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Colombia: Continued Basel III alignment

The Financial Regulation Unit (URF) of the Colombian Ministry of Finance and Public Credit (MHCP) issued its regulatory agenda for 2018, including the release of another set of rules to align the Colombian financial regulation framework with Basel III standards for the second trimester of 2018.

The announcement is not an isolated event. Colombia started adopting Basel III regulatory standards in 2011. In the meantime, the MHCP has issued Decrees 1771 of 2012 and 904 of 2013 regarding new equity adequacy requirements and financial institutions' solvency ratios, and Decrees 1648 of 2014 and 2392 of 2015 regarding the gradual deduction of unsecured subordinated debt from Tranche 1 regulatory capital. Nonetheless, Colombia still has a long way to go in adopting regulatory standards on conservation, contracyclical and systematic capital buffers, deduction of intangible assets, pension liabilities and the regulation of unsecured subordinated debt. The Colombian financial regulatory landscape is fairly robust and more demanding than the Basel III standards, including in terms of risk-weighted assets (RWA), and a total solvency ratio of nine percent and a minimum core solvency ratio of 4.5 percent for financial institutions.

While adopting Basel III regulatory standards for conservation, contracyclical and systematic capital buffers appears to be a straightforward regulation to be adopted by the MHCP, implementing the set of rules from a macroeconomic perspective and capital funding is more challenging. Most importantly, the MHCP will need to determine which regulatory aspects should be modified to gradually comply with Basel III final standards, while adapting the rulings to the Colombian financial market conditions and mitigating unforeseeable risks.

Although proposed reforms will contribute to reinforcing local financial stability, there will be a heated debate between regulators, financial institution representatives and academics regarding the economic impact of complying with another set of Basel III regulations within the proposed time frame. Therefore, the actual impact of the Basel III final framework on Colombia remains to be seen.

Carlos Fradique-MéndezEsteban Gutiérrez Soto

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