  - Amend the law to provide this protection, for instance, require that prior to suing supervisors in criminal or civil courts for actions or omissions during the course of duty, a judgment must be obtained against the SFC.

### Licensing, illegal deposit taking, and structure (CPs 2–5)
- Post-2008 changes and enforcement capacity:
  - Decree 4334 of 2008 allows intervention of establishments when, in the opinion of the Superintendency of Corporations or the SFC, there are objective or notorious facts that indicate the massive taking of money through a broad variety of schemes.
  - The SFC has a dedicated group for investigating and pursuing illegal deposit taking activities (25 people).
  - In 2010 this group:
    - investigated more than 600 cases of suspected illegal deposit taking;
    - conducted inspection to more than 100;
    - concluded that 18 of them were conducting illegal activities, of which most adjusted to legal limits and 6 of them were intervened and prosecuted.
  - The SFC informs the public about entities posing as supervised entities or deposit taking entities.
- Authorization processes:
  - SFC authorization processes are well rounded and robust, including licensing, transfers of ownership and investments.
  - The SFC has significantly strengthened the process for authorization of acquisitions abroad in response to Colombian banking groups’ expansion, mainly in Central America.

### Prudential regulation and capital adequacy (CPs 6–18)
- Capital adequacy framework and gaps:
  - Colombia has not formally adhered to any of the Basel capital standards, albeit the regulation follows many of the Basel I rules.
  - Banks are required to maintain a capital adequacy ratio of 9 percent of risk weighted assets for credit and market risks, on a solo and consolidated basis.
  - Gaps and shortcomings:
    - capital for market risk does not cover foreign subsidiaries and the SFC cannot require capital for other risks;
    - the definition of capital includes voluntary reserves and does not deduct goodwill and investments in unregulated subsidiaries;
    - the risk weight applied for exposures with sovereigns is low and independent of risk (zero the local government and 20 percent for foreign governments);
    - some components do not have appropriate loss absorption capacity.
- Recent reform (effective August 1, 2013):
  - The revised capital adequacy regulation will take full effect on August 1, 2013 and incorporates some Basel III recommendations:
    - (i) a minimum Tier I capital of 4.5 percent of risk weighted assets;
    - (ii) deduction of goodwill from Tier I capital with a grandfathering clause;
    - (iii) some restrictions for the inclusion of voluntary reserves and current profits, to include only those that are expected to be permanent;
    - (v) amendments on the consideration of minority interests to mitigate the risk of multiple leveraging.
  - Additional recommendations:
    - consider adherence to one of the Basel standards;
    - in the medium term, adopt Pillar two of Basel II.

### Risk supervision, SARs, and supervisory organization
- Risk management norms and specialized units:
  - SFC has issued SARs on credit, market, liquidity, operational and anti-money laundering risks.
  - Specialized risk units have responsibility for overall supervisory process of each risk, including autonomous powers to issue administrative orders and sanctions.
- Gaps in risk coverage and consolidated risk management:
  - SARs scope is individual institutions and individual risks.
  - There is a general requirement for comprehensive risk management but no further specifications for banks and banking groups.
  - No standards for management of interest rate in the banking book and country and transfer risks, which have become significant with banks’ expansion abroad.

### Asset classification and provisioning
- Structure and methodology:
  - Banks must segregate exposures into retail (with sub portfolios for auto loans, credit card loans and others), commercial (with sub portfolio for large, middle and small companies), mortgages and microcredit.
  - Each commercial and retail sub portfolio is required to be classified into seven levels of risk (which take into account past due information and other criteria) with increasing levels of provisioning, calculated through transition matrixes and encompassing a pro-cyclic and a counter-cyclic element.
  - Mortgages and microcredit are provisioned based in past dues and collateral, as well as through a generic provisioning.
- Assessment:
  - Asset classification and provisioning regulations and supervision in Colombia are comprehensive and robust and the SFC seems up to date with market developments.

### Large exposures and related party lending
- Rules and shortcomings:
  - Colombia has an overly complex set of rules for limiting large exposures.
  - Local affiliates are not consolidated and available unused credit lines are not taken into account when calculating large exposure limits or related party lending.
  - For large exposures, a statement under oath of nonrelation can exempt certain parties from the definition of connected parties.
- Recommendations:
  - Require that exposures to directors, senior management and key staff, their direct and related interests, and their close family in affiliated companies comply with related party lending limits;
  - Require banks to have policies preventing persons benefiting directly or indirectly from the exposure from participating in granting and managing the exposure.

### AML/TF (anti–money laundering and terrorist financing)
- Framework and implementation:
  - SFC has a clear scope of activities and up to date legal framework and SARs guidance for allocation of functions and responsibilities, processes and controls oversight, and reporting suspicious activities.
  - Actual oversight of implementation by banks needs enhancement, particularly monitoring the effectiveness of banks’ policies and processes, including strict KYC, in preventing misuse.

### Methods of ongoing banking supervision (CPs 19–21)
- Restructuring and risk-based supervision:
  - Post-merger structure resulted initially in quasi-autonomous risk areas with limited consolidated strategic view.
  - SFC initiated restructuring by developing a risk-based supervisory annual plan, increasing coordination among areas.
  - Planned steps include establishment of a relationship manager to ensure thorough understanding of banks’ and banking groups’ risk profiles.
  - SFC is implementing Marco Integral de Supervision (MIS); once fully implemented, MIS plus relationship managers should produce more consistent, deeper, and less compliance-focused supervision.

### Accounting, disclosure, and IFRS convergence (CP 22)
- Current accounting deviations:
  - Some deviations are prudent (provisions based on incurred loss plus countercyclical component; some items such as brands cannot be included in goodwill).
  - Some deviations are lax (various deferred charges, amortization of goodwill, guarantees issued and labor and pension benefits).
  - Disclosures on related party and minority interest are not according to IAS; under IAIS banks would need to identify transactions with indirect related parties and whether a minority interest is in fact minority interest.
  - External audit norms are general and do not cover all international audit standards; auditor independence standards are insufficient (an auditor can receive as much as 25% of its revenues from non-audit services from a firm it audits without being disqualified and disqualifications appear to only apply to the term of the specific engagement).
- Convergence to IFRS:
  - General framework issued in 2009 (Law 1314).
  - Full implementation needs additional regulation by the MoF and the Ministry of Commerce.
  - Current stage is voluntary testing; some entities (only two of them are banks) have announced participation in testing and will prepare 2012 opening balance under IFRS.
  - SFC is assessing best approach and has a tentative plan to adopt IFRS by 2014, but it has not yet published a timetable for implementation.

### Corrective, remedial, and resolution powers (CP 23)
- Preventive and corrective toolkit:
  - SFC can issue administrative orders, moral suasion, cease and desist orders and sanctions.
  - Sanctioning process is lengthy; SFC prefers early issuance of administrative orders as soon as risk of potential violation is detected.
  - For more serious problems, SFC has a comprehensive range of bank resolution tools and triggers.

