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Regulatory changes in the financial sector

The banking industry in Central America has undergone important changes over the past five years. Well-known financial groups from North America, Canada, England and South America set their eyes on the region as an area that provided opportunities to develop banking and insurance practices. This led to significant acquisitions of financial institutions throughout the region, and in the case of El Salvador, represented the acquisition most (if not all) private banks.

Banking regulations in El Salvador have been recognised in Central America as some of the strictest in the region. The regulatory agency has tried to adopt international standards in regards to the capitalisation of the institutions and in all matters related to the prudential regulation of the entities in the financial system. With respect to prudential regulation, the rules of the Basel Committee have been an important reference point for the application of these regulations.

The entity that regulates and supervises banks and financial institutions in El Salvador is the Superintendence of the Financial Systems (SSF). It was created in the early 1990s in an effort to restructure, modernise and strengthen the financial system of El Salvador through the Central Bank of Reserve. Before the SSF, banks were supervised by the Board for the Supervision of Banks, which was created in 1914.

The most relevant change in the Salvadoran banking regulations in 2011 was the new Financial System Supervision and Regulation Law (Ley de Supervisión y Regulación del Sistema Financiero) which came into force in August and incorporated the Pension and Securities Superintendence under the umbrella of the SSF, changing the regulatory structure and centralising the maximum authority in one Superintendent. Although the laws and provisions that regulate the operations of banks, insurance companies, stock brokerage houses and pension funds companies have not changed, the new law creates new rules for consolidated supervision and sanctions for the institutions that do not comply with the new standards.

The style of prudential regulation of the SSF is strict, and it is performed through procedures called "comprehensive audits", conducted by members of the SSF. The audit analyses the bank's management of its legal, operative and reputational risk, and, in particular, the credit risk and reserves kept for potential contingencies arising from credits.

In addition, the presence of multinational financial groups in the country modernised the management of banks by implementing international standards to their corporate governing policies and establishing first-world credit policies that have resulted in making the Salvadoran banking industry one of the best capitalised, with better credit risk management and a highly acceptable default rate with regards to international standards.

Aquiles A Delgado and Oscar Samour

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