BANKING REGULATION AND SUPERVISION IN PANAMA: FROM THE NATIONAL BANKING COMMISSION TO THE SUPERINTENDENCY OF BANKS

The Beginnings of the Banking Activity

The banking activity in Panama dates from the beginning of our Republic upon being established two important banks in 1904.The first of them, the International Bank Corporation, which changed name to First National City Bank of New York, today Citibank, which makes a part of Citigroup, the biggest financial conglomerate in the world.    The second one was the Banco Nacional de Panama.

With the lapse of years, several banks both international and Panamanian started operations supporting the financing of commercial, industrial and agricultural activities in our country.   In 1934, it stands out the creation of Caja de Ahorros, which specialized in the mortgage financing, Banque Nationale de Paris in 1948, which changed its name to BNP Paribas and Banco General in 1955.   The banking activity grew freely, by reason of the undeniable comparative advantages of our country, to the degree that by the end of the sixties more than one hundred establishments with banking license were in operation, without performing strictly the delicate duties of financial intermediation.

The cornerstones of the International Banking Center

It is not until 1970, 66 years afterwards, when it is approved Cabinet Decree No. 238 of July 2 1970, the first Banking Law that created the National Banking Commission as an entity regulating the banking activity in Panama. With the new juridical order, innumerable banks with “bronze plate” disappear and a total of 21 banks operate in an orderly manner by late 1970, with assets of B/.898 million dollars.

Initially, the National Banking Commission was ascribed to the Ministry of Finance and Treasury.  In 1973, the emerging entity stays under the Ministry of Planning and Economic Policy, conformed by 7 members with a right to vote, of whom 3 corresponded to high officers of the public sector, 3 representatives of banks proposed by the Banking Association of Panama, and one appointed by the Executive Branch who could be neither director, nor officer nor a bank employee.

The National Banking Commission had the duty to establish a framework of policies favoring the development of the banking activities. Additionally, it could fix banking interests for certain types of deposits, as well as the liquidity levels, the legal bank reserves over local deposits and the capital reserves for local operations.

The Banking Law of 1970 was conceived with a developing character to attract the physical presence of new and prestigious international banks from all parts in the world.The comparative advantages of Panama offered the unique conditions for the creation and development of an International Banking Center specialized in external operations, in counting on a flexible fiscal system, a bilingual market, a modern telecommunications system which permitted to concentrate from our country the registration of innumerable international financial transactions and a dollar system.

It is worth pointing out that the official currency of the Republic of Panama is the balboa, which has a par value with the United States dollar and as per the Panamanian legislation, circulates freely without restrictions in commercial and financial transactions.

The existence of an international banking would allow for the formation of a specialized human resource with the best international banking practices. The International Banking Center grows and specializes in the financing to Latin America as its main market.In 1982, the Banking Center reaches its maximum level with the operation of 106 banks of general and international license which maintained assets for B/.49,000 million dollars. Additionally, there were 12 Representation Offices, which elevated the number of banking licenses to 118 in the year 1982.

The level of activities of the Banking Center resulted affected by the middle of the eighties by the crisis of the external debt in Latin America which caused a reduction of the external assets by the order of B/.18,390 million dollars between 1982 and 1987.

Political Crisis Affected International Banking Center

It is not possible to leave out of this recount the difficult experience that meant the political crisis of 1988, during the military government, which caused a fall of the assets nearing B/.14,776 million dollars and the closing of the banking system for nine and a half weeks, only the international operations being allowed. The above-referred crisis unleashed an invasion which maintained the country in a very delicate situation. When the bank opened and released the funds to the public, the credibility of the system was evidenced when no massive withdrawals occurred neither in time deposits nor in savings accounts.

The growth of assets from 1990 to the year 1999 was B/.18,601 million dollars, standing out the strengthening of a powerful Panamanian Private Banking.

New Banking Law and Creation of the Superintendency of Banks

Thanks to the support of a group of experts regarding banking comprised by bankers and lawyers, a new modern legislation is achieved, conceived under the norms and principles of the Basle Committee, an entity which establishes in the world the banking policies and sound practices. Decree Law 9 of February 25 1998 introduces a change in the self-regulation philosophy which permitted the development of the International Banking Center during the two previous decades, to adapt the system to the new economic realities.

The new legislation establishes a framework with clear faculties and powers for the regulator. Additionally, it strengthens the institutional aspect in providing administrative and financial autonomy to the Superintendency of Banks, in assigning thereto its own budget coming from the rates contributed by the banks and the supervision costs, different from the National Banking Commission whose funds were consigned by the Central Government to the General Budget of the Government.

Another advantage provided by the law is the stay of the members of the Board of Directors and of the Superintendent for terms established by the Law, with causes for removal established therein whose application is competence of the Supreme Court of Justice.

