6 of April 2020
COVID 19 | Financial Law & Capital Markets
Measures adopted by the Basel Committee and the Colombian Financial Superintendency regarding the economic emergency derived from COVID-19
Within the framework of the COVID-19 pandemic declared by the World Health Organization (WHO), financial markets have been strongly affected in terms of liquidity standards available to allow the continuity of investment, loans and other financial operations required to avoid entering into a recession. In addition to the capital injection, interest rate reductions and other measures adopted by the central banks of different countries, the Basel Committee announced on March 27, 2020, a series of measures designed to provide additional operational capacity so that banks and their supervisors can react positively to the impact that the COVID-19 has had on the global financial system.
Within the designed measures are: (i) delaying the final implementation date of the Basel III standards for bank capital and reporting duties for one year until January 1, 2023; and (ii) allowing banks to adopt a new market-risk framework, making clearer disclosures of their key liquidity and funding ratios.
Consistent with the above, and with the priority of committing resources to respond to the impact of COVID-19, the Colombian Financial Superintendency (“CFS“), issued on March 17, 2020, the External Circular 009 of 2020 (Circular Externa 009 de 2020), whereby (i) it postponed the sending date of resolution plans required to adopt international standards until April, 2021, for the following entities: Bancolombia, Banco de Bogotá, Bando Davivienda and BBVA Colombia, in accordance with the list of entities with systemic importance published in the Circular Letter 088 of 2019 (Carta Circular 088 de 2019); (ii) postponed the sending date of the results of the resistance tests required by the CFS through Circular Letter 23 of 2019 (Carta Circular 23 de 2019), until the last working day of July 2021; and (iii) suspended, for 120 calendar days following March 17, 2020, the requirement to make technical appraisals of the appropriate guarantees under the terms provided in Chapter II of the Basic Accounting and Financial Circular (Circular Básica Contable y Financiera).
The measures adopted by the Basel Committee will allow banks to allocate the resources that were intended to strengthen their solvency to address the negative shock that the COVID-19 has had on the global financial market. This will allow banks to have greater liquidity, in order to promote companies and households financing services, taking into account that through the measures implemented by the Basel Committee, supervisors will acquire credit capacity by reducing the capital reserves required from banks for scenarios in which losses on loans must be covered.
In the same terms, banks will be able to see the measures adopted as an opportunity to continue their preparation regarding compliance with the requirements made by the Basel Committee, in relation to the measurement of the capital they require to face operational risks, and also as an alternative to guarantee the correct financing service of the real sector of the economy.
The measures implemented by the CFS will ensure that the impact of COVID-19 is not prolonged and that there is a timely response capacity so that the country’s economic recovery can be normalized in the second half of the year with a reduction rate in the growth of COVID-19 in the national territory and in the region. The increased financing capacity of the financial sector in Colombia may have a positive impact on unemployment rates and the dynamism of financial operations within the national territory.
The measures mentioned above also contribute to other measures that have been adopted in this health emergency context, such as (i) the financing package approved by the International Finance Corporation (IFC) aimed at mitigating the negative impact of COVID-19 on the global economy by activating financing operations to promote working capital and operational continuity for companies whose supply chains have been affected; (ii) the initiative and call for action by the World Bank Group and the International Monetary Fund regarding debt relief by the G-20 member countries to the poorest countries that are members of the International Development Association, to address COVID-19-related emergencies.
Therefore, the measures adopted by the Basel Committee have the priority of mitigating the contraction of the world economic growth, through channels that will allow the development of financing mechanisms and guarantee a higher level of liquidity in the economy. Consequently, the banks will have an additional year to comply with the Basel agreements so that they can concentrate their efforts on the economic and local needs derived from the COVID-19. It is relevant to highlight that the measures adopted by the Basel Committee must be addressed jointly with the other actions that most countries have adopted locally with respect to the mitigation of the negative impact on their local economies. Therefore, the measures previously adopted by the CFS are in line with the local and global interest in establishing strategies to mitigate negative shocks to economic stability.
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