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Specific aspects of the financial reform law

Law 510 of 1999, which approved the Financial reform is in force as of August 3 1999. Law 510 was passed with two principal objectives :

  • to strengthen the financial institutions; and

  • to increase the versatility and autonomy of these institutions in the management of their business affairs.

  • Regarding the strengthening of the financial sector, the law provides the following reforms:

  • Increase of the minimum corporate capital required for financial institutions. Such capital must be maintained during the existence of the institution and will be adjusted annually according to the consumers price index (CPI). The new law also establishes a transition period so that existing entities may adjust to these new requirements.

  • The requirements for the approval necessary to incorporate a new financial entity are modified to include, among others and in the event foreign shareholders participate in such entity, information that will guarantee that a consolidated supervision is exercised over the activities of the financial entity and its foreign shareholders.

  • New situations that authorize administrative takeover operations of financial institutions with liquidation purposes are included, as well as other preventative measures that may be undertaken by the Banking Superintendency. In addition to the former reasons (suspension in their payment of obligations, rejection of the surveillance activity of the Banking Superintendency and failure to comply with its orders), the following are reasons that authorize the administrative takeover of a financial institution: i) failure to maintain the minimum required capital, ii) failure to comply with the recovery plan designed for a determined institution, iii) considerable inconsistencies in the information supplied to the Banking Superintendency, and iv) reduction of the technical patrimony of the institution, to less than 40% of that required by the current regulation.

  • Reduction of the terms for liquidation procedures. Indeed, the new law embodies detailed regulations concerning occupation and liquidation procedures, and gives wider powers to the Banking Superintendency in such procedures in order to provide a wider flexibility and agility of the regulation.

  • Regarding the wider autonomy and versatility of financial institutions in the management of their business affairs, the reform law includes the following changes:

  • authorization to financial entities to invest in shares or mandatory convertible bonds negotiable in the stock exchanges;

  • amplification and clarification of the enterprise concept (to include any regulated association mechanism), applicable to the authorized investments of the financial corporations;

  • elimination of the applicable limitations for Commercial Financing Corporations, to undertake leasing operations;

  • mechanisms to facilitate securitization of Savings and Housing Corporation's mortgage loans. Concerning long term financing for housing, as well as the current situation of the Savings and Housing Corporations, the reform provides, among other things, the following innovations:

    i) The government is empowered to create, in a six-month term, a specialized long-term financing system for housing linked to the CPI. The government may adopt incentives and long-term profitability criteria for the securities issued to finance these activities.

    ii) The Banks and Savings and Housing Corporations are authorized to issue securities to finance the construction and acquisition of housing.

    iii) Creation of a new arbitration system to settle conflicts arising out of mortgage loans.

    iv) Protective measures for mortgage debtors, such as the fact that mortgage credits may be transferred or prepaid at any time. Finally, the financial reform includes other aspects worth mentioning such as:

  • In regards to the public securities market and the powers of the Superintendency of Securities, the following changes are introduced: i) the minimum capitals required for broker dealers are raised, and ii) regulations and procedures as to the creation and operation of specialized futures and derivatives exchanges.

  • Securities brokers are authorized to act as intermediaries of the foreign exchange market under the rules to be issued by the Board of Directors of the Central Bank.

  • Special powers have been given to the government to modify the authorized investment of insurance companies and capitalization corporations.

  • The purposes and procedures applicable to the Financial Guarantee Fund are clarified.

  • It is made clear that the maximum penalty interest rate allowed is the ordinary banking interest rate plus 50%.

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