In order to further develop the Colombian financial market, new regulations have been enacted over recent years, creating a regulatory framework that is becoming more responsive to international and national market dynamics. With this in mind, it is worth considering the more innovative structures now used in banking, especially, tier two capital debt for credit establishments.
Colombia has adopted the Basel Committee on Banking Supervision recommendations regarding capital adequacy. By doing so it intends to modernize the capital adequacy regulations for local credit establishments such as banks, financial corporations, saving and housing corporations, and commercial financing companies,.
Under the Capital Adequacy Guidelines, capital is expressed as a percentage of a bank's total credit risk weighted asset exposures, and is divided into two categories, tier one capital which is normally the core or permanent capital, and tier two capital which is made up of other items referred to as capital surrogates.
The Colombian Ministry of Finance and Public Credit issued Decree 1720 of 2001, which, among other things, allows Colombian credit establishments to issue tier two capital bonds, constituting such bonds as subordinated debt of the issuer. Payment of capital and interests under such subordinated bonds, in the event of the liquidation of the issuer, is subordinated to the prior payment of the external liabilities of the issuer.
In December 2002, the first issuance of subordinated bonds took place successfully in Colombia, the issuer being a recognized commercial bank (Davivienda). The Col$130 billion ($44.4 million) issuance was rated AA+ by Duff and Phelps and was partially guaranteed by the International Finance Corporation (IFC), showing again the support and trust of the IDB and IFC in the Colombian economy; Gómez-Pinzón Linares Samper Suarez Villamil Abogados acted as local counsel for the guarantor.