### Consolidated and cross-border supervision (CPs 24–25)
- Progress and capabilities:
  - Consolidated supervision enhanced since SFC creation: onsite exams of non-supervised members of conglomerates, consolidation of financial statements, information exchange with foreign supervisors, authorization of foreign capital investments.
  - Dedicated team responsible for supervision of financial conglomerates; scope covers financial conglomerate and broader mixed conglomerate.
- Key issues hindering effectiveness:
  - No regulation framing consolidated supervision activities of the SFC; only general references in law and regulations covering reporting, access to information, consolidated exposure limits and consolidated capital requirement. No consolidated-level risk management requirements beyond limited SAR references.
  - Legal powers for consolidated supervision are narrow: they cover supervised entities and their subsidiaries but leave out unregulated bank holding companies; consolidated supervision, capital requirements and exposure limits are applied from the bank down and only cover supervised entities.
  - Scope of consolidated prudential requirements is incomplete and uneven (some exclude domestic subsidiaries, others exclude foreign subsidiaries); regulation should be amended to correct this.
  - SFC lacks powers to force group-structural changes if inadequate, though it has used moral suasion in a few cases.
- Cross-border cooperation and colleges:
  - SFC has no legal limitations for supervisory cooperation and has signed MoU with most home and host supervisors of Colombian conglomerates (published on SFC web page).
  - SFC organized two colleges of supervisors:
    - one with Banco de Bogota with participation of six foreign supervisory agencies (first meeting in January 2012);
    - another with Bancolombia on November 2012 with participation of supervisory agencies from Central America.
  - SFC is a member of the Central American Council of Banking Supervisors (CCSB), an effective forum for coordination with most host supervisors of the three largest Colombian groups.

### Summary compliance highlights (selected points from Table 4)
- 1.1 Responsibilities and objectives: The law establishes clear responsibilities and objectives for the SFC, as the sole supervisor of the financial institutions.
- 1.2 Independence, accountability and transparency:
  - Operational independence of the SFC is prescribed by the law and there is no evidence of political interference in bank supervision.
  - The Superintendent can be removed by the President without disclosure of reasons, as there is no procedure for his appointment and dismissal.
  - Fragmented power structure within the SFC, prescribed in detail in a Presidential decree, could hinder effectiveness by limiting the Superintendent's capacity to adapt organization to changing needs.
- 1.3 Legal framework: Regulatory arrangement requires excellent coordination between MoF and SFC; URF addresses issues but could be further enhanced.
- 1.4 Legal powers: Adequate range of powers in place.
- 1.5 Legal protection: No legal protection against lawsuits for actions and/or omissions while discharging duties in good faith.
- 1.6 Cooperation: Arrangements for cooperation are in place.
- 2. Permissible activities: Defined and power to control illegal deposit taking has been strengthened.

*Source: IMF staff assessment contained in the provided content unit.*

### 3. Licensing criteria

### 3. Licensing criteria

### Summary of assessment findings
- Well rounded and robust framework for the authorization of bank licenses.

### Related supervisory and prudential assessments (items 4–25)
- 4. Transfer of significant ownership: Well rounded and robust framework for ownership transfers.
- 5. Major acquisitions: Robust framework for the authorization of large acquisitions and investments.
- 6. Capital adequacy (outgoing regime): No deduction of goodwill and of investments on capital of unregulated holdings; voluntary reserves count as capital; capital for market risk only applies to local subsidiaries; low risk weight for sovereign debt.
- 7. Risk management process: No comprehensive risk management framework. Supervision of risk management applied mainly on a solo basis and individual risks.
- 8. Credit risk: Comprehensive framework. Assessment of strategies and policies could be enhanced.
- 9. Problem assets, provisions, and reserves: Comprehensive framework. Need to broad the scope for classification of exposures to include off-balance sheet exposures.
- 10. Large exposure limits: Limits in place but regulation does not require banks to consolidate local affiliates. Parties can be exempted from the definition of connected parties; approved credit lines are not taken into account for calculating the limits.
- 11. Exposure to related parties: Current procedures do not ensure that the full scope of related parties is monitored and complies with the definition of related parties; narrow definition - does not encompass key staff and management in affiliates; approved facilities are not taken into account when calculating limits.
- 12. Country and transfer risks: No framework in place.
- 13. Market risks: Comprehensive framework, limited oversight of implementation, with no defined supervisory cycle, complemented by active market monitoring enabling oversight of actual exposures.
- 14. Liquidity risk: Comprehensive framework, limited oversight of implementation, with no defined supervisory cycle complemented by active market monitoring enabling oversight of liquidity.
- 15. Operational risk: Adequate framework but surveillance procedures scope should be broadened.
- 16. Interest rate risk in the banking book: No regulations in place but some oversight.
- 17. Internal control and audit: Adequate framework in place but need no overall assessment; need to broaden the internal audit oversight to encompass outsourced activities.
- 18. Abuse of financial services: Robust framework but oversight of implementation of SARLAFT needs to be enhanced.
- 19. Supervisory approach: Fragmented view of banks’ risk profiles, with no proper consolidation of risks and overall oversight of banks, undermining strategic view and adequate prioritization.
- 20. Supervisory techniques: Off-site and on-site frameworks in place. Reports could be more conclusive and strategic to allow for fuller knowledge regarding banks operations and risk profile.
- 21. Supervisory reporting: Need to broaden the scope to include information on all risks on a consolidated basis.
- 22. Accounting and disclosure: Deviations from IAS on deferred charges, amortization of goodwill, guarantees issued, labor and pension benefits and the valuation of assets. Also disclosures on related party and minority interest are not according to IAS. Auditing regulation needs improvement, especially with regards to the standards for audit independence.
- 23. Corrective and remedial powers of supervisors: Broad range of preventive and corrective powers and evidence of their effective use.
- 24. Consolidated supervision: Regulatory gaps hinder the consolidated supervision of banking groups: legal power only covers the bank and its subsidiaries, leaving out unregulated holdings and affiliates; no power to change group structure; prudential requirements do not cover the overall banking group.
- 25. Home-host relationships: Adequate arrangements for the cooperation with foreign supervisors.

### Table 5 — Recommended Action Plan to Improve Compliance with the Basel Core Principles (selected entries)
- Reference Principle 1.2 Independence, accountability and transparency: Amend law to establish procedure for the appointment and removal (with disclosure of reasons) of Superintendent.
- Reference Principle 1.3 Legal framework: Amend the URF framework to strengthen its independence, ensure that the SFC maintains a key role in the regulatory process and find a better balance between regulation of MoF and Instructions issued by SFC.
- Reference Principle 1.5 Legal protection: Amend law to grant legal protection to supervisors.
- Reference Principle 6. Capital adequacy (outgoing regime): New regime corrects most of the shortcomings of old regime.
- Reference Principle 7. Risk management process: Issue instructions and implement comprehensive risk management framework.
- Reference Principle 9. Problem assets, provisions, and reserves: Strengthen regulation for restructured loans. Require banks to classify all exposures.
- Reference Principle 10. Large exposure limits: Eliminate various exceptions; broaden scope to include all affiliates; ensure the proper application of interconnected parties; ensure that approved facility lines are taken into account when calculating limits; streamline the regulation.
- Reference Principle 11. Exposure to related parties: Clarify the regulation so limits are applied to all exposures to related parties; broaden the scope; enhance oversight.
- Reference Principle 12. Country and transfer risks: Issue framework and design oversight process.
- Reference Principle 13. Market risks: Effectively oversight of proper implementation of the SARM.
- Reference Principle 14. Liquidity risk: Effectively oversight proper implementation of the SARL.
- Reference Principle 15. Operational risk: Broaden the scope of oversight beyond IT.
- Reference Principle 16. Interest rate risk in the banking book: Issue framework and design oversight process.
- Reference Principle 17. Internal control and audit: Develop framework for overall assessment.
- Reference Principle 18. Abuse of financial services: Effectively oversight proper implementation.
- Reference Principle 19. Supervisory approach: Implement intended changes ensuring the establishment of relationship managers for banks.
- Reference Principle 20. Supervisory techniques: Revamp reports moving toward a more risk-based approach.
- Reference Principle 21. Supervisory reporting: Ensure information is gathered on a consolidated basis.
- Reference Principle 22. Accounting and disclosure: Implementation of IFRS and international auditing standards, including a higher standard for the independence of external auditors.
- Reference Principle 24. Consolidated supervision: Issue regulation to broaden scope of consolidated supervision and enhance powers of SFC.

