## _wp12183

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### Introduction
- Recent reforms aim to contain systemic risk and revisit institutional foundations for monetary and financial policies.
- Macroprudential policy definition: "a policy that uses primarily prudential tools to limit systemic or system-wide financial risk" (IMF (2011a)).
- Scope and focus:
  - Assessment of institutional arrangements for financial stability in Latin America.
  - Primary focus on eight countries grouped into two models:
    - "Pacific" model: Chile, Colombia, Peru, Costa Rica, and Mexico.
    - "Atlantic" model: Argentina, Brazil, and Uruguay.
  - Structure: review progress and macro-financial vulnerabilities; analyze institutional arrangements and recent reforms; discuss ways to enhance macroprudential policy effectiveness.

### The case for macroprudential policy in Latin America
- Historical frequency and cost of crises:
  - During 1970 to 2007, Latin America experienced 28 systemic banking crises.
  - Argentina experienced four episodes: 1981, 1989, 1995, and 2002.
  - In half of these events a currency crisis also took place; in nine events a sovereign debt crisis occurred as well.
  - Systemic banking crises in Latin America typically exceeded 10 percent of GDP and in some cases even 30 percent of GDP (Laeven and Valencia, 2008).
  - Systemic crisis definition follows Laeven and Valencia (2008): systemic crises characterized when three out of six specified conditions are met.

### A. Latin America has made significant strides to preserve financial stability
- Regulatory and supervisory improvements:
  - Risk-weighted-capital asset ratios increased beyond the 8 percent required by the Basel I Accord.
  - Implementation of the Core Principles for Effective Banking Supervision.
  - Gradual introduction of Basel II provisions and shift from compliance-checking to risk-oriented supervision.
- Financial safety nets and resolution frameworks (selected facts):
  - Deposit insurance coverage (figures at the January 2010 exchange rate):
    - Argentina: USD 8,000; lender-of-last-resort 100% of capital, 180 days renewable; risk based premium.
    - Brazil: USD 34,500; lender-of-last-resort not specified, 360 days; not risk based.
    - Chile: USD 5,000; lender-of-last-resort not specified, 90 days renewable; No premium.
    - Colombia: USD 9,900; lender-of-last-resort not established, 30 days renewable up to 180 days; Risk based.
    - Costa Rica: deposit insurance does not exist; lender-of-last-resort 50% of liquid assets, 30 days renewable once up to 1 year; public banks have full guarantee.
    - Mexico: USD 132,900; lender-of-last-resort not established by law; Risk based.
    - Peru: USD 28,900; lender-of-last-resort 100% of capital, 30 days renewable; Risk based.
    - Uruguay: USD 5,000 For. Curr. and USD 25,600 Dom. Curr.; lender-of-last-resort 150% of capital, up to 180 days; Risk based.
  - Bank resolution instruments include: 1: Intervention or nationalization; 2: Mergers and acquisitions; 3: Bridge bank; 4: Purchase and assumption operations.
- Financial soundness indicators (eight-country sample, end-2010):
  - Median risk-weighted-capital-asset ratio: more than 15 percent; in no country is this ratio below 10 percent.
  - Median nonperforming loans: slowly declining after two-year deterioration.
  - Banks’ profitability: recovered unevenly across countries.
- Contributing macroeconomic factors to resilience:
  - Favorable terms of trade and commodity price increases allowed accumulation of international reserves before the Lehman collapse.
  - Stockpiled reserves discouraged speculative attacks and allowed intervention to moderate depreciation.
  - Central banks reacted swiftly: initially tightening to anchor inflation expectations, later reversing stance after Lehman collapse; some implemented unconventional monetary measures.
  - Stronger macroeconomic policies: moderate fiscal and external deficits, lower external debt, enhanced international reserves, and flexible exchange rate regimes.
- Basel III buffers:
  - In the LA6 (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), banks’ capital exceed Basel III requirements and in many instances satisfy the required conservation and countercyclical buffers (Terrier and others, 2011).

### B. Important vulnerabilities remain
- Capital flow volatility:
  - Short-term inflows picked up to 4 percent of GDP by end 2010.
  - Total inflows reached more than 8 percent of GDP by end 2010.
  - Large inflows often concentrate in non-tradable sectors (e.g., real estate), which together with credit expansion can feed asset bubbles.
- Exchange rate and balance-sheet risks:
  - Currency depreciations can raise interest rates in defense of the currency and damage financial institutions’ balance sheets, amplifying financial distress.
- Absorptive capacity concerns:
  - Some economies may not be able to absorb productively large capital inflows because of size and lack of solid institutional underpinnings, discouraging long-term investment.
- Regional macro-financial vulnerabilities:
  - Most countries are primarily commodity exporters and exposed to terms of trade shocks.
  - Commodity dependence is more acute in South America: exports share in total exports of 30 percent or more.
  - Argentina and Brazil: commodities share in total exports of more than 30 and 40 percent respectively.
  - Remittances: in Central American countries like Honduras and El Salvador remittances account for about 20 percent of GDP.
  - Downside risks remain potentially severe if shocks are prolonged and occur in combination with a financial shock.
- Commodity price volatility:
  - Volatility of oil and metal prices—and also of food—has increased significantly during the last decade.
  - While commodity prices are currently high, a large correction is conceivable as they are at a high level compared to historical data.
- Credit dynamics and cyclical risks:
  - Real credit growth recovered since the early 2000s and surged since the middle of the decade.
  - Real credit growth by late 2011:
    - about 20 percent y/o/y in Brazil Colombia
    - more than 15 percent y/o/y in Chile and Peru
  - Dynamic credit expansion is likely to lay the ground for buildup of systemic risks.
- Idiosyncratic and cross-border shocks:
  - Natural disasters (e.g., Hurricane Mitch in 1998; El Niño floods in the late 1990s) damaged infrastructure and affected loan portfolios.
  - Cross-border interconnectedness examples:
    - Uruguay: nonresident deposits from Argentina estimated at one-fifth of total deposits.
    - Costa Rica: exposure to regional financial groups (Citi, HSBC, Lafise, Continental).
- Financial system structural vulnerabilities:
  - Financial dollarization: high in Costa Rica, Peru, and Uruguay—share of dollar liabilities about 50 percent or more in these and other countries like Bolivia and Nicaragua.
  - Systemically important financial institutions (SIFIs): banking systems typically dominated by two or three banks; failures likely to lead to government or central bank intervention.
  - Large public banks: more than 40 percent market share in Brazil, Costa Rica, and Uruguay; also important in Argentina, Chile, and Mexico.
  - Wholesale funding and financial deepening: reliance on wholesale funding growing; dependence on wholesale funding can pose major systemic liquidity risk.
  - Sophisticated instruments: Brazil and Mexico confronted problems with complex derivatives during 2008, particularly in the foreign exchange market.

