Historical Review

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

The Beginnings of Banking Activity in Panama

Banking activity in Panama dates back to the beginning of our Republic with the establishment of two important banks in 1904. The first bank established in Panama was the International Bank Corporation, which changed its name to First National City Bank of New York and is today known as Citibank, part of Citigroup – the biggest financial conglomerate in the world. The second bank was Banco Nacional de Panamá.

Years later, several international and Panamanian banks started operations supporting the funding of commercial, industrial, and agricultural activities in our country. In 1934, the Caja de Ahorros – which specialized in mortgages – was established. In 1948, Banque Nationale de Paris, which later changed its name to BNP Paribas, opened its doors, and in 1955 Banco General began operations. Banking activity grew freely due to the undeniable comparative advantages of our country, to the point that by the end of the 60’s more than one hundred banking establishments were operating, but without strictly performing the delicate duties of financial intermediation.

The Foundations of the International Banking Center

It is not until 1970, 66 years later that the first Banking Law was approved by means of Cabinet Decree 238 dated 2 July 1970. This Law created the National Banking Commission, the regulator of banking activity in Panama. With this new legal framework many "brass plate" banks disappeared, and by the late 1970’s a total of 21 banks were operating legally, with assets of B/.898 MM.

Initially, the National Banking Commission (NBC) was ascribed to the Ministry of Finance and Treasury. In 1973, the emerging entity was under the control of the Ministry of Planning and Economic Policy. It consisted of 7 members with the right to speak and vote, of which 3 were senior public officials, 3 were bank representatives proposed by the Panama Banking Association, and one was appointed by the Executive Branch. The last member could not be a director, officer or employee of a bank.

The National Banking Commission was responsible for establishing a framework of policies fostering the development of banking activities. Additionally, the NBC could fix banking interests for certain types of deposits, as well as liquidity levels, legal bank reserves over domestic deposits and capital reserves for domestic operations.

The Banking Law of 1970 was conceived so as to attract the physical presence of new and prestigious international banks from all over the world. The comparative advantages of Panama offered the unique conditions for the creation and development of an International Banking Center specializing in external operations thanks to a flexible fiscal system, a bilingual marketplace, a modern telecommunications system permitting the registration of innumerable international financial transactions, and a dollarized system.

It is worth pointing out that the official currency of the Republic of Panama is the balboa, whose value is on a par with the United States dollar. According to the Panamanian legislation, the US dollar circulates freely in Panama and is without restrictions in commercial and financial transactions.

The existence of international banking allowed the development of specialized human resources incorporating the best international banking practices. The International Banking Center grew and was specialized in providing funds to Latin America as its main market. In 1982, the Banking Center reached its maximum level with the operation of 106 general and international license banks with assets of B/.49 billion. Additionally, there were 12 Representative Offices, which elevated the number of banking licenses to 118.

Between 1982 and 1987, the level of activity in the Banking Center was affected by the mid-80’s external debt crisis in Latin America, causing a reduction of about B/.18.39 billion in external assets.

Political Crisis Affects the International Banking Center

It is impossible to forget the difficult situation created by the political crisis in 1988 during the military government, which caused a decrease in assets to near B/.14.78 billion and the closure of the banking system for nine and a half weeks. Only international operations were allowed. The aforementioned crisis unleashed an invasion that kept the country in a very delicate situation. However, when the banks finally opened and released funds to the public, the absence of a run on the banks confirmed the reliability of the system.

Between 1990 and 1999, assets grew by B/.18.61 billion, highlighting the strength of a powerful Panamanian Private Banking System.

The Creation of the Superintendency of Banks

Thanks to the support of a group of banking experts comprised by bankers and lawyers, a new, modern legislation was written, conceived under the norms and principles of the Basel Committee, an entity which establishes sound banking policies and practices worldwide. Decree Law 9 dated 26 February 1998 introduced a change in the self-regulation philosophy that had permitted the development of the International Banking Center during the previous two decades, adapting the system to the new economic realities.

The new legislation established a framework with a regulator having clear powers. Additionally, the legislation strengthened the institutional aspect by providing administrative and financial autonomy to the Superintendency of Banks, assigning its own budget from banking and supervisory fees – unlike the National Banking Commission, whose funds were consigned by the Central Government to the General Budget of the State.

Another advantage provided by the law was the establishment of fixed terms for the members of the Board of Directors and the Superintendent, with specific causes for their removal and legal determination for dismissal resting with the Supreme Court of Justice.

The Board of Directors of the Superintendency of Banks is composed of distinguished professionals and entrepreneurs with no links with the banking sector. They are prohibited from being public servants.

The main duties of the Board of Directors are: approval of prudent standards; interpretation of the administrative scope of legal and regulatory provisions in regards to banking; resolving the appeals against resolutions issued by the Superintendent; advising the National Government on the development of the Panamanian banking system.

Among the main duties of the Superintendent are: to watch for the stability of the banking system; supervise banks and those economic groups whereof they make a part; grant and cancel banking licenses; order corrective measures concerning banks (appointment of advisors, interventions, reorganizations, compulsory liquidations, imposition of fines, etc.); as well as authorizing bank mergers and the administration of the daily tasks of the Superintendency.

Banking Regulator: Necessary Steps

Once the law had been approved, the next important task was to adapt and develop the framework established in the legal standard. In recent years, a broad regulatory framework has been developed, ensuring reliable norms conforming to the highest international standards and following sound banking practices. This has always been the case in our banking system, ensuring adequate supervision of the main banking risks.

The most salient of these regulations are those on the classification of assets, the adequacy of equity, market risk, corporate governance, external auditors, mergers and acquisitions, the prevention of the improper use of banking services and the appointment, functions, and duties of the Compliance Officer.