### Authorities’ comments and clarifications (paragraphs 75–95)
- Paragraph 75: In 2011, the Colombian government requested that the International Monetary Fund (IMF) and World Bank conduct a comprehensive financial sector assessment, including specific analysis of standards applicable to the banking, insurance, securities, payment systems, and financial infrastructure provider sectors. IMF and World Bank experts and experienced supervisors from other countries conducted a detailed evaluation during the period from May to July, 2012.
- Paragraph 76: Preliminary findings were provided to the authorities for comment; the previous assessment of this type in Colombia was conducted at the end of 2004 when there were two supervisory authorities.
- Paragraph 77: Colombia has demonstrated considerable progress in implementing standards and principles applicable to regulation and oversight of banks, insurance companies, the securities market, and providers of financial infrastructure. The assessment recognized that the Colombian Financial Superintendent (SFC) has improved its capacity since the merger of the banking and securities superintendencies and the enactment of Law 964 of 2005.
- Paragraph 78: A single supervisory authority like the SFC covers all financial sectors and activities, ensuring greater transparency and efficiency and eliminating regulatory gaps and arbitrage.
- Paragraph 79: For securities market oversight, the SFC has authority to access a wide variety of information, a comprehensive regulatory framework, well-developed supervisory procedures and methodologies, and broad powers to take preventive and corrective measures and impose sanctions. SFC staff are professional and increasingly expert in conducting risk-based supervision.
- Paragraph 80: The FSAP evaluators recognized achievements but indicated weaknesses persist and supervision should be strengthened, including reforming SFC organizational structure to increase independence, efficiency, and deepen oversight of the securities market.
- Paragraph 81: The SFC offers clarifications and notes areas of differing views on the assessment of banking supervision.
- Paragraph 82: Since 2011 Colombia has been developing a new capital adequacy regime, published in August 2012 and to take full effect on August 1, 2013; the revised capital regime will address many shortcomings noted by the assessment, but the assessment could not evaluate rules not yet in force.
- Paragraph 83: While de jure independence may be difficult in Colombia’s legal and constitutional framework, the SFC asserts it has full de facto independence and conducts supervision without political interference.
- Paragraph 84: The SFC highlights close collaboration with the Toronto Center which has strengthened capacity for risk based supervision.
- Paragraph 85: Decree 4334 of 2008 allows intervention of the Superintendency of Corporations or the SFC when objective or notorious facts indicate massive taking of money through varied schemes.
- Paragraph 86: On prudential regulation (principles 6–18), the SFC notes the low risk weight for sovereign debt is standard in many jurisdictions; for peso-denominated entities Colombian government debt is weighted at zero percent on the RWA and other sovereign debt often weighted at 20 percent.
- Paragraph 87: SFC proposes adding: “In addition to the reforms already being planned, it is recommended that the authorities consider their adherence to one of the Basel standards and, in the medium term, the adoption of the Pillar two of Basel II.”
- Paragraph 88: On paragraph 18 (AML/CFT), SFC notes in-situ and extra-situ procedures are conducted; all supervised banks have been included into the supervisory cycle on a period no longer than three years, with one exception (market share 0.16 percent) where the cycle took four years.
- Paragraph 89: Oversight procedures are complemented with internal and external auditors and compliance officers; there is an agreement with the UIAF to identify failures on reports.
- Paragraph 90: On BCP 22 (accounting and disclosure), regulation for NIIF implementation was issued on December 28, 2012. Decree 2784 of 2012 establishes that most of the SFC’s supervised entities must issue NIIF financial statements starting in 2015, with these transition and enforcement deadlines:
  - Mandatory preparation period: 2013.
  - Transition deadline – opening statement: January 1, 2014.
  - Enforcement deadline (first comparative): December 31, 2014.
  - Reporting deadline – NIIF Financial statements: December 31, 2015.
- Paragraph 91: For risk management process (7) and supervisory approach (19), SFC is developing the MIS (Marco Integral de Supervisión) to allow consolidated risk assessment of all supervised entities, enabling strategic view and prioritization.
- Paragraph 92: For Market Risk (13), the SARM must be implemented by every credit institution and is subject to revision on in-situ inspections by the Deputy Office for Supervision of Market Risk and Integrity.
- Paragraph 93: Measurement models of market risk must be sent to the SFC on a daily basis; extra-situ supervision uses indices and early warnings to identify individual and systemic risks, including foreign currency denominated assets.
- Paragraph 94: For Liquidity Risk (14), the SARL must be implemented by every credit institution and is subject to in-situ inspections by the Deputy Office for Supervision of Market Risk and Integrity.
- Paragraph 95: The liquidity risk measurement model, known as IRL (similar to the LCR of Basel III), must be sent to the SFC at least on a weekly basis; extra-situ supervision over individual and systemic liquidity risk takes place at every time. The IRL includes, among others, the ratio of foreign currency denominated liquid assets. The SFC also uses money market operations reports, deposits, interest rates, deposits concentration, liquidity of investments, etc., for liquidity oversight.

*Source: _cr1350 - 3. Licensing criteria*

### 101.      Principle 9, Principle for self-regulation. In 2006, a strong self-regulatory institution

### Principle 9, Principle for self-regulation. In 2006, a strong self-regulatory institution 

### Self-regulation (Principle 9)
- In 2006, a strong self-regulatory institution to which membership is mandatory for intermediaries of all types was created to assist the SFC by acting as the front-line regulator with respect to certification of professionals, market oversight, dispute resolution, complaints handling and for the prevention and sanctioning of conduct inconsistent with the rules of the market by AMV members, pursuant to a memorandum of understanding between the authorities that was concluded in 2007, and for other matters as further agreed.
- The provisions for oversight of the SRO are strong and there is good cooperation between the authorities.
- Shortcoming: there should be an appeal to the SFC for denial of access to membership in that membership in the SRO is mandatory in order to participate in the industry.

### Enforcement of securities regulation (Principles 10–12)
- The powers of the SFC with respect to administrative enforcement activities and access to records, statements and testimony are extensive as they pertain not only to regulated institutions, but also to all market participants, and even to non-participant third parties.
- AMV complements the SFC powers, which include disgorgement, and has undertaken an active disciplinary program that assesses credible, dissuasive and proportionate sanctions.
- The law and decrees clearly sets forth the sanctioning process.
- Perception/weaknesses:
  - There remains the perception that enforcement is sometimes an unduly lengthy process.
  - While recognizing the length and depth required for proper investigation of certain types of complex misconduct; more efforts/resources should be expended to combat fraud and market abuse.
  - The SFC, as augmented by the AMV program, has active monitoring and disciplinary programs, but action to deter misconduct could proceed more quickly, sanctions could be stronger and more “message” cases could be selected for their deterrent purposes.

### Cooperation in regulation (Principles 13–15)
- SFC was just this May admitted to Annex A of IOSCO’s MMoU, the gold standard of information sharing.
- The SFC does actively cooperate and provide and receive information under its various arrangements which are designed to give priority to those jurisdictions which are linked with Colombia.

### Issuers (Principles 15–18)
- Standards for issuance of securities and related disclosure are high.
- Governance gaps:
  - Although progress has been made, there are still substantial gaps in the protections accorded minority shareholders.
  - Potential gaps exist in the information as to who has the capacity to influence the decisions of financial entities within conglomerates (see also Principles on Intermediaries).