### Key banking concentration metrics (percentage share of total deposits and short-term funding, as of 2010)
- Argentina: First 23.69; Second 8.82; Third 8.47
- Brazil: First 23.46; Second 19.54; Third 15.88
- Chile: First 21.64; Second 20.88; Third 18.55
- Colombia: First 19.35; Second 13.65; Third 12.42
- Costa Rica: First 20.86; Second 20.22; Third 7.28
- Mexico: First 20.79; Second 20.4; Third 8.81
- Peru: First 24.5; Second 21.7; Third 16.3
- Uruguay: First 42.59; Second 17.82; Third 4.84
- Source for table: Bankscope.

### Existing macroprudential tools and practices
- Historical context:
  - Many macroprudential-type instruments were used historically for monetary policy purposes (e.g., reserve requirements).
- Common instruments and uses:
  - Limits on net open positions / currency mismatches: widely used to tame FX speculation.
  - Limits on interbank exposures: reduce contagion risk.
  - Caps on loan-to-value (LTV) or debt-to-income (DTI) ratios: recently introduced in most sample countries (except Mexico and Uruguay), mainly for housing, consumer credit, credit cards, auto loans.
  - Countercyclical dynamic provisioning: used in Colombia, Peru, and Uruguay; Bolivia introduced such provisioning in 2008 (not in sample).
  - Reserve requirements (RRs): used historically as monetary instrument and recently as buffers; rates vary widely and sometimes differentiated by deposit type and currency.
    - Examples:
      - Reserve rate as high as 42 percent in Brazil by end-2010 (for demand deposits).
      - 4.5 percent for deposits at less than or equal to 18 months in Colombia at the same date.
      - Argentina in 2010: 19 percent and 20 percent for deposits in local and foreign currency, respectively.
      - Peru: foreign currency deposits subject to a surcharge of 30 percent as a marginal RR.
- Specific country practices:
  - Peru: additional capital requirement of 2.5 percent of the estimated foreign exchange exposure to discourage foreign currency lending to domestic-currency earners.
  - Brazil and Mexico: recently imposed limitations on derivative positions.
  - Colombia: in 2009 introduced a liquidity risk management system (Sistema de Administración de Riesgo de Liquidez) applicable to most financial intermediaries.
- Empirical evidence:
  - Reserve requirements have a measurable, if transitory, effect in taming credit growth (Tovar and others, 2012).
  - Dynamic provisioning found effective in containing leverage and credit growth in some studies (Lim and others, 2011).

### Gaps and challenges in macroprudential frameworks and institutions
- SIFIs and capital:
  - Despite concentration and SIFIs, little emphasis on strengthening capital positions of SIFIs or provisions to reduce their failure likelihood.
- Liquidity buffers:
  - Limited use of dedicated liquidity buffers for macroprudential purposes across Latin America (Colombia is an exception).
- Constitutional and legal constraints:
  - Financial stability is often not an explicit legal mandate for central banks or supervisory agencies; stability often implicit rather than firmly established.
  - Constitutional mandates can constrain reform options and central bank participation in macroprudential bodies (example: Chile).
  - Peru: constitutional mandate to keep deposits safe may constrain measures perceived to elevate depositor risk.
- Institutional models:
  - Pacific model: supervision and regulation organized along financial industries; central bank focused on monetary policy (Colombia, Chile, Peru, Costa Rica, Mexico).
  - Atlantic model: banking supervision and regulation within central bank (Argentina, Brazil, Uruguay).
  - Recent legal/administrative steps created financial stability committees:
    - Chile, Mexico, Uruguay: financial stability committees created by executive decree with macroprudential responsibilities and crisis management powers.
    - Brazil: Central Bank created an internal financial stability committee within the BCB in 2011, comprised by all members of its Board.

### Box 1 — The New Financial Stability Committees in Chile, Mexico, and Uruguay
- Overview and purpose:
  - Chile: Financial Stability Council in 2011.
  - Mexico: Financial System Stability Council in 2010.
  - Uruguay: Financial Stability Committee in 2011.
  - Common mandate: prevent buildup of systemic risks and recommend macroprudential policies to relevant agencies.
- Decision powers and accountability:
  - Committees do not have decision powers and are not held accountable.
  - Exception: Mexico's Council required to prepare and publish a report assessing financial stability and measures taken.
- Information, coordination, and crisis management powers:
  - All three can obtain information from financial industries and play coordinating roles.
  - Mexico and Uruguay: explicit powers to manage financial crises.
  - Chile: crisis management powers reside with individual institutions; Council operates as a coordinating device.
- Governance and membership:
  - All three chaired by the Minister of Finance (MoF); other members include heads of supervisory agencies and the central bank.
  - Chile exception: governor of the Central Bank of Chile (BCC) invited but not formally a member due to constitutional independence concerns.
  - Composition details:
    - Mexico — includes CNBV head, National Commission of Insurances, National Commission for the Savings for Retirement, Executive Secretary of the Institute of Banks Saving Protection, Undersecretary of Finance, Governor of the Bank of Mexico and two Deputy Governors, plus other members.
    - Uruguay — comprises Governor of the Central Bank of Uruguay; Superintendent of Financial Services; President of the Corporation for the Protection of Banks Savings.
    - Chile — comprises head of the Superintendence of Securities and Insurances; the Superintendence of Banks and Financial Institutions; and the Superintendence of Pensions.
- Additional responsibilities and meeting frequency:
  - Chile: recommend criteria for supervisory agencies' budgets; meet at least every month.
  - Mexico: meet at least quarterly.
  - Uruguay: coordinate with international institutions on financial stability; meet at least once a year.
- Characterization framework (four dimensions):
  - Agency responsible for taking macroprudential actions.
  - Role of the government (MoF chairing trade-offs).
  - Separation between policy decision-making and control over instruments.
  - Existence of a separate coordinating body.
- Pacific model implications:
  - Central bank and financial supervision authority both take regulatory decisions falling within macroprudential policy.
  - Issues: unclear tasks/responsibilities of committees; unclear monitoring ownership; coordination challenges for tools related to monetary policy (e.g., reserve requirements legally assigned to central bank vs. other instruments assigned to supervision); accountability difficulties when several agencies execute macroprudential policies.
  - Reporting: only Mexico has a legal requirement for an annual financial stability report by its council.
  - Government role varies: Chile and Mexico (MoF chairs); Colombia (MoF commands regulation and supervision legally reports to MoF); Costa Rica (MoF member of CONASSIF); Peru (government plays no role).
  - Separation between decision and implementation: generally no separation in Pacific-model countries; exceptions: Colombia and Costa Rica; Peru provides clearer instrument assignment.
  - Coordination bodies: Chile and Mexico’s councils help mitigate coordination weaknesses; Costa Rica’s CONASSIF coordinates broader financial sector policies; Peru relies on informal committees; Colombia has a formal coordination committee without decision powers.
  - Strengths: institutional separation preserves focus on mandates (price stability vs. prudential soundness) and avoids concentration of powers.
- Atlantic model implications:
  - Closer institutional integration between central bank and supervisory agencies facilitates monitoring and mitigation of systemic risks via enhanced access to data.
  - Trade-off: concentration of power calls for compensating mechanisms.
  - Brazil example: CMN (National Monetary Council) has broad powers; BCB houses COMEF (financial stability committee) and elevates macroprudential proposals to CMN; systemic risks in securities markets are legally out of COMEF scope.