The Board of Directors of the Superintendency of Banks is conformed by distinguished professionals and entrepreneurs with no links with the banking sector, or possibility of being public servants.

The main duties of the Board of Directors are:approval of prudential norms, interpretation in the administrative scope of legal and regulatory provisions regarding banking, resolving the appeals against resolutions issued by the Superintendent, advising the National Government in connection with the development of the banking system of Panama.

Among the main duties of the Superintendent are: to watch for the stability of the banking system, supervise banks and economic groups whereof they make a part, grant and cancel banking licenses, decree corrective measures with respect to banks (designation of advisors, intervention, reorganization, forced liquidation, imposition of fines, etc.) in addition to authorizing bank mergers and the administration of the daily tasks of the Superintendency.

Banking Regulator: necessarily complementary

Once the law is approved the following important task was to adapt and develop the whole framework established in the legal norm. In the last four years, it has been developed a wide regulation framework which ensures reliable norms according to the highest international standards, in accordance with the sound banking practices such as it has been the tradition in our banking system, guaranteeing an adequate supervision of the main banking risks.

Among the regulations stands out the classification of assets, patrimonial adequation, market risk, corporate governance, external auditors and mergers and acquisitions, on prevention of the improper use of banking services and on designation, duties functions and duties of the Compliance Officer.

The efforts and will to lead the changes that are necessary to guarantee the stability and major supervision of the system were possible thanks to a combination of factors which permitted Panama to consolidate its banking system. A key element in this process was the increment of the technical training of the human resource of the institution and which allows it the updated knowledge of the main changes regarding supervision and regulation of financial systems.

Another important advancement has been the modernization of the system, since presently the Superintendency has a state-of-the-art informatic structure which permits it to receive detailed information of banks through a computerized information transfer system which characterizes by its high security.

The Superintendency has increased the transparency of the system offering periodic and updated information through its site in the Internet, which allows users and the national and international community to have available financial information both at a consolidated level and from individual banks, ensuring to account holders, institutional investors and local and external analysts, the health and financial condition of our system in an updated and constant way.

Likewise, the Superintendency of Banks presents since late 2002, the entire financial statistics of international assets and liabilities to the International Payments Bank (BIS) in Basle, which contributes to increase the transparency of its operations.

A competitive Banking System

Since the creation of the Superintendency of Banks, it has contributed to minimize the main risks and to guarantee the security and solidity of the International Banking Center.  This big commitment and responsibility has been constructed with solid bases of credibility, transparency and professionalism, procuring to project a better image of a modern and reliable center.

The development of the International Banking Center of Panama has been strengthened, consolidating this successful banking market as one of the most important in the Latin American region. As of December 2005, 75 banking institutions operate with an average of net consolidated assets of US$44,195 million dollars.  Additionally, there are 6 Representation Offices.

Each one of the actions performed by the Superintendency of Banks have been decidedly aimed to stimulate an economic environment favorable to local and international private investment, procuring, with no doubt, to offer an International Banking Center that is attractive to a competitive and globalize world with view to a regional positioning.


Upgrade of the banking rules, modification of Decree Law 9, 1998. New Banking Law

During the last years, the banking development in Panama has increased, and similarly, the complexity of its operations. At the same time the international standards, better known as the Basel Core Principles for an effective Banking Supervision, were updated. To maintain the competitiveness of the well-regulated International Banking Center and to strengthen the faculties of supervision, the Superintendency deemed convenient to modify its banking rules to comply with the new international standards.

To comply with the foregoing, the modification of Decree Law 9 of 1998 is sustained by four pillars that seek to strengthen the capacity of the Superintendency to supervise and regulate the banking system.

As the first pillar, we have the increase of the Superintendency’s authority to regulate banks, as well as corporations which in the Superintendency's judgment form part of the Banking Group, including the holding corporations. Similarly, the authority to supervise the activities of the non-financial corporations that could entail a risk for the Banking Group was broadened.

The second pillar is developed on the basis of establishing a balance in the relations between the banks and the banking customers as the weak part of the relation. Likewise, it is ordered that banks are obliged to render their services under the principles of transparency, integrity and equity. At the same time, the authority to hear and decide the claims that violate titles V and VI of up to a sum of twenty thousand Dollars, is extended and stipulated as privative in the administrative realm.

Aiming to enhance the reliability and stability of the system and to protect small savers, the third pillar is developed, which concentrates on modifying the process of addressing situations of banks in trouble; specifically, establishing a quick process that guarantees recovering savings. With this measure, the latter will be paid within fifteen days following the date in which the resolution that orders the liquidation of deposits of ten thousand Dollars or less is enforced.

The last pillar focuses on the development of human resources by way of the creation of the Banking Supervisor Career. In this regard, the adequate conditions are created so that human resources have the incentives and compensations that allow the Superintendency to attract and keep the best human staff.