### Auditors, credit rating agencies, and other information service providers (Principles 19–23)
- The SFC has adopted the international best practice with respect to rating agencies and has even brought enforcement actions.
- The SFC has preceded the development of international standards in working toward more independent pricing methodologies for securities for which there is not an active market.
- In September 2012, after the IOSCO assessment was conducted, the SFC issued a timetable for bringing its accounting and auditing standards up to the standard of international practice and its local standards are not in practice of international quality.

### Collective investment schemes (Principles 24–28)
- The rules for those schemes that fall within the definition of carteras colectivas are comprehensive and meet IOSCO standards.
- Risk/concern: there is the possibility that certain trusts may operate trusts with multiple participants that are not truly private offers, which while subject to regulation have a lesser standard than would a collective investment offering similar types of financial products.

### Market intermediaries (Principles 29–32)
- SFC treats all intermediaries substantially equivalently, applying the prudential, risk and conduct regimes to each.
- Observed issues:
  - There have been cases where intermediaries have assumed excessive exposures.
  - More thought could be given as to how to address at the SFC level the failures of firms and other disruptions.

*Source: IMF staff report excerpt.*

### 108.      Principles 33-37, Principles for the Secondary Markets. The markets and trading

### _cr1350 - 108.      Principles 33-37, Principles for the Secondary Markets. The markets and trading

### Summary findings (Principles 33–37)
- The markets and trading systems of Colombia meet international standards with respect to transparency, including the reporting of over-the-counter transactions, and the rules for market abuse.
- The SFC has:
  - impressive ability to intervene to address disruption;
  - excellent real-time facilities to address surveillance for misconduct;
  - strong proprietary systems for identifying trading exceptions.
- Reporting and market data practices:
  - SFC requires real-time reporting of transactions for the BVC.
  - Over-the-counter transactions are reported with a fifteen minute delay.
  - BVC prices are available on the website with a 20 minute delay and volume and end of day price information is available as is historic pricing.
  - All domestic equities must be traded on the BVC.
- Multiple trading/venue issues:
  - There are multiple systems (voice broking and matching systems) for the same security, so further consolidation of pricing information would be useful.
  - Multiple systems for the same securities raise potential concerns about price reporting and possible pricing inconsistencies.
- Settlement and intra-settlement trading risks:
  - Due to how trading and settlement is organized on multiple systems and orders are entered, the SFC should be careful to have appropriate measures in place to ensure that any trading within the settlement period does not result in misallocation of customer transactions in the clearing and settlement process, or insufficient collateral to address the potential risks and that nonprofessional clients in fact receive best execution.
  - The delay between the time trades are matched, allocated and settled could permit trading intra-settlement that is not properly collateralized and TTV transactions, if not properly monitored, may also permit double gearing risks.
- Market abuse detection and enforcement:
  - SFC operates a monitoring center with feeds from all markets of the BVC as well as the systems of negotiation and registry, and monitors activities using its own proprietary tools on both a real time and an end of day basis.
  - The AMV also conducts surveillance. Manipulation and misuse of privileged information are violations with both administrative and criminal penalties; in the latter case it is not necessary to prove the source of the information.
  - Few cases have been concluded to date, but efforts to combat such abuses are being continually enhanced; some cases are currently in process, and AMV recently assessed fines against traders of a major market participant.

### Key issues identified
- Price reporting fragmentation:
  - Multiple voice broking and matching systems for the same security; possible pricing aberrations and inconsistencies among like products.
  - Recommendation in text: further consolidation of pricing information would be useful.
- Settlement-period exposures:
  - Risk of misallocation of customer transactions in the clearing and settlement process during the settlement period.
  - Risk of insufficient collateral and potential double gearing via TTV transactions.
- Best execution for nonprofessional clients:
  - Presence of multiple venues and brokers’ own order handling systems can jeopardize best execution for non-professional clients unless additional attention is paid to how orders are processed and transactions submitted to the central depository.
- Liquidity risk identification:
  - More work on identifying and mitigating liquidity risks in the securities sector is recommended.

### Policy recommendations and supervisory priorities
- Consolidate price reporting and market data feeds to reduce fragmentation and the risk of pricing inconsistencies across multiple voice broking and matching systems.
- Ensure appropriate measures to manage intra-settlement trading risks:
  - Prevent misallocation of customer transactions during the settlement period;
  - Ensure sufficient collateral to address potential intra-settlement exposures;
  - Monitor TTV transactions to prevent double gearing risks.
- Enhance oversight of order handling and allocations where brokers use their own order handling systems or multiple venues exist, to ensure nonprofessional clients receive best execution in practice.
- Continue to enhance market abuse enforcement capacity and case resolution to translate surveillance activity into concluded enforcement actions.
- Conduct further work to identify and mitigate liquidity risks in the securities sector (see also Principles 30 and 32).

### Complementary supervisory observations (context from related principles)
- Principle 33: Exchanges and other trading and registry systems must be authorized; the rules of trading, the system, and the products must be approved by SFC. The AMV also certifies four categories of participants; including operators and order takers.
- Principle 34: SFC conducts full-time monitoring of the BVC and other trade negotiation and registry systems; AMV runs batch monitoring; both SFC and AMV have strong intervention powers and conduct on-site inspections.
- Principle 35: Transparency obligations summarized above; consolidation of pricing information recommended.
- Principle 36: SFC monitoring center and AMV surveillance described above; manipulation and misuse of privileged information are sanctionable; enforcement activity is increasing but relatively few concluded cases to date.
- Principle 37: Monitoring system has alerts for trading activity outside pre-set tolerance levels; settlement-period and collateralization issues noted; recommendation for more work on liquidity risk identification and mitigation.

*Source: _cr1350 - 108.      Principles 33-37, Principles for the Secondary Markets. The markets and trading*

### 109.      The report recognizes the progress made in regard to the supervision and

### _cr1350 - 109.      The report recognizes the progress made in regard to the supervision and

### Securities market supervision, trusts, and collective investment vehicles
- The report recognizes progress in supervision and regulation of the securities market and specifically the technical capacity of SFC personnel. (paragraph 109)
- On principles 24 through 28 concerning collective investment vehicles the document notes: “(...) There is however the possibility that certain trusts may operate trusts with multiple participants that are not truly private offers, which while subject to regulation have a lesser standard than would a collective investment offering similar types of financial products.” (paragraph 110)
- The SFC disagrees with the assertion that certain trusts, as investment vehicles, are subject to lesser standards than collective investment schemes (carteras colectivas). The IOSCO evaluation identified serious confusion between collective investment products and the product termed ―investment trust‖ (fiducia de inversión) administered by trust companies (sociedades fiduciarias). (paragraph 111)
- Definition and legal framing of the trust product:
  - These trust instruments are defined in regulations as trust instruments whereby one person transfers possession of one or more given assets to another person, with or without transfer of title, for the transferee to accomplish a specific purpose for the benefit of the grantor or a third party. (paragraph 112)
- Legal duties and protections for investment trusts:
  - Trust companies entering into trust operations are bound by duties and general principles for trusts established by applicable regulations, including duties to inform; provide reliable advice; protect trust assets; act in fairness and good faith; and act prudently and with diligence, professionalism and expertise. (paragraph 113)
  - These principles are defined in regulation, especially External Circular 007 of 1996, issued by the SFC. (paragraph 114)
- Specific issues raised regarding speculative collective vehicles (Table 6, principle 28):
  - The document states: “(...)The offering designated as a speculative cartera colectiva is not required however to be maintained in a way that permits the separate identification and treatment of the interests of customers as separate from those of the operator, and 100% of the value may be loaned. There is a potential for confusion about the safety of funds invested in such vehicles despite the risk warnings.” (paragraph 115)
  - The SFC’s position: all standards and regulations on conflicts of interest, investor protections, segregation, custody, advice and disclosure of risks, risk management, authorization, and reporting are applicable to all collective investment schemes including speculative collective vehicles. This is supported by numerous regulatory and supervisory provisions, notably Part 3, Decree 2555 of 2010. (paragraph 116)

### Accounting, auditors, and information providers (principles 19–23) and NIIF implementation
- Regulation for NIIF implementation in Colombia was issued on December 28th, 2012. Decree 2784 of 2012 establishes NIIF adoption timelines for most SFC supervised entities: (paragraph 117)
  - Mandatory preparation period: 2013.
  - Transition deadline – opening statement: January 1st of 2014.
  - Enforcement deadline (first comparative): December 31st of 2014.
  - Reporting deadline – NIIF Financial statements -: December 31st of 2015.