### Box 2 — Institutional Arrangement for Financial Stability in Brazil
- Institutional mandates and roles:
  - No explicit financial stability or macroprudential policy mandate assigned to any institution.
  - CMN issues regulations and guidelines; BCB identifies banks’ systemic risks and assesses potential impact.
  - May 2011: BCB issued internal regulation establishing COMEF within the central bank; COMEF comprised of all BCB Board members and meets every other month.
- Organizational structure and "twin peaks" model:
  - Banking supervision: BCB.
  - Surveillance of other financial institutions:
    - CVM for securities markets.
    - CNSP for insurance companies.
    - CNPC for private pension funds.
  - Deposit insurance: Credit Guarantee Fund (FGC); all financial institutions and savings and loan associations are members.
  - No single institution empowered to coordinate across all sectors.
- Coordination mechanisms:
  - COREMEC (Presidential Decree, 2006): advisory role to promote coordination among entities regulating and supervising financial institutions; no direct link with CVM.
  - SUMEF (established by COREMEC in September 2010): Subcommittee to Monitor the Stability of the Financial System; promotes information sharing and coordination; no decision or recommending powers and no access to CMN.
- Accountability, government role, and tensions:
  - Accountability requirements for macroprudential policies not explicitly defined.
  - CMN empowered to take macroprudential decisions but has no accountability requirements; BCB monitors systemic risks and executes macroprudential policies.
  - Government plays an active role; government has majority representation and chairs the CMN.
  - Institutional tension example: since 2000 there have been seven governors of the central bank.
- Separation between policy-making and implementation:
  - CMN decides and regulates; BCB and CVM implement.
  - Contrasts with other Atlantic-model countries where central bank may both decide and implement.
- Analysis and policy implications:
  - Need for strong institutional framework to identify, analyze, and monitor systemic risk; ensure timely and effective use of macroprudential tools by creating appropriate mandates with powers and accountability; ensure coordination while preserving autonomy of separate policy functions.
  - Specific issues: lack of a single empowered coordinator across banks, insurance, pensions, and securities; COREMEC and SUMEF lack decision-making powers and direct links to CMN and CVM; government majority/chairmanship of CMN can risk central bank independence.
- Policy recommendations:
  - Clarify legal mandates for macroprudential policy and introduce dedicated accountability frameworks distinct from monetary policy frameworks.
  - Introduce pursuit of financial stability as the main objective of central bank actions in supervision and regulation, while preserving price stability as the main objective of monetary policy.
  - Make objectives explicit in legislation to facilitate assignment of regulatory powers and accountability.
  - Where feasible, admit separate insurance and securities agencies as members of a central bank financial stability committee to obtain information on nonbank institutions and develop coherent macroprudential strategies.
  - Ensure that a strong or leading role of government on financial stability committees does not undermine central bank independence.

### Appendix I — Central bank and banking regulation institution mandates (selected)
- Central bank legal mandates (selected countries):
  - Argentina: Maintain monetary stability, financial stability, employment, and economic development with social equity.
  - Brazil: Formulate monetary and credit policy to achieve economic and social progress (Law 4595/64). Ensure the stability of the purchasing power of the currency and the soundness and efficiency of the financial system (approved by the Board of the BCB).
  - Chile: Preserve the stability of the currency and the normal functioning of internal and external payments.
  - Colombia: Preserve the purchasing capacity of the currency.
  - Costa Rica: Maintain the domestic and external stability of the national currency and to ensure its convertibility. Secondary objectives: (i) promote the orderly development of the economy with the aim of achieving full use of the nation's productive resources, preventing or moderating inflationary or deflationary tendencies as may arise in money and credit markets; (ii) ensure the proper use of the nation’s international monetary reserves; (iii) promote the efficiency of the domestic and external payments; and (iv) promote a stable, efficient, and competitive financial system. General Superintendence of Financial Entities.
  - Mexico: Seek the stability of the purchasing power of the currency. Also, promote the sound development of the financial system and a proper functioning of payment systems.
  - Peru: To preserve monetary stability.
  - Uruguay: Preserve price stability to contribute to growth and employment. Regulate the functioning and supervise payments and financial systems, fostering its soundness, solvency, efficiency, and development.
- Mandates for banking supervision agencies (selected countries):
  - Argentina: BCRA in charge of banking supervision.
  - Brazil: BCB in charge of banking supervision.
  - Chile: Supervise banks and other financial institutions with the aim of protecting depositors.
  - Colombia: Preserve public confidence and financial stability; maintain integrity, efficiency and transparency of the stock market and other financial assets; ensure respect for consumer rights and proper financial service.
  - Costa Rica: Preserve the stability, strength, and efficient functioning of the national financial system.
  - Mexico: Preserve the stability and the integrity of the financial system and promote its efficiency and inclusive development.
  - Peru: Protect depositors, insured, and pensioners.
  - Uruguay: Central Bank of Uruguay (BCU) in charge of banking supervision.

### Appendix II — Institution responsible for establishing key macroprudential measures (selected)
- Argentina:
  - Dynamic provisioning: BCRA
  - Exceptional capital requirements (buffers): BCRA
  - Exceptional capital requirements SIFIs: BCRA
  - Limits on LTV: BCRA
  - Limits on interbank exposures: BCRA
  - Reserve requirements: BCRA
- Brazil:
  - Dynamic provisioning: CMN regulates and the BCB implements.
  - Exceptional capital requirements: CMN regulates and BCB implements.
  - Exceptional capital requirements SIFIs: CMN regulates and BCB implements.
  - Limits on LTV: CMN regulates and BCB implements.
  - Limits on interbank exposures: CMN regulates and BCB implements.
  - Reserve requirements: BCB
- Chile:
  - Dynamic provisioning: Superintendence of Banks
  - Exceptional capital requirements: Superintendence of Banks in coordination with the BCC in the of M&A
  - Exceptional capital requirements SIFIs: Superintendence of Banks
  - Limits on LTV: Superintendence of Banks and BCC (covered bonds and other specific mortgage products)
  - Limits on interbank exposures: BCC
  - Reserve requirements: BCC
- Colombia:
  - Dynamic provisioning: Financial Superintendence
  - Exceptional capital requirements: Financial Superintendence
  - Exceptional capital requirements SIFIs: Not defined.
  - Limits on LTV: Ministry of Finance
  - Limits on interbank exposures: Ministry of Finance
  - Reserve requirements: Bank of the Republic
- Costa Rica:
  - Dynamic provisioning: General Superintendence of Financial Entities (SUGEF) for approval of CONASSIF.
  - Exceptional capital requirements: BCCR reviews minimum capital annually; supervisory agencies can submit for CONASSIF approval.
  - Exceptional capital requirements for specific institutions: Supervisory agencies for CONASSIF approval.
  - Limits on LTV: Supervisory agencies for CONASSIF approval.
  - Limits on interbank exposures: Supervisory agencies for CONASSIF approval.
  - Reserve requirements: Central Bank of Costa Rica
- Mexico:
  - Dynamic provisioning: CNBV
  - Exceptional capital requirements: CNBV
  - Exceptional capital requirements for specific institutions: CNBV
  - Limits on LTV: CNBV/Bank of Mexico
  - Limits on interbank exposures: CNBV
  - Reserve requirements: Bank of Mexico
- Peru:
  - Dynamic provisioning: Superintendence of Banks, Pension Funds, and Insurances
  - Exceptional capital requirements: Superintendence of Banks, Pension Funds, and Insurances
  - Exceptional capital requirements for specific institutions: Superintendence of Banks, Pension Funds, and Insurances
  - Limits on LTV: Superintendence of Banks, Pension Funds, and Insurances
  - Limits on interbank exposures: Superintendence of Banks, Pension Funds, and Insurances
  - Reserve requirements: Central Reserve Bank of Peru
- Uruguay:
  - Dynamic provisioning: BCU
  - Exceptional capital requirements: BCU
  - Exceptional capital requirements for specific institutions: BCU
  - Limits on LTV: BCU
  - Limits on interbank exposures: BCU
  - Reserve requirements: BCU
- Source: Central banks’ legislation and answers to unofficial survey to central banks.

