This content is from: Local Insights

Colombia: Following Basel’s standards

Luis Gabriel Morcillo-MéndezMaria Camila Ordoñez
The Colombian Ministry of Finance enacted Decree 1648 of 2014, by which it incorporated hybrid instruments into the Colombian regulation, particularly in connection with financial institutions. This comes as a result of recommendations made by the Basel Committee on Bank Supervision (BCBS) regarding hybrid instruments and their incorporation as mechanisms for issuers' absorption of losses.

By means of such decree, the Ministry included hybrid instruments as part of the additional basic capital of the Colombian institutional entities and established the required criteria for losses absorption. This innovative action allows financial institutions, from now on, to issue hybrid instruments and use them not just as a temporary financing source, but as a future losses absorption mechanism, which will prevent them from an actual liquidation or facilitate their financial recovery.

For such purposes, hybrid instruments should: (i) be effectively authorised and sold; (ii) be unsecured and subordinated indebtedness and should not be subject to any agreement that results in the amendment of their subordinated nature; (iii) only be paid or redeemed in the event of liquidation of the financial entity, notwithstanding any early redemption events; (iv) cause a dividend or coupon which payment should be made from profit and cannot be accumulated with the payment of other coupons; (v) not be financed by the financial institution or any related party; and, (vi) have losses absorption capacity, and therefore be convertible in stock, or consider an amortisation mechanism that assigns any losses to the instrument in the occurrence of the triggering event.

Additionally, the Ministry established that the issuer could only redeem those instruments five years after their issuance, provided that the financial institution obtains previous authorisation from the Colombian Superintendence of Finance. It must also substitute the instruments for equity instruments of equal or better quality that do not have an impact on the income generated by the issuer, and do not cause any expectations regarding the execution of the call option.

Amendments made by Decree 1648 represent a great development in terms of Colombian regulation and the adoption of international standards, bringing Colombian financial institutions regulation closer to that of Europe, the US and even Brazil, Mexico and Peru. These modifications are expected to significantly vary the strategies of financial institutions which are looking for financing sources, and will contribute to the stability of the Colombian financial system.

Luis Gabriel Morcillo and Maria Camila Ordoñez

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