### Insurance Core Principles (ICPs) assessment — scope and executive summary
- Scope and basis:
  - Assessment of insurance sector compliance with IAIS Insurance Core Principles (ICPs) as adopted in October 2011, based on regulatory framework, supervisory practices and other conditions as they existed in June 2012. (paragraph 118–120)
  - Supervision responsibility: Financial Superintendency of Colombia (SFC) supervises insurers, reinsurers, savings companies, and insurance and reinsurance intermediaries; SFC reports to the Ministry of Finance. (paragraph 119)
- Industry overview and recent evolution:
  - The insurance industry is described as a small but rapidly growing part of the economy. (paragraph 122)
  - In the last 5 years, gross premiums written and assets managed by the sector have more than doubled. (paragraph 122)
  - Insurance penetration has increased from 2.0 percent of GDP to 2.3 percent of GDP. (paragraph 122)
  - The industry is profitable, competitive, well capitalized, and widely held in ownership, but penetration remains far below that in several other Latin American countries. (paragraph 122)
- Drivers of growth and constraints:
  - Growth linked to steady growth and recent stability of the economy and changes to social benefit programs, stimulating demand for personal health and accident products, workers compensation, and annuities. Further growth dependent on increasing confidence and trust, deeper capital markets, and access in underserved populations. (paragraph 123)
- Regulatory progress in last five years:
  - Strengthened solvency requirements; established requirements for risk management and internal control systems covering credit risk, market risk, operational risk and AML/CFT; improved investment requirements; improved technical reserve standards for earthquake insurance; market risk management rules for assets backing technical reserves of general insurers; stronger public disclosure of financial information; new mortality tables for life insurance; revised insolvency and liquidation procedures; stronger consumer protection regime. (paragraph 124)

### Key supervisory and regulatory challenges identified
- Institutional independence and governance:
  - Independence of the SFC should be strengthened, particularly regarding appointment, performance assessment and dismissal of the Superintendent; establishing a fixed term (e.g. five to seven years) should be considered. (paragraph 126)
  - Consideration of balance of authority between the Ministry of Finance and the SFC; make decree requirements less prescriptive and more principle-based or minimum-threshold based to allow SFC technical detail management; improve consultation with industry and timing of regulatory changes. (paragraph 127)
- Legal clarity and licensing:
  - Licensing, changes in control, portfolio transfers and suitability requirements are generally in line with international standards, but a clear definition of insurance business in law may help address “near insurance” products (e.g. funeral service related products). (paragraph 128)
- Solvency, internal controls, and risk-based supervision:
  - Many solvency and internal control requirements are relatively new and need fine tuning; additional changes to technical reserve requirements and the solvency regime are necessary to address full range of risks. Timely introduction in consultation with industry is important. (paragraph 129)
  - SFC has developed a risk-based supervisory framework but implementation requires cultural and organizational changes: proper documentation, staff training and competency, communication, reorganization to focus on entities rather than risk categories, and increased legal protection for staff exercising authority in good faith. (paragraph 130)
- Governance and enterprise risk management:
  - Need for stronger enterprise risk management and governance for solvency purposes; consideration of mandatory risk management committees, asset liability management policies, risk tolerance statements; development of best practices suitable to small and medium institutions; industry association encouraged to play a role. (paragraph 131)
- Capital markets and long-term instruments:
  - Continued capital market development and creation of long term investment products are critical for life insurance; difficulty in matching long-term liabilities (annuities) with assets of similar duration. (paragraph 132)
  - Issue: many private pension annuities are linked to minimum wage increases, causing insurers’ liabilities to rise unpredictably; uncertainty undermines pricing and availability of annuities, affecting private pension system stability. (paragraph 132)
- Accounting and transition readiness:
  - Colombia intends to adopt International Financial Reporting Standards and international auditing standards; industry expected to begin adoption in 2014 or 2015, but SFC survey suggests many insurers are not prepared. Coordination of multiple regulatory changes (e.g., reserving requirements) is necessary. (paragraph 133)
- Actuarial capacity:
  - Actuarial capacity is low (perhaps less than 120 people). Establish fuller actuarial programs at local universities and create a self-regulating actuarial profession for standards, licensing and discipline. A proposal from actuarial associations and universities has been developed and merits timely consideration. (paragraph 134)
- Consumer protection and distribution oversight:
  - Progress made under Law 1328 of 2009, but oversight of insurance agents needs improvement; consider establishing a public registration system for insurance agents with suitability requirements, minimum educational standards, a code of conduct, training, and a public database of disciplined/disqualified agents. An industry-based self-regulating organization overseen by SFC may be a viable model. (paragraph 135)
- Group supervision and conglomerate oversight:
  - Regulatory framework for group supervision needs improvement; supervision of large conglomerates does not extend to all relevant entities, and the Superintendent’s authority over financial holding companies or industrial members is extremely limited, hindering consolidated reporting and consolidated risk management. (paragraph 136)

### Institutional structure, staffing, and resources of the SFC
- Legal and organizational setup:
  - Under the Colombian Constitution, the President exercises authority to inspect, monitor and control financial activities through the Superintendencia Financiera de Colombia (SFC). The SFC was established by Presidential decree 4327 of 2005, merging the banking and insurance regulator (Superintendencia Bancaria) with the securities supervisor (Superintendencia de Valores). The SFC is established as a technical body under the Ministry of Finance, with legal, administrative and financial autonomy. (paragraph 137)
- Staffing and funding:
  - The organization has approximately790 staff and is largely funded from fees set by the Superintendent on regulated entities. Fees for insurers are paid twice per year and are based on a rate applied to institutional assets. The Superintendent has authority to make additional assessments in event of funding shortfalls. (paragraph 137)
- Organizational divisions relevant to insurance supervision:
  - Two key supervisory divisions under the Superintendent: Institutional Supervision, and Supervision of the Risks and Market Conduct. The latter is primarily responsible for supervision of risks in all financial institutions and has branches for credit, market, operational risk as well as money laundering, financial conglomerates and institutional governance. (paragraph 138)
  - Institutional Supervision handles licensing and regulatory approvals, organized by financial service area (pensions, insurance, securities brokers and agents). The insurance section is responsible for insurers, reinsurers, and brokers, including insurer licensing, reinsurer registration, broker licensing, authorization of classes, policies and maximum rates, review and monitoring of actuarial calculations, technical reserves and capital requirements. There are 60 staff dedicated solely to insurance in this section. Other relevant areas include risk supervision areas with 216 staff and research and development with 49 staff. (paragraph 139)
  - The SFC has a Department of Financial Consumer Protection with 15 staff reporting directly to the Superintendent; Colombia also established a Judicial Power Department to hear financial consumer cases as an alternative to courts or arbitration, which has only recently begun operations. (paragraph 140)
  - The SFC has a five member Advisory Council of experts appointed and removed by the President; the Council advises on strategic and major regulatory decisions. (paragraph 141)

*Source: IMF staff report content unit _cr1350 - 109.