### Appendix III — Characterizing the Latin American banking system
- Structural features:
  - Financial systems dominated by banks; relatively underdeveloped capital markets except in Brazil and Chile.
  - Share of foreign banks’ lending: 20 percent (aggregate), reaching 70 per cent in Mexico.
  - Regional comparisons: Eastern Europe 60 percent, East Asia 10 percent, Middle-East and Africa less than 10 percent.
  - Banking systems fund mainly through deposits; Latin American Average Deposit-to-Loan ratio: 105 percent (Figure 11); Emerging Europe average: 75 percent.
  - Wholesale funding: limited but recently growing.
- Compliance with Basel Core Principles (BCPs):
  - Compliance improved over the decade but weaknesses persist.
  - Western Hemisphere compliant or largely compliant on over 60 percent of BCP principles.
  - Biggest lacunas (less than 40 percent of Western Hemisphere countries complying or largely complying): Principle 6 (minimum capital adequacy requirements), Principle 12 (market risk measurement/control), Principle 13 (comprehensive risk management), Principle 20 (banking group consolidated supervision).

*Italic line: Source: _wp12183 - IMF staff text (extracted content).*

### References .............................................................................................................

### _wp12183 - References

### Introduction
- Recent reforms worldwide aim to contain the buildup of systemic risk and revisit institutional foundations for monetary and financial policies.
- Macroprudential policy is defined as "a policy that uses primarily prudential tools to limit systemic or system-wide financial risk" (IMF (2011a)).
- The paper assesses institutional arrangements for financial stability in Latin America and identifies issues to consider when building institutional foundations for effective macroprudential policy implementation.
- Focus: primarily eight Latin American countries, grouped into two models:
  - "Pacific" model: Chile, Colombia, Peru, Costa Rica, and Mexico.
  - "Atlantic" model: Argentina, Brazil, and Uruguay.
- Paper structure:
  - Review progress and prevailing macro-financial vulnerabilities.
  - Analyze institutional arrangements for financial stability in sample countries, including recent reforms.
  - Discuss way forward and avenues to enhance macroprudential policy effectiveness.

### The case for macroprudential policy in Latin America
- Historical frequency and cost of crises:
  - During 1970 to 2007, Latin America experienced 28 systemic banking crises.
  - Argentina experienced four episodes: 1981, 1989, 1995, and 2002.
  - In half of these events a currency crisis also took place; in nine events a sovereign debt crisis occurred as well.
  - Systemic banking crises in Latin America typically exceeded 10 percent of GDP and in some cases even 30 percent of GDP (Laeven and Valencia, 2008).
- Definition note: systemic financial crises definition follows Laeven and Valencia (2008), which characterize systemic crises when three out of six specified conditions are met.

### A. Latin America has Made Significant Strides to Preserve Financial Stability
- Regulatory and supervisory improvements:
  - Increase in risk-weighted-capital asset ratios beyond the 8 percent required by the Basel I Accord.
  - Implementation of the Core Principles for Effective Banking Supervision.
  - Gradual introduction of provisions contained in the Basel II Accord and movement from compliance-checking to risk-oriented supervision.
- Financial safety nets and resolution frameworks (selected facts from Table 1):
  - Argentina: lender-of-last-resort 100% of capital, 180 days renewable; deposit insurance coverage USD 8,000; risk based premium.
  - Brazil: lender-of-last-resort not specified, 360 days; deposit insurance coverage USD 34,500; not risk based.
  - Chile: lender-of-last-resort not specified, 90 days renewable; deposit insurance coverage USD 5,000; No premium.
  - Colombia: lender-of-last-resort not established, 30 days renewable up to 180 days; deposit insurance coverage USD 9,900; Risk based.
  - Costa Rica: lender-of-last-resort 50% of liquid assets, 30 days renewable once up to 1 year; deposit insurance does not exist; public banks have full guarantee.
  - Mexico: lender-of-last-resort not established by law; deposit insurance coverage USD 132,900; Risk based.
  - Peru: lender-of-last-resort 100% of capital, 30 days renewable; deposit insurance coverage USD 28,900; Risk based.
  - Uruguay: lender-of-last-resort 150% of capital, up to 180 days; deposit insurance coverage USD 5,000 For. Curr. and USD 25,600 Dom. Curr.; Risk based.
  - Deposit insurance coverage figures are expressed at the January 2010 exchange rate.
  - Bank resolution instruments include: 1: Intervention or nationalization; 2: Mergers and acquisitions; 3: Bridge bank; 4: Purchase and assumption operations.
- Financial soundness indicators (eight-country sample, end-2010):
  - Median risk-weighted-capital-asset ratio currently stands at more than 15 percent; in no country is this ratio below 10 percent.
  - Median nonperforming loans are slowly declining after two-year deterioration.
  - Banks’ profitability recovered unevenly across countries.
- Contributing macroeconomic factors to resilience:
  - Favorable terms of trade and commodity price increases allowed accumulation of international reserves before the Lehman collapse.
  - Stockpiled reserves discouraged speculative attacks and allowed intervention to moderate depreciation.
  - Central banks reacted swiftly: initially tightening to anchor inflation expectations, later reversing stance after Lehman collapse; some implemented unconventional monetary measures.
  - Stronger macroeconomic policies: moderate fiscal and external deficits, lower external debt, enhanced international reserves, and flexible exchange rate regimes.
- Basel III buffers:
  - In the LA6 countries (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), banks’ capital not only exceed Basel III requirements, but in many instances satisfy the required conservation and countercyclical buffers (Terrier and others, 2011).

### B. Important Vulnerabilities Remain
- Capital flow volatility:
  - Capital inflows have been historically volatile, including in the 2000s.
  - Short-term inflows picked up to 4 percent of GDP by end 2010.
  - Total inflows reached more than 8 percent of GDP by end 2010.
  - Short-term inflows can quickly reverse into outflows and induce exchange rate instability and large nominal depreciations.
  - Large inflows often concentrate in non-tradable sectors (e.g., real estate), which together with credit expansion can feed asset bubbles and pose vulnerabilities.
- Exchange rate and balance-sheet risks:
  - Currency depreciations can raise interest rates in defense of the currency and damage financial institutions’ balance sheets, amplifying financial distress.
- Historical note on capital flows:
  - After Argentinean and Uruguayan crises, capital flows to Latin America resumed due to improved macroeconomic stability and growth prospects; capital inflows concentrated on emerging markets that are more financially integrated, except for Argentina, Ecuador, and Venezuela which have inhibited foreign investment.
- Absorptive capacity concerns:
  - Some economies in Latin America may not be able to absorb productively large amounts of capital inflows because of size and lack of solid institutional underpinnings, which discourages long-term investment.

