The Government takes actions to strengthen capital of credit

The Government takes actions to strengthen
capital of credit institutions.
 The adjustments will strengthen the quality of the instruments that
make up the capital of credit institutions, following international
 A higher quality capital enables credit institutions to better face the
risks that are associated to their businesses.
 The timing for this reform is adequate given that the Colombian
financial system is sound and highly profitability.
Bogotá, August 24th of 2012. The National Government issued Decree 1771 of
2012, which defines the components of the capital of credit institutions (Banks,
Financial Companies and Financial Corporations) with the purpose of adjusting the
Colombian regulation to international standards.
This prudential regulation is the result of the work and discussions carried out
during the past year with international experts, the financial sector and the
Financial Safety Network (Ministry of Finance, Financial Superintendence, Fogafin
and the Central Bank). The regulation follows international practices to strengthen
financial institutions making sure that their capital is of the highest quality, which
results in a stronger support to depositors’ resources.
The measure maintains the minimum solvency level (the ratio that has to exist
between capital and assets (RWA)) at 9%, and introduces a new measure of “core
solvency” that gives information about the highest quality capital and sets a
minimum level of 4.5% according to this new decree.
The criteria for accounting an instrument as regulatory capital include: stability,
permanence and availability in times of stress. For example, fixed assets
(buildings) were previously recognized as capital even though their value and
marketability is highly uncertain during a crisis; these are no longer accounted for.
Also, voluntary reserves may be discretionally used up in times of need, which is
why the new regime will consider this instrument only if deemed permanent and
when it accounts for no more than 10% of total capital.
This reform is performed in a moment in which the Colombian financial system
exhibits excellent results, so its adoption should not affect the normal functioning of
the system or the financial intermediation of the economy.
The decree establishes a transition period of one year, which allows the institutions
to meet the requirements in due time, considering their particular characteristics.
In recent years, the financial sector has followed a globalization process with the
presence of new agents in the local financial system and the expansion of national
entities in external markets. This poses the need to continue in aligning our
regulatory framework with international standards.
Frequently Asked Questions (FAQ)
1. What are the main adjustments included with the new regulation?
Decree 1771 of 2012 modifies the definition of regulatory capital with the purpose
of improving its quality in line with best international practices.
The new definition is based on the Basel Committee recommendations regarding
regulatory capital by improving the quality of the instruments that comprise it,
nevertheless considering specific issues of the Colombian environment.
There is also a new classification of regulatory capital which includes the following
elements: Core Level 1 Capital (PBO), Additional Level 1 Capital (PBA) and Level
2 Capital (PA). The PBO is the element with the highest quality with the highest
capacity to absorb losses. The new regulation includes a description of each type
of capital, the elements that compose them and the criteria that enable its
classification. It also maintains the minimum solvency level in 9%, but introduces a
new measurement of core solvency of 4.5%, to be met by Core Level 1 Capital
2. To which financial institutions does this new regulation apply?
Banks, Financial Corporations and Financial Companies.
3. Which are the important dates to be considered in the implementation
of the new decree?
 Transition period between current and the new capital regime:
The above mentioned institutions must comply with the new capital requirements
by August 2013. This transition period enables enough time for credit institutions to
make any adjustments needed (profit withholding, reclassification of reserves,
capitalization, etc.), without interfering the regular supply of financial services.
 Action plan:
Each institution must submit their action plan to comply with the new capital regime
to the Financial Superintendence of Colombia before January 31st of 2013.
This will enable the Superintendence to closely monitor the transition process of
each institution.
4. What are the benefits for depositors and the public in general?
These changes will strengthen the solvency of credit institutions’, making them
more resilient during future financial crises, making the financial system more
stable, sound and trustworthy. This helps protect depositors, credit institutions and
the general public.
A strong and resilient financial system is the key to sustainable economic growth
given the importance of banks in credit intermediation between depositors and
investors. Banks also supply important financial services to particular clients, small
and medium enterprises (SMEs), important corporations and governments that
depend on these services in their daily activities.
5. Will this decision have any effects on credit allocation, access to
financial services and their costs?
Studies performed by Colombian authorities show that the new definition of
regulatory capital does not represent a significant increase of the current capital of
credit institutions; in this manner the supply of financial services should not be
Furthermore, the transition period established by the decree will give the financial
sector enough time to gradually adapt to the new regulation, maintaining an
adequate credit supply within the economy.
6. Is this decision appropriate given the international financial crisis and
the current economic environment?
One of the aspects that were studied the most by the government in the process of
issuing the new regulation was regarding its timeliness. This is why this reform is
implemented in a moment in which the Colombian financial system exhibits
excellent results, so the adoption of the standards does not affect the normal
financial intermediation that is needed by the productive system.
7. Did this reform take place because Banks were regulated incorrectly?
It has been demonstrated that the Colombian financial system is strong. The most
important proof is its resilience facing the international financial crisis of 2008.
However, the previous capital regulation had not been updated in more than a
decade, reason why a thorough revision was long due, especially taking into
account the fast pace of financial innovation and regulatory changes.
Finally, it is important to mention that international guidelines and
recommendations that are being adopted take into account lessons learned from
the most recent financial crisis, and are always adjusted to adequately fit the
Colombian financial system.