### 142.      The Federacion de Aseguradores Colombianos (Fasecolda) is a non-profit industry

### _cr1350 - 142.      The Federacion de Aseguradores Colombianos (Fasecolda) is a non-profit industry

### Market Overview
- Fasecolda represents 24 out of 25 non-life insurers and approximately 18 out of 19 life insurers; headed by a former Minister of Finance; governed by a Board of Directors comprised of Chief Executives from member companies; has technical sub-committees by major line of business.
- Colombia also has an insurance brokers association (Asociacion Colombiana de Corredores de Seguros – ACOAS) with eight members.

- Size and growth
  - Colombia is Latin America’s fourth largest economy and its sixth largest insurance market.
  - Total industry premiums were 2.3 percent of GDP.
  - Total industry assets were 5.5 percent of GDP.
  - The average Colombian spends approximately $140 dollars per year on insurance.
  - Gross premiums written: COP 6,520 bn. in 2005 and COP 14,162 bn. in 2011.
  - Average annual growth of gross premiums written: approximately 13.8 percent (2005–2011).
  - Nominal GDP growth rate for same period: approximately 9 percent.
  - Insurance penetration ratio increased from 1.91 percent to its current level (current level not numerically restated in text).

- Market composition (2011, excluding Personal Accident and Healthcare)
  - Non-life insurance: approximately 49 percent of gross premiums written.
  - Non-life average annual growth (2005–2011): approximately 11.5 percent.
  - Motor insurance: approximately 44 percent of total non-life premiums.
  - Property insurance: 23 percent of non-life premiums.
  - Surety: 9 percent of non-life premiums.
  - Construction and engineering insurance: 7 percent of non-life premiums.

  - Life insurance: approximately 43 percent of gross premiums written.
  - Life premiums average annual growth since 2005: approximately 12.5 percent.
  - Group life, workers compensation and disability: almost 74 percent of life total.
  - Workers compensation and group life: fastest growing areas of life sector over last five years.
  - Pensions and annuities growth: strong except in 2010.

- Personal Accident and Healthcare
  - Comprised approximately nine percent of premiums written or COP 1206 bn.
  - Composition: roughly 44 percent personal accident insurance and 56 percent healthcare insurance.
  - Both non-life and life insurers can write this business; larger portion written by life insurers.

- Reinsurance and retention
  - Non-life industry retention: between 69 -74 percent of gross premiums written over last five years (varies by line).
  - No minimal risk retention limit; maximum retention: any one risk cannot be more than 10% of the company’s equity.
  - Property: largest reinsurance class; treaty reinsurance typically used for single risk and catastrophic exposure.
  - Largest catastrophic exposure: Earthquake.
  - Quota share treaties: used in surety lines.
  - Facultative reinsurance: used for marine hull, aviation, and terrorism.
  - Life market retention: approximately 94 percent of gross premiums written were retained in 2010.
  - Smaller life insurers: place reinsurance on a quota share basis backed by excess of loss.
  - Larger life insurers: generally have only excess of loss coverage.

- Market structure and concentration (2011)
  - Market comprised of 25 non-life insurers (including two cooperatives), and 19 life insurers.
  - Two state owned insurers: La Previsoria (non-life) and Positiva (life).
  - La Previsora accounted for 6.9 percent of non-life premiums in 2011.
  - Positiva underwrites individual life business and workers compensation; assumed assets, liabilities and workers compensation contracts of the Instituto de Seguros Sociales-ISS in 2008.
  - Five largest non-life insurers account for approximately 48 percent of premiums written.
  - Ten largest non-life insurers account for 77 percent of premiums written.
  - Non-life Herfindal-Hirschman index: approximately 727 (indicating an un-concentrated market).
  - In life sector (including personal accident and sickness premiums): five largest insurers account for 67 percent of total assets; ten largest for approximately 91 percent of total assets.
  - Life industry Herfindal-Hirschman index: approximately 1123 (indicating moderate concentration).
  - Concentration levels for both life and non-life have not increased significantly over the last five years.

- Ownership
  - Insurers associated with Colombian financial conglomerates account for more than 36 percent of gross premiums written.
  - Companies ultimately foreign controlled account for approximately 40 percent of gross premiums written.
  - Colombia’s reinsurers are all foreign companies (some with local offices; others accessed through brokers).

- Profitability, capital and assets
  - Both life and non-life industries profitable over last five years.
  - Capital position improving due to stronger minimum solvency requirements.
  - Net earnings in 2011 declined from 2010 levels, largely due to declining investment earnings and introduction of new solvency-strengthening measures.
  - Assets and equity have grown faster than premiums over last five years.
  - ROE decreased from previous years largely due to declining investment returns in 2011.
  - Asset growth in life industry between 2007 and 2008 reflects transfer from ISS to Previsora Vida under Resolution 1293 of August 11, 2008.
  - Previsora Vida changed its name to Positiva Compania de Seguros on October 8, 2008.

- Investments
  - Investment composition: approximately 51 percent government securities; 29 percent corporate securities (mainly fixed term deposits); 12 percent equities; all other investment types comprise less than 8 percent of total.
  - Treasury decree 2953 of 2010 updated investment regulations applying to technical reserves.
  - Investments described as conservative and short term (primarily fixed income instruments).

- Distribution and intermediation
  - Distribution primarily through traditional agent and broker networks.
  - Agents account for perhaps 60 percent of business.
  - Agents are not supervised by the SFC; insurers are responsible for agents’ actions.
  - Industry sources suggest more than 10,000 agents in the country.
  - Non-traditional distribution methods (internet, telemarketing) comprise a small share, except Bancassurance.
  - 2009 industry association study: Bancassurance distributes approximately 20 percent of life insurance products; approximately 81 percent of these sales were for group life (including creditor group life) and personal accident insurance products.
  - There are approximately 50 insurance brokerages: 34 insurance brokers and 14 reinsurance brokers; these are regulated by the SFC.
  - Brokers specialize in commercial or industrial clients; in life sector brokers control group product sales while life agents dominate individual life sales.

- Commissions
  - Non-life commissions: range between 5–20 percent depending on type of insurance.
  - Life insurance commissions (other than group insurance and workers compensation): can be considerably higher.
  - First year premiums for renewable term and universal life insurance: range from 35 to 40 percent; subsequent year commissions around 25 percent.
  - Commissions on health care insurance: range up to 25 percent.
  - Brokers tend to receive slightly higher percentage commissions than agents.

### Preconditions for Effective Insurance Supervision
- Macroeconomic and systemic context
  - Real GDP growth in 2011: 5.9 percent.
  - Inflation ended 2011 at 3.7 percent.
  - Growth drivers: domestic demand and strength of mining and energy sectors.
  - Challenges: one of Latin America’s highest unemployment rates; problems with physical infrastructure and catastrophic risks (e.g., earthquakes and major floods).

- Legal and judicial framework
  - Colombia has a civil law system including constitution, civil and criminal codes, congressional legislation, presidential decrees and ministerial regulations; SFC issues circulars.
  - Commercial Code is basic business law; corporate regimen: law 222 of 1995; insolvency regime: Law 1116 of 2006.
  - Bifurcated judicial system: Supreme Court (private law) with 23 judges appointed by Congress for eight years; Council of State (public law); Constitutional Court protects the Constitution.
  - Legal process: costly and lengthy; most civil claims for loss injury or damage must be initiated within two years of the event.
  - World Bank estimate (June 2011): time from launching an action to enforce a contract until payment of a claim can take more than three years.