*Source: _wp12183 - References, IMF PDF content provided.*

### 2011. However, it is unclear how damaging a more prolonged period of outflows

### _wp12183 - 2011. However, it is unclear how damaging a more prolonged period of outflows

### Regional macro-financial vulnerabilities
- Most countries in the region are primarily commodity exporters and are exposed to terms of trade shocks and large volatility of commodity prices.
- Commodity dependence is more acute in South America, where exports have a share in total exports of 30 percent or more.
- Argentina and Brazil: commodities have a share in total exports of more than 30 and 40 percent respectively.
- Remittances are a key source of external financing in some Central American countries: in the Central American countries, like in Honduras and El Salvador, remittances account for about 20 percent of GDP.
- While many countries enjoy solid macroeconomic fundamentals, high international reserves, and flexible exchange rates, downside risks remain potentially severe if shocks are prolonged and occur in combination with a financial shock.

### Commodity price volatility and terms of trade risks
- Volatility of oil and metal prices—and also of food—has increased significantly during the last decade, hitting record highs in the recent past.
- While commodity prices are currently high, a large correction is conceivable as they are at a high level compared to historical data.

### Credit dynamics and cyclical risks
- Real credit growth recovered since the early 2000s and surged since the middle of the decade.
- Real credit was growing at a fast pace by late 2011:
  - about 20 percent y/o/y in Brazil Colombia
  - more than 15 percent y/o/y in Chile and Peru
- Dynamic credit expansion is likely to lay the ground for buildup of systemic risks that may threaten financial stability.
- Latin America has a record of boom and bust cycles that turned into financial and currency crises (early to mid-1980s and mid to late-1990s); smoothing out the credit cycle is warranted due to procyclical behavior of financial markets.

### Idiosyncratic and cross-border shocks
- Natural disasters have frequently hit some countries, damaging infrastructure and agriculture and adversely impacting financial systems’ loans (Hurricane Mitch in 1998; El Niño floods in the late 1990s).
- Cross-border interconnectedness creates vulnerabilities:
  - Uruguay: nonresident deposits from Argentina are currently estimated at one-fifth of total deposits.
  - Costa Rica: exposure to regional financial groups (Citi, HSBC, Lafise, Continental).

### Financial system structural vulnerabilities
- Financial dollarization is high in several countries: Costa Rica, Peru, and Uruguay—and other countries not in the sample like Bolivia and Nicaragua—retain a high share of dollar liabilities of about 50 percent or more.
  - Dollarization tends to rise during periods of stress (e.g., peak of the crisis in late 2008).
  - Financial dollarization heightens exposure to currency depreciations and can amplify financial stress; it also restricts government and central bank crisis-management options.
- Systemically important financial institutions (SIFIs):
  - In virtually all sample countries there are SIFIs—banking systems typically dominated by two or three banks, which may be too-important-to-fail.
  - Failure of such banks would likely lead to government or central bank intervention, creating moral hazard and enhanced fiscal contingency.
- Large public banks:
  - Public banks have more than 40 percent market share in countries like Brazil, Costa Rica, and Uruguay, and are also important in Argentina, Chile, and Mexico.
  - Public banks can act as “safe havens” and support countercyclical policies but also represent fiscal contingencies if they engage in risky activities and require recapitalization.
- Wholesale funding and financial deepening:
  - As financial systems develop, banks may rely less on deposits and more on wholesale funding; dependence on wholesale funding can pose major systemic liquidity risk.
  - Sophisticated instruments (derivatives) have presented problems: Brazil and Mexico confronted problems with complex derivatives during 2008, particularly in the foreign exchange market, which were not adequately regulated.

### Key banking concentration metrics (Table 2: percentage share of total deposits and short-term funding, as of 2010)
- Argentina: First 23.69; Second 8.82; Third 8.47
- Brazil: First 23.46; Second 19.54; Third 15.88
- Chile: First 21.64; Second 20.88; Third 18.55
- Colombia: First 19.35; Second 13.65; Third 12.42
- Costa Rica: First 20.86; Second 20.22; Third 7.28
- Mexico: First 20.79; Second 20.4; Third 8.81
- Peru: First 24.5; Second 21.7; Third 16.3
- Uruguay: First 42.59; Second 17.82; Third 4.84
- Source for table: Bankscope.

### Existing macroprudential tools and practices
- Historical use of macroprudential-type instruments without formal macroprudential frameworks; many instruments were used earlier for monetary policy purposes (e.g., reserve requirements).
- Common instruments and uses across sample countries:
  - Limits on net open positions / currency mismatches: widely used to tame FX speculation and prevent exchange rate risks in banks’ balance sheets.
  - Limits on interbank exposures: used to reduce contagion risk.
  - Caps on loan-to-value (LTV) or debt-to-income (DTI) ratios: recently introduced in most sample countries (except Mexico and Uruguay) to limit credit booms—mostly applied to housing, consumer credit, credit cards, auto loans.
  - Countercyclical dynamic provisioning: used in Colombia, Peru, and Uruguay to build buffers to absorb loan losses during downturns; Bolivia also introduced counter-cyclical dynamic provisioning in 2008 (not in sample).
  - Reserve requirements (RRs): used historically as monetary instrument and more recently as buffers; rates vary widely and are sometimes differentiated by deposit type and currency.
    - Examples of RR rates and modalities:
      - Reserve rate was as high as 42 percent in Brazil by end-2010 (for demand deposits).
      - 4.5 percent for deposits at less than or equal to 18 months in Colombia at the same date.
      - In Argentina in 2010 the rate was 19 percent and 20 percent for deposits in local and foreign currency, respectively.
      - In Peru, foreign currency deposits were subject to a surcharge of 30 percent as a marginal RR.
- Specific country practices:
  - Peru: additional capital requirement of 2.5 percent of the estimated foreign exchange exposure to discourage foreign currency lending to domestic-currency earners.
  - Brazil and Mexico: more recently imposed limitations on derivative positions.
  - Colombia introduced in 2009 a liquidity risk management system (Sistema de Administración de Riesgo de Liquidez) applicable to most financial intermediaries.
- Empirical evidence and effectiveness:
  - Recent empirical research suggests RRs have a measurable, if transitory, effect in taming credit growth (Tovar and others, 2012).
  - Dynamic provisioning has been found effective in containing leverage and credit growth in some studies (Lim and others, 2011).

