EXECUTIVE SUMMARY Despite the global and domestic shocks of
20082009, the banking sector remains sound. Salvadoran banks were
not directly exposed to the global financial crisis. However, the
parent banks of several major Salvadoran banks were hit hard and
directed subsidiaries to conserve risk capital. The higher risk
aversion and recession in the United States, combined with
uncertainty about the 2009 elections, led to a sharp economic
downturn, and a decline in both credit demand and supply. Banks
nonperforming loans increased and profitability declined. Even so,
capitalization remained high. Stress tests indicate most banks are
resilient to a severe macroeconomic, sectoral and liquidity shocks.
Implementation of the 2004 FSAP update recommendations has been
limited (Appendix 1). The supervisory frameworks for banks,
insurance, and cross-border cooperation were improved and partial
progress was made in strengthening the financial infrastructure,
insolvency process, microfinance regulatory framework, and
restructuring of state-owned banks. However, important legal
provisions to strengthen supervision and safety nets, as well as a
corporate insolvency law have not yet been approved. Furthermore,
while loan classification and provisioning rules were upgraded,
important risk and corporate governance regulations for banks have
yet to be issued. The proposed Financial System Supervision and
Regulation Law (FSSRL) could improve consolidated supervision and
reduce the scope for regulatory arbitrage, but will require careful
implementation. The FSSRL would merge the supervisors of banks and
insurance, pensions, and securities to create one unified
supervisor, with stronger powers. To balance this, the FSSRL would
shift regulatory power to the central bank. A sole supervisor and a
sole regulator are expected to facilitate consolidated supervision,
as well as reduce regulatory gaps and the scope for regulatory
arbitrage. However, the merger of supervisors and the institutional
split between regulatory and supervisory powers will require a
great deal of planning and ongoing cooperation between the
supervisor and the regulator to ensure effective supervision.
Remaining gaps in banking supervision and the safety net should be
addressed. Supervisory practices should include more qualitative
judgment and forward-looking risk assessments, and the regulatory
perimeter should be reviewed. Key banking regulation (e.g., on
corporate governance as well as credit, market, interest and
liquidity risks) must be issued and the proposed FSSRL should more
comprehensively address shortcomings in legal protection and the
remedial action framework. The banking law should also be amended
to strengthen the least-cost bank resolution framework as well as
the deposit insurance fund. Regulations implementing the central
banks (limited) powers for emergency liquidity assistance (ELA), as
well as the bank resolution process are also needed. Passage of the
proposed FSSRL would provide the BCR with more ELA powers, although
the authorities should also design and test comprehensive policies
for systemic liquidity and banking crisis resolution.
International Monetary Fund
|Country of origin:
International Monetary Department
||Electronic book text
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