- Accounting, audit and actuarial capacity
  - Financial reporting framework moving towards IFRS.
  - Under Constitution, Congress can issue GAAP; Law 43 of 1990 created the Technical Council for Public Accounting (Consejo) which developed Colombian GAAP.
  - Decree 2649 (1993) established Colombian GAAP; SFC can issue accounting standards related to supervisory duties (Law 45 of 1993 and Decree 663 of 1993).
  - July 2009: Congress enacted Law 1314 to converge Colombian GAAP with international standards.
  - June 2011: Consejo submitted official proposal to Minister of Finance and Commerce regarding adoption of international accounting and auditing standards.
  - December 2011: President decreed that large and medium sized enterprises can voluntarily implement IFRS starting in 2012.
  - SFC published a timetable for IFRS implementation.
  - Actuarial capacity: perhaps 120 trained actuaries currently working in the country.
  - Actuaries do not currently have professional standing; a signing actuary is not required to be member of an actuarial association.
  - The country’s two actuarial associations do not have self-regulatory powers; they do have minimum education requirements for membership.

- Coordination and market infrastructure
  - Coordinating Committee of the Financial System (CCSSF) composition: Minister of Finance, Chair of the Central Bank, Superintendent of the Financial Superintendency of Colombia, Director of FOGAFIN.
  - CCSSF meets at least four times per year; mandate includes strengthening financial stability, development of an early warning system, issue resolution mechanisms and interagency information sharing protocol.
  - Financial and capital markets have experienced significant growth since last FSAP assessment but lack depth and long term instruments.
  - Availability of long-term fixed-income investments is limited, important for life insurance growth and pension payout phase.

### Main Findings and Recommendations
- General
  - Significant progress in last five years: SFC is well-resourced, professional, with a clear strategic direction in insurance; regulatory and supervisory practices improved; further changes planned.
  - Significant challenges remain to achieve fuller compliance with international standards and to build confidence in the growing insurance sector.

- Supervisory objectives and independence
  - Independence of the SFC should be strengthened by improving processes around appointment, performance assessment and dismissal of the Superintendent.
  - Consideration: establishment of a fixed term of appointment (e.g. five to seven years).
  - Current situation: no explicit procedures regarding appointment, performance evaluation and dismissal of the Superintendent; frequent turnover—average term of last three superintendents has been less than three years.
  - Superintendent is appointed and can be removed by the President without disclosure of reasons; may also be censured and removed by Congress.

- Rule-making approach and consultation
  - Move decree requirements for technical areas and SFC organization from prescriptive to more principle based where appropriate.
  - Better consultation with industry and more expeditious timing of regulatory changes recommended to help supervisor and industry respond to rapidly changing markets.

- Staff protection and supervisory approach
  - Improved protection for staff from lawsuits for actions taken in good faith should be given high priority and implemented as soon as possible.
  - Strong protection is necessary to enable a risk based supervisory approach that requires greater exercise of judgment versus a compliance-oriented framework.

- Licensing, suitability and control
  - Licensing, suitability and control processes are strong in many respects but would benefit from a clear statutory definition of insurance business.
  - Clarifying definition could help address licensing issues related to “near insurance products” (e.g. funeral insurance, prepaid medical).
  - Licensing regime might benefit from ability to attach conditions to licenses to increase market participation without endangering consumer protection.
  - These issues will become more important as market grows and as insurers develop more inclusive products like microinsurance.

- Governance and risk management
  - Recommendations:
    - Board training.
    - Explicit minimum competency requirements for directors.
    - Development of guidance on best practices for board governance and enterprise risk management.
  - Need for fine tuning of internal controls, development of an actuarial control function, and greater actuarial capacity within institutions to support enterprise risk management and more complex products.

*Source: Excerpt from IMF assessment chapter on Colombia insurance sector (content unit _cr1350 - 142.)*

### 173.      The SFC has taken very significant steps towards developing and implementing an

### 173–178: The SFC’s supervisory framework, prudential standards, group supervision, and market conduct

### Risk-based supervisory framework (paragraph 173)
- The SFC has taken "very significant steps towards developing and implementing an improved risk based supervisory framework."
- Much work remains to ensure supervision is carried out "in a risk based and cost effective manner."
- A risk based approach requires changes to policies, procedures, and "the basic supervisory culture."
- Implementation considerations and safeguards:
  - "Care need to be taken to ensure that the new framework is properly documented."
  - "Adequate guidance and training are provided."
  - Implementation should be "in a consistent manner."
  - The framework should not "result in unreasonable and unnecessary regulatory burden on the supervised entities."
- Organizational change recommendation:
  - "Some reorganization of the supervisory departments to focus on the entity being regulated rather than risk category may aid in framework implementation."

### Prudential Standards (paragraphs 174–175)
- Recent regulatory changes that have "helped to improve prudential practices and the measurement of solvency position in the industry":
  - Changes in the solvency requirements.
  - Changes in internal control requirements.
  - Introduction of new mortality tables for life business.
  - Introduction of new investment regulations.
- Further action required:
  - "Further changes, related to reserving practices and solvency requirements, are necessary to move towards international solvency standards."
  - "The SFC is aware of these issues and is moving to address them."
- Policyholder protection in insolvency:
  - "Policy holders with outstanding claims need to be given a clear priority in law in the event of a liquidation."
  - Reference: "ICP 12.1 requires that a high legal priority be established for the protection of the rights and entitlements of policy holders in such circumstances."

### Group supervision and cross-border cooperation and management (paragraphs 176–177)
- Shortcomings in the regulatory framework for group supervision:
  - "The Colombian market is dominated by insurers belonging to large financial groups."
  - "The supervision of large conglomerates, however, does not extend to all relevant entities in the group."
  - The Superintendent’s authority over "financial holding companies or industrial members of a conglomerate is extremely limited."
  - This limitation impacts the SFC’s authority to ensure "consolidated financial reporting and consolidated risk management are taking place."
- Cross-border crisis management concerns:
  - "Weaknesses in group supervision can also increase problems with cross border crisis management."
  - "Cross-border cooperation and coordination specifically related to crisis management of Colombian insurers is progressing but many of the details of a crisis management system have yet to be completed."
  - The SFC "is working hard with other supervisors to complete its work in this area but much remains to be done."

### Market conduct (paragraph 178)
- Consumer protection progress and remaining needs:
  - "Consumer protection has made important progress in the last years, but more work is needed."
  - "The establishment of the consumer protection system is a significant step forward."
  - Requirement and outcome: "The requirement for an effective ombudsman in each insurer has proven to be a successful measure to protect consumers."
  - Operational cautions:
    - "Care is needed to ensure that the new system is adequately resourced and cost effective."
    - "Further fine tuning of policies and procedures will likely be required as the SFC gains more experience with the new requirements especially with respect to inclusive insurance products like micro insurance."

*Source: paragraphs 173–178 of the provided IMF content unit.*

### 179.      Better oversight of insurance agents is necessary to reduce the number of

### _cr1350 - 179.      Better oversight of insurance agents is necessary to reduce the number of

### Key findings on intermediaries and market conduct
- Better oversight of insurance agents is necessary to reduce the number of complaints and ensure that customers are treated fairly.
- Law1328 of 2009 significantly improves the consumer protection system, but further oversight of insurance agents is required to operationalize those protections (see ICP 18).
- The insurance market is currently incorporating a large number of first time consumers; inclusive products like micro insurance need appropriate market-conduct regulation.
- Establishment of an industry-based policy holder protection scheme is suggested to ensure minimal levels of protection for claimants in the event of a liquidation.