### Gaps and challenges in macroprudential frameworks and institutions
- Despite concentration and SIFIs, little emphasis has been placed on strengthening capital positions of SIFIs or specific provisions to reduce their failure likelihood.
- Limited use of dedicated liquidity buffers for macroprudential purposes across Latin America (Colombia is an exception).
- Constitutional and legal constraints:
  - In many countries financial stability is not an explicit legal mandate for central banks or supervisory agencies; preserving financial stability is often implicit rather than firmly established in law.
  - Central bank mandates (e.g., Chile, Colombia, Mexico, Peru) enshrined in Constitutions can constrain reform options and central bank participation in certain macroprudential bodies (example: Chile).
  - In Peru, constitutional mandate to keep deposits safe may constrain macroprudential measures perceived to elevate depositor risk.
- Institutional models:
  - Two main models identified:
    - Pacific model: supervision and regulation organized along financial industries; central bank focused on monetary policy (Colombia, Chile, Peru, Costa Rica, Mexico).
    - Atlantic model: banking supervision and regulation within central bank (Argentina, Brazil, Uruguay).
  - Until recently, neither model explicitly incorporated a mandate for preserving systemic financial stability, though recent legal and administrative steps have created financial stability committees:
    - Chile, Mexico, Uruguay: financial stability committees created by executive decree with macroprudential responsibilities and crisis management powers.
    - Brazil: Central Bank created an internal financial stability committee within the Central Bank of Brazil (BCB) in 2011, comprised by all members of its Board.

*Source: _wp12183 (extracted PDF content).*

### Box 1. The New Financial Stability Committees in Chile, Mexico, and Uruguay

### Box 1. The New Financial Stability Committees in Chile, Mexico, and Uruguay

### Overview and purpose
- Following the global crisis, Chile, Mexico, and Uruguay made progress towards improving financial stability frameworks by creating new institutional arrangements:
  - Chile: Financial Stability Council in 2011.
  - Mexico: Financial System Stability Council in 2010.
  - Uruguay: Financial Stability Committee in 2011.
- Common mandate: prevent the buildup of systemic risks and, if necessary, recommend the implementation of macroprudential policies to the relevant agencies.
- Decision powers and accountability:
  - These committees do not have decision powers and are not held accountable.
  - Exception: in Mexico, the Council is required to prepare and publish a report assessing financial stability and the measures taken to this end.

### Information, coordination, and crisis management powers
- Information and coordination:
  - All three arrangements are vested with powers to obtain information from all financial industries and their participating institutions.
  - They play a coordinating role to secure the consistency of financial stability efforts.
- Crisis management powers:
  - Mexico and Uruguay: financial stability committees have explicit powers to manage financial crises.
  - Chile: crisis management powers reside with individual institutions; the Council operates as a coordinating device. Crisis management is explicitly mentioned as a key consideration for establishing the Council.

### Governance and membership
- Chair and membership commonality:
  - In all three countries the committee is presided by the Minister of Finance (MoF).
  - Other members are the heads of the financial supervisory agencies and the central bank.
- Chile exception:
  - The governor of the Central Bank of Chile (BCC) is invited to participate but is not formally a member of the Council because this was seen to conflict with the independence and mandate of the BCC as sanctioned in the Constitution.
- Composition details:
  - Mexico — Financial System Stability Council includes: head of the National Commission of Banks and Securities; National Commission of Insurances; National Commission for the Savings for Retirement; Executive Secretary of the Institute of Banks Saving Protection; Undersecretary of Finance; Governor of the Bank of Mexico and two Deputy Governors (in addition to other members).
  - Uruguay — Financial Stability Committee comprises the Governor of the Central Bank of Uruguay; the Superintendent of Financial Services; and the President of the Corporation for the Protection of Banks Savings.
  - Chile — Financial Stability Council comprises the head of the Superintendence of Securities and Insurances; the Superintendence of Banks and Financial Institutions; and the Superintendence of Pensions.

### Additional responsibilities and meeting frequency
- Country-specific additional tasks:
  - Chile: recommending criteria for the determination of the budget of the supervisory agencies.
  - Uruguay: coordinating with other international institutions on issues of financial stability.
- Required meeting frequencies:
  - Chile: at least every month.
  - Mexico: at least quarterly.
  - Uruguay: at least once a year.

### Characterizing financial stability arrangements (context from the broader analysis)
- Four dimensions used to characterize institutional setups:
  - Agency responsible for taking macroprudential actions (ownership and accountability).
  - Role of the government (importance of MoF chairing the committee and trade-offs arising from MoF’s priorities).
  - Separation between policy decision-making and control over macroprudential instruments (relevance for enforcement and accountability).
  - Existence of a separate coordinating body (needed when different agencies are in charge of macroprudential policies).
- Application:
  - The three new committees are evaluated alongside long-standing institutional setups using these dimensions to assess integration, coordination, and accountability.

### Pacific model (implications for Chile, Mexico, and similar countries)
- Model description:
  - Both the central bank and the financial supervision agency take regulatory decisions that fall in the domain of macroprudential policy.
  - Financial supervision authority also adopts microprudential policies.
- Issues highlighted:
  - Unclear specific policy tasks and responsibilities of committees (Chile and Mexico), which may pose problems for establishing accountability.
  - Unclear which institution is charged with monitoring systemic risks—the central bank or the committee.
  - Coordination challenges for tools closely related to monetary policy (e.g., reserve requirements legally assigned to the central bank vs. other macroprudential instruments assigned to supervision).
  - Difficulties in effective accountability when several agencies execute macroprudential policies.
- Reporting and accountability examples:
  - Only Mexico has a specific legal provision requiring the Financial System Stability Council to provide an annual report on the stability of the financial system and decisions adopted by the Council.
  - Chile, Colombia, Costa Rica, and Peru: financial stability committees or institutions do not have reporting requirements or are not legally assigned a macroprudential policy function.
  - Governors of central banks in Pacific-model countries cannot be held accountable for financial stability when that responsibility is beyond their legal mandate; financial stability analyses appear at best in financial stability reports and annual reports of supervision institutions.
- Government role variation:
  - Chile and Mexico: government plays a key role since the MoF chairs the committees (committee has only recommending powers).
  - Colombia: MoF is in charge of financial sector regulation and the Financial Superintendence legally reports to the MoF.
  - Costa Rica: MoF is a member of CONASSIF, which coordinates and integrates financial system regulation; MoF has potential influence.
  - Peru: government plays no role on financial stability.
- Separation of decision and implementation:
  - In most Pacific-model countries there is no separation between the agency that takes decisions and the implementing institution; central banks and supervisory agencies retain final decision-making autonomy.
  - Colombia exception: MoF commands financial regulation and delegates implementation to the Superintendence of Banks and the Bank of the Republic.
  - Costa Rica exception: CONASSIF empowered to adopt some financial stability measures; supervisory agencies and the central bank execute decisions.
  - Peru: institutional separation ensures each institution controls instruments assigned by law.
- Coordination bodies:
  - Chile and Mexico: financial stability councils help mitigate coordination weaknesses by having powers to coordinate financial stability efforts.
  - Costa Rica: formal committee created to coordinate financial sector policies in general—coordinating macroprudential policy is beyond its mandate.
  - Peru: informal coordinating committee mainly fosters exchange of information about monetary, financial, and government policies.
  - Colombia: a formal coordination committee exists to exchange financial sector information but lacks decision or recommending powers.
- Strengths of separation:
  - Institutions remain focused on their mandates (price stability and soundness of individual financial institutions), facilitating accountability for monetary and prudential policies.
  - Avoids concentrating broad powers in a single dominant institution, reducing political hazard risks in weak political-institution contexts.

