The Regulatory Unit (Unidad de Regulación Financiera or URF) of the Ministry of Finance and Public Credit has issued several decrees with the purpose of harmonising Colombian capital requirement regulations applicable to banking institutions with the capital requirement regulations included in Basel III.
The URF issued Decree 1477 of 2018 and Decree 1421 of 2019, which finalised the convergence of Colombian rules with international standards. The main developments of these two decrees were, among others: (i) the inclusion of additional leverage ratios, and the implementation of certain conservation buffers as capital requirements of banking institutions; (ii) the improvement of the criteria for inclusion of instruments as tier one, additional tier one and tier two capital of banking institutions, including the incorporation of tax and regulatory events as early redemption events for tier two and additional tier one instruments; and (iii) the incorporation of operative risks in the accounting of capital requirements and risk-weighted assets of banking institutions.
Because these decrees incorporate certain transitional arrangements pursuant to which banking institutions must comply with the new capital requirements beginning on January 1 2021, the impact and effect of these new capital requirement rules are just beginning to be evaluated in the Colombian market.
Many questions and doubts surrounding how these measures should be implemented and interpreted have risen in the market, as occurred in other jurisdictions when they were implementing these new Basel III standards. For example, questions of how the loss absorption mechanisms should be applied or understood in such cases when there is more than one instrument of a determined capital quality, are questions