### Observations across Insurance Core Principles (selected ICPs relevant to agents, conduct, and supervision)
- ICP 2 (Supervisor): The SFC’s operational independence should be strengthened; nomination/appointment framework for the Superintendent is weak and dismissal reasons are not published. Improved protection for staff from lawsuits for actions taken in good faith is a priority to support a move to risk based supervision.
- ICP 8 (Risk Management and Internal Controls): The absence of a functioning actuarial profession impedes insurers’ ability to control insurance risk, especially for life insurance and as the industry grows in complexity.
- ICP 14 (Valuation): Liability valuation methods do not cover important risks; the proposed reserving decree and the transition to IFRS are opportunities to improve reserving and asset/liability valuation.
- ICP 16 (Enterprise Risk Management for Solvency Purposes): ERM is evolving; SFC should establish more comprehensive ERM requirements consistent with ICP 16 and actively supervise insurer progress.
- ICP 17 (Capital Adequacy): Colombia has recently incorporated more risk specific capital requirements; further development for operational risk is necessary. All capital requirements are at the legal entity level; group-level capital requirements should be considered.
- ICP 18 (Intermediaries): Effective regulation of intermediaries is critical to consumer confidence; establishing better and more uniform requirements for insurance intermediaries is a necessary priority.
- ICP 19 (Conduct of Business): Additional fine tuning of policies and procedures and additional resources will likely be required as the SFC gains experience with new consumer protection requirements.
- ICP 21 (Countering Fraud in Insurance): SFC has formalized internal controls to deter and detect fraud; development of a joint SFC/industry fraud strategy would allow better cross-sector assessment of fraud.
- ICP 23 (Group-wide Supervision): Supervision of large conglomerates does not extend to all relevant entities; the missing picture of the whole group limits effective group-wide supervision.
- ICP 24 (Macro-prudential Surveillance and Insurance Supervision): SFC has made significant progress; it should continue developing macro-prudential surveillance, the role of the CCSSF, and processes to assess systemic importance of insurers.
- ICP 26 (Cross-border Cooperation and Coordination on Crisis Management): Cross-border cooperation on crisis management is progressing but many details remain to be completed; SFC should complete crisis plans and coordinate internationally, for example through supervisory colleges.

### Specific recommendations (focused on intermediaries, agents, conduct, and related supervisory improvements)
- Establish better and stronger regulatory requirements for insurance intermediaries as a high priority (ICP 18).
  - Implement a basic licensing/registration system for insurance agents.
  - Adopt a code of conduct for insurance agents.
  - Set basic suitability requirements and minimum educational standards for insurance agents.
  - Establish a public database of agents who have been formally disciplined for actions in the conduct of insurance business or disqualified from registration.
  - Consider establishment of a self-regulatory organization for agents, with appropriate SFC oversight, as a potential delivery vehicle.
- Consider granting of licenses with conditions or limitations to increase market participation without endangering consumer protection (ICP 4).
- Establish minimal competency requirements for director and officer positions (ICP 5).
- Promote board training, explicit minimum competency requirements, and development of best practices for board governance and enterprise risk management (ICP 7).
- Develop an actuarial function as an internal control to advise boards and senior management and address asset-liability mismatch issues (ICP 8).
- Implement and document policies and procedures for a risk-based supervisory framework; complete two insurance pilot projects to facilitate implementation (ICP 9).
- Improve protections for SFC staff from lawsuits for actions taken in good faith to support risk-based supervision (ICP 2, ICP 11, ICP 9).
- Review and consider establishing priority for policyholder claims in liquidation and consider an industry-based policyholder protection scheme; review the capital level triggering transfer to FOGAFIN for liquidation (ICP 12).
- Implement the new reserving decree and transition to IFRS promptly to improve reserving practices and valuation systems (ICP 14).
- Further develop capital requirements, particularly for operational risk; continue a cautious approach to internal models and consider group-level capital requirements (ICP 17).
- Ensure adequate resources for AML/CFT implementation and oversight of SARLAFT (ICP 22).
- Increase SFC powers and tools to address group supervision issues to at least the financial holding company level (ICP 23).
- Continue development of macro-prudential surveillance (role of CCSSF) and move forward with assessing systemic importance of insurers (ICP 24).
- Complete crisis management plans for insurers, ensure international coordination, and strengthen group supervision requirements to support cross-border crisis management (ICP 26).
- Establish a joint SFC/industry fraud strategy to proactively reduce fraud risk across the sector (ICP 21).

*IMF staff observations and recommendations as presented in the source document.*

### 180.      The mission made note of advances made in the past five years in the insurance

### _cr1350 - 180.      The mission made note of advances made in the past five years in the insurance

### Advances in regulation and supervision
- The mission noted advances made in the past five years in the insurance sector with respect to regulation and supervision and the SFC’s clear vision for its supervisory work.
- Over five years ago both the MHCP and the SFC committed to publishing proposed regulations for public comment pursuant to quality policies and to achieve their vision and missions.
- The SFC’s integrated management system establishes activities to consider when designing, developing, and revising regulatory texts, including presentation of proposed solutions for public comment.
- In developing any new regulations for insurance entities, the SFC conducts consultations with the parties involved as to the impact and content of proposed regulations.

### Governance of boards and suitability of members
- The SFC’s functions include the appointment and swearing in of directors, administrators, legal representatives, auditors, and others.
- Applicants for such positions must provide the SFC with information on their education, professional and employment experience, and other aspects of their background; the SFC uses this and additional requested information to determine competency for the position.
- External Circular (CE) 38 of 2009 (directives concerning review and adaptation of the internal control system) establishes that members of boards of directors have primary responsibility for corporate governance and must act with professionalism, integrity, competence, and independence.
- CE 38 of 2009 defines responsibilities including defining the entity’s strategy, performance, and internal control system.

### Internal control system requirements
- All components of the internal control system must be appropriate to the organization’s size (in terms, inter alia, of number of employees, value of assets and revenue, funds received from the public, number of branch offices or agencies) and the nature of its activities and corporate purpose.

### Corporate governance recommendations and supervisory evaluation
- The SFC has established a set of recommendations for corporate governance based on best international practices:
  - composition of the board of directors;
  - establishment of certain committees;
  - professional and personal profiles of board members;
  - reporting to the shareholders’ meeting;
  - other aspects.
- These recommendations serve as the criteria by which the supervisor conducts a full evaluation of corporate governance and issues any recommendations deemed relevant.

### Consolidated supervision and beneficial ownership
- Financial System Founding Law (EOSF), Article 53, provides that persons requesting licenses must submit all information on the beneficial owners of capital, both at the time of applying for a license and thereafter at any point during the life of the financial entity.
- Decree 2555 of 2010, Article 6.1.1.3 provides a clear definition of beneficial owner.
- If a financial entity is registered with the stock exchange, it is required to disclose its 20 principal shareholders to the market (CE 02 of 2001, second chapter, section 2, issued by the former Superintendency of the Securities), which it does through the Securities Market Information System (SIMEV) administered by the SFC.
- The SFC’s quality certified processes establish the express requirement that applicants for licenses provide complete information about the beneficial owners of the entity’s capital (checklist provided for that purpose and published on the SFC website).
- The SFC rules (the Basic Accounting and Financial Circular, CBCF) establish the obligation for insurers to submit quarterly reports on their shareholding structure, identifying shareholders owning 1 percent or more of the capital, up to the third level of ownership. This standard far exceeds those of other Latin American countries.

### Supervisory exercises and practical procedures
- A supervision exercise has been developed to identify and evaluate the shareholding structure, capital structure, and beneficial ownership of the entity; the same exercise was conducted for the evaluation of banks.
- In the process of constitution as well as trading of shares, the SFC investigates the beneficial owner; identification of the beneficial owners is a requirement on the checklists.
- Processes provide for the identification of operations that result in the acquisition of or change in control of the entity.

*Source: IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1350.pdf_