### Atlantic model (contrast and implications)
- Model description:
  - Closer institutional integration between the central bank and supervisory agencies.
  - Central bank often in command of banking regulation, enabling better monitoring and mitigation of systemic risks via enhanced access to data and information.
- Trade-offs:
  - Closer integration concentrates significant power and calls for compensating mechanisms.
- Brazil example (specified features):
  - Existence of the National Monetary Council (CMN) vested with broad powers, including potential macroprudential decisions following recommendations from the BCB and the Securities Commission (CVM).
  - BCB houses the financial stability committee (COMEF), which monitors systemic risks associated with the banking system and elevates for CMN consideration the approval of macroprudential policies aimed at tackling those risks.
  - Systemic risks emerging in securities markets or other financial industries are legally out of the scope of the COMEF.

*Source: Box 1 from the provided IMF content unit.*

### Box 2. Institutional Arrangement for Financial Stability in Brazil

### Box 2. Institutional Arrangement for Financial Stability in Brazil

### Institutional mandates and roles
- There is no explicit financial stability or macroprudential policy mandate assigned to any institution in Brazil.
- Implicit roles:
  - CMN issues regulations and provides guidelines to be implemented by the BCB and the CVM in their role of monitoring, controlling and regulating financial institutions and securities markets.
  - BCB is in charge of identifying banks’ systemic risks and assessing their potential impact.
- BCB action:
  - On May 2011 the BCB issued an internal regulation to establish a COMEF within the central bank.
  - COMEF is comprised by all the members of the BCB’s Board and meets every other month.

### Organizational structure and the “twin peaks” model
- Brazil has a version of the “twin peaks” model for financial stability:
  - Banking supervision is conducted by the BCB.
  - Surveillance of other financial institutions is conducted by different agencies:
    - CVM for securities markets.
    - National Council of Private Insurances (CNSP) regulates and monitors insurance companies.
    - Management Council of Complementary Pensions (CNPC) rules the functioning of private pension funds.
  - Deposit insurance institution: Credit Guarantee Fund (FGC); all financial institutions as well as savings and loan associations are members.
- No single institution is empowered to coordinate financial stability across all sectors.

### Coordination mechanisms: COREMEC and SUMEF
- COREMEC:
  - Created via a Presidential Decree in 2006 to promote coordination and improve the functioning of entities responsible for regulating and supervising financial institutions.
  - Has a purely advisory role, based on information received from the four agencies in charge of surveillance of banks, securities, insurance, and pensions.
  - Does not have a direct link with the CVM.
- SUMEF:
  - Established by COREMEC in September 2010 as the Subcommittee to Monitor the Stability of the Financial System.
  - In practice, SUMEF promotes the sharing of information among institutions represented in COREMEC and is a forum to coordinate and discuss financial stability.
  - SUMEF has no decision or recommending powers and has no access to the CMN either.

### Accountability, government role, and institutional tensions
- Accountability requirements for macroprudential policies are not explicitly defined.
  - In practice, central bank boards are held accountable for their mandates and could de facto report about measures adopted to preserve financial stability over a given period.
  - Complication in Brazil: CMN is empowered to take macroprudential decisions but has no accountability requirements, whereas BCB monitors systemic risks via its financial stability committee and executes macroprudential policy decisions.
- Government representation and influence:
  - In the Atlantic model context, the government plays an active role in macroprudential policy.
  - In Brazil the government has the majority of members and chairs the CMN.
  - Institutional tension example: since 2000, there have been seven governors of the central bank (illustrating political influence and turnover).

### Separation between policy-making and implementation
- Brazil exhibits a separation between agencies that adopt and implement macroprudential decisions:
  - CMN is empowered to decide and regulate.
  - Policy implementation is a responsibility of the BCB and the CVM.
- This contrasts with other Atlantic model countries where the central bank may both decide and implement (e.g., BCRA) or where the financial stability committee has only recommending powers and the central bank executes policy (e.g., Uruguay).

### Analysis and policy implications (extracted from the broader “Way Forward”)
- Need for a strong institutional framework to:
  - Achieve effective identification, analysis, and monitoring of systemic risk.
  - Ensure timely and effective use of macroprudential policy tools by creating appropriate mandates and assuring strong powers and accountability.
  - Ensure effective coordination in risk assessments and mitigation while preserving autonomy of separate policy functions.
- Specific institutional issues highlighted for Brazil:
  - Lack of a single empowered coordinator of financial stability across banks, insurance, pensions, and securities.
  - COREMEC and SUMEF provide coordination and information-sharing but lack decision-making powers and direct links to key bodies (e.g., CMN and CVM).
  - Government majority/chairmanship of CMN can pose risks to the independence of the central bank and to the forcefulness of macroprudential action.

### Policy recommendations and procedural improvements (applicable to Brazil within Atlantic model discussion)
- Clarify legal mandates for macroprudential policy and introduce dedicated accountability frameworks distinct from monetary policy frameworks.
- Introduce the pursuit of financial stability as the main objective of the central bank’s actions in supervision and regulation, while preserving price stability as the main objective of monetary policy.
- Make objectives explicit in legislation to facilitate assignment of regulatory powers and accountability.
- Where feasible, admit separate insurance and securities agencies as members of a central bank financial stability committee to:
  - Establish regular access to information on nonbank financial institutions and markets.
  - Develop a coherent macroprudential strategy extending to nonbank financial institutions when needed.
- Ensure that a strong or leading role of government on financial stability committees does not undermine central bank independence.

*Source: Box 2. Institutional Arrangement for Financial Stability in Brazil (excerpt).*

### Appendix I. Central Bank and Banking Regulation Institution Mandates

### Appendix I. Central Bank and Banking Regulation Institution Mandates

### Legal mandates for central banks (selected countries)
- Argentina: Maintain monetary stability, financial stability, employment, and economic development with social equity.
- Brazil: Formulate monetary and credit policy to achieve economic and social progress for the country (Law 4595/64). Ensure the stability of the purchasing power of the currency and the soundness and efficiency of the financial system (approved by the Board of the BCB).
- Chile: Preserve the stability of the currency and the normal functioning of internal and external payments.
- Colombia: Preserve the purchasing capacity of the currency.
- Costa Rica: Maintain the domestic and external stability of the national currency and to ensure its convertibility. Secondary objectives: (i) promote the orderly development of the economy with the aim of achieving full use of the nation's productive resources, preventing or moderating inflationary or deflationary tendencies as may arise in money and credit markets; (ii) ensure the proper use of the nation’s international monetary reserves; (iii) promote the efficiency of the domestic and external payments; and (iv) promote a stable, efficient, and competitive financial system. General Superintendence of Financial Entities.
- Mexico: Seek the stability of the purchasing power of the currency. Also, promote the sound development of the financial system and a proper functioning of payment systems.
- Peru: To preserve monetary stability.
- Uruguay: Preserve price stability to contribute to growth and employment. Regulate the functioning and supervise payments and financial systems, fostering its soundness, solvency, efficiency, and development.