The efforts and the will necessary to create the changes guaranteeing the stability and great supervision of the system came about thanks to a combination of factors which permitted Panama to consolidate its banking system. A key element in this process was the increase in technical training for the institution’s human resource, permitting an up-to-date understanding of the main changes in supervision and regulation of financial systems.

Another important advancement was the modernization of the system. The Superintendency now has a state-of-the-art computer system which permits it to receive detailed information from banks through a highly secured computerized information transfer system.

The Superintendency has increased the transparency of the system by providing periodic and updated information through its website, which allows users and the national and international community to have financial information available both at the macro level and from individual banks. This provides account holders, institutional investors and domestic and external analysts with updated and continuous assurance of the health and financial condition of our system.

Additionally, since late 2002 the Superintendency of Banks has been presenting complete financial statistics on international assets and liabilities to the Bank for International Settlements (BIS) in Basel, contributing to an increase in the transparency of its operations.

Updates to the banking rules, amendment of Decree Law 9 of 1998. The New Banking Law

During recent years, banking in Panama has grown, and with it the complexity of its operations. At the same time, the international standards, better known as the Basel Core Principles for effective Banking Supervision, were updated. To maintain the competitiveness of the well-regulated International Banking Center and to strengthen supervisory powers, the Superintendency deemed it advisable to amend the banking rules to comply with the new international standards.

To comply with these, Decree Law 9 of 1998 was amended by four pillars that seek to strengthen the capacity of the Superintendency to supervise and regulate the banking system.

The first pillar provides the Superintendency with additional authority to regulate banks and the corporations which in the Superintendency's judgment form part of the Banking Group, including holding corporations. Similarly, the authority to supervise the activities of nonfinancial corporations that could present a risk for the Banking Group was broadened.

The second pillar was developed to establish a balance in the relationship between the banks and banking clients by strengthening the position of the latter. This pillar also requires banks to provide their services under the principles of transparency, integrity and equity, and provides an administrative tribunal with exclusive jurisdiction over claims arising from violations of Titles V and VI, increasing the maximum claim to twenty thousand balboas.

Aiming to enhance the reliability and stability of the system and to protect small depositors, the third pillar modifies the process of dealing with banks in trouble, establishing a process that guarantees the quick recovery of savings. Under this provision, deposits of up to ten thousand balboas will be disbursed within fifteen days of the date on which the resolution ordering the liquidation of the bank is executed.

The last pillar focuses on the development of human resources by creating the Banking Supervisor Civil Service Career. For this, adequate conditions are created for employees to have the incentives and compensation that allow the Superintendency to attract and keep the best staff.

Consolidating the foundations of a competitive Banking System

Since its creation, the Superintendency of Banks has contributed to minimizing the principal risks to, and guaranteeing the security and soundness of the International Banking Center. This great commitment and responsibility has been built with solid bases of credibility, transparency and professionalism, seeking to promote the image of a modern and reliable Banking Center.

The development of Panama’s International Banking Center has been strengthened, consolidating this successful banking market as one of the most important in Latin America.

One of the main challenges of the banking supervisor is to be one step ahead of the banks on new business development and be efficient in monitoring sophisticated products. Thus, it is important to continuously update supervisory techniques.

It is also necessary to face these challenges by developing norms and standards that will strengthen financial systems and achieve greater security in banking operations while providing greater transparency, truthfulness and accuracy in the financial information that is provided and used to make decisions.

In order to face these challenges, the Superintendency of Banks of Panama began implementing a Strategic Plan in 2010.

Currently, the SBP is carrying out its 2012 – 2014 Strategic Plan to continue:

  • Strengthening banking supervision through the development and establishment of a general regulatory framework containing sufficient elements for banks to adequately manage risks.
  • Strengthening management and implementation of a good corporate governance system that introduces improvements and regulations that take best banking practices into consideration.
  • Ensuring true compliance with international standards on anti-money laundering, human trafficking and the financing of terrorism.
  • Recruiting important banks from Latin America and member countries of the Organization for Economic Co-operation and Development (OECD) in order to strengthening the International Banking Center’s international image.
  • Continuing to negotiate agreements or memorandums of understanding with foreign supervisory bodies for consolidated supervision and ensuring that the relationships with these bodies are based on principles of reciprocity and confidentiality and strictly adhere to the requirements of banking supervision.

Based on this plan, and in order to consolidate Panama as the Banking Center of the Americas, we are implementing an updated framework for assessing and measuring the condition of banking groups and entities in an adequate and timely manner. This framework will seek to strengthen the banking supervisory system by emphasizing the evaluation of their corporate governance and risk management systems, in order to understand their risk profile and adopt the best supervisory strategies.

To comply with the above, we have adopted the use of the Uniform Risk-Based Supervision Manual (MUSBER, for its acronym in Spanish). In addition, we have also implemented a GREN rating system that evaluates the bank’s corporate governance, risks, economic and financial condition, and compliance with rules and regulations.

Aligned with the institution’s objective on adopting international standards, we have started the full adoption of IFRS. This is an indispensable requirement in promoting the adoption of the XBRL (Xtensive Business Reporting Language) international standard in the local market, in order to reduced extant information dissimilarities between the regulator and regulated parties and offer domestic and international users a better interpretation of financial concepts.

The Superintendency of Banks of Panama is continuously monitoring the behavior of the world’s main economies and their financial systems, reaffirming its mission of overseeing the adequate implementation of best banking practices.

As the regulator and supervisor of banking and trusts, we reaffirm our commitment of keep working to maintain a banking center that will become the Banking Center of Latin America and the Financial Hub for the Americas.