### Mandates for banking supervision agencies (selected countries)
- Argentina: BCRA is in charge of banking supervision (see the mandate above).
- Brazil: The BCB is in charge of banking supervision (see the mandate above).
- Chile: Supervise banks and other financial institutions with the aim of protecting depositors.
- Colombia: Preserve public confidence and financial stability, maintaining the integrity, efficiency and transparency of the stock market and other financial assets, and ensure respect for consumer rights and the proper financial service.
- Costa Rica: Preserve the stability, strength, and efficient functioning of the national financial system.
- Mexico: Preserve the stability and the integrity of the financial system and promote its efficiency and inclusive development.
- Peru: Protect depositors, insured, and pensioners.
- Uruguay: The Central Bank of Uruguay (BCU) is in charge of banking supervision (see the mandate above).

*Source: Central banks’ legislation and institutions’ websites.*

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### Appendix II. Institution Responsible for Establishing Some Key Macroprudential Measures (Selected Latin American Countries)

### Institutions and assigned macroprudential tools (selected entries)
- Argentina
  - Dynamic provisioning for the financial system: BCRA
  - Exceptional capital requirements (buffers) for the financial system: BCRA
  - Exceptional capital requirements SIFIs: BCRA
  - Limits on the loan to value ratio in the financial system: BCRA
  - Limits on financial institutions exposures on the interbank market: BCRA
  - Reserve requirements: BCRA
- Brazil
  - Dynamic provisioning: CMN regulates and the BCB implements.
  - Exceptional capital requirements: The CMN regulates and the BCB implements.
  - Exceptional capital requirements SIFIs: The CMN regulates and the BCB implements.
  - Limits on LTV: The CMN regulates and the BCB implements.
  - Limits on interbank exposures: The CMN regulates and the BCB implements.
  - Reserve requirements: BCB
- Chile
  - Dynamic provisioning: The Superintendence of Banks
  - Exceptional capital requirements: The Superintendence of Banks in coordination with the BCC in the of M&A
  - Exceptional capital requirements SIFIs: The Superintendence of Banks
  - Limits on LTV: The Superintendence of Banks and BCC (covered bonds and other specific mortgage products)
  - Limits on interbank exposures: BCC
  - Reserve requirements: BCC
- Colombia
  - Dynamic provisioning: Financial Superintendence
  - Exceptional capital requirements: Financial Superintendence
  - Exceptional capital requirements SIFIs: Not defined.
  - Limits on LTV: Ministry of Finance
  - Limits on interbank exposures: Ministry of Finance
  - Reserve requirements: Bank of the Republic

- Costa Rica
  - Dynamic provisioning: General Superintendence of Financial Entities (SUGEF) for approval of the CONASSIF.
  - Exceptional capital requirements: The BCCR reviews minimum capital annually. In addition, the various supervisory agencies can also submit it for the approval of CONASSIF.
  - Exceptional capital requirements for specific institutions (too big to fail): Supervisory agencies for the approval of CONASSIF.
  - Limits on LTV: Supervisory agencies for the approval of CONASSIF.
  - Limits on interbank exposures: Supervisory agencies for the approval of CONASSIF.
  - Reserve requirements: Central Bank of Costa Rica

- Mexico
  - Dynamic provisioning: National Commission of Banks and Securities (CNBV)
  - Exceptional capital requirements: CNBV
  - Exceptional capital requirements for specific institutions: CNBV
  - Limits on LTV: CNBV/Bank of Mexico
  - Limits on interbank exposures: CNBV
  - Reserve requirements: Bank of Mexico

- Peru
  - Dynamic provisioning: Superintendence of Banks, Pension Funds, and Insurances
  - Exceptional capital requirements: Superintendence of Banks, Pension Funds, and Insurances
  - Exceptional capital requirements for specific institutions: Superintendence of Banks, Pension Funds, and Insurances
  - Limits on LTV: Superintendence of Banks, Pension Funds, and Insurances
  - Limits on interbank exposures: Superintendence of Banks, Pension Funds, and Insurances
  - Reserve requirements: Central Reserve Bank of Peru

- Uruguay
  - Dynamic provisioning: BCU
  - Exceptional capital requirements: BCU
  - Exceptional capital requirements for specific institutions: BCU
  - Limits on LTV: BCU
  - Limits on interbank exposures: BCU
  - Reserve requirements: BCU

*Source: Central banks’ legislation and answers to unofficial survey to central banks.*

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### Appendix III. Characterizing the Latin American Banking System

### Key structural features and comparative observations
- Financial system dominated by banks
  - The banking system in the Latin American countries is dominated by banks.
  - Relative to other emerging market regions, Latin American countries have relatively underdeveloped capital markets. Only Brazil and Chile have a fairly well developed financial market (mainly in the form of equity), with the remainder of the region lacking it.
  - Contributing factors: persistence of macroeconomic instability (relative to East Asia) leading to recurrent macroeconomic and financial crises; low savings record, which is typically the main engine of growth of the financial system.

- Foreign banks’ lending is high
  - Most lending is disbursed through local subsidiaries of foreign banks, with the Spanish banks playing a predominant role.
  - The share of foreign banks’ lending is 20 percent (aggregate reference in the text).
  - Country variation: reaching 70 per cent in the case of Mexico.
  - Regional comparisons: Eastern Europe 60 percent, East Asia 10 percent, Middle-East and Africa less than 10 percent.
  - Foreign banks often finance mostly through domestic deposits (they tend to be subsidiaries), suggesting potential isolation from parent company events.

- Banking system reliance on deposits
  - The banking system in Latin American countries funds itself mainly through deposits.
  - This deposit funding structure contributes to relative robustness to temporary liquidity dry ups.
  - Evidence: very high Deposit-to-Loan ratios for foreign-owned local affiliates; Latin American Average: 105 percent (Figure 11).
  - Emerging Europe average: 75 percent.

- Wholesale funding
  - While availability of wholesale funding is still quite limited, it has recently been growing.

### Compliance with Basel Core Principles (BCPs)
- Compliance has improved in the last decade, though weaknesses persist in certain areas.
- Judging by compliance of the 25 Basel Core Principles, Latin America as a whole still ranks among the weaker regions.
- The Western Hemisphere (including the United States and Canada) is compliant or largely compliant on over 60 percent of BCP principles, placing it between Africa and the Asia-Pacific region (Figure 12).
- The BCPs are imperfect proxies for supervisory quality; results suggest the region has room to improve the regulatory and supervisory environment.
- The biggest lacunas: “As measured by less than 40 percent of Western Hemisphere countries, the biggest lacunas, complying or largely complying too are principles 6 (prudent and appropriate minimum capital adequacy requirements), 12 (banks have in place systems that accurately measure, monitor and adequately control market risks), 13 (banks have in place a comprehensive risk management process), and 20 (banking group on a consolidated basis).”

*Italic line: Source: IMF staff text (Appendices I–III, selected Latin American countries).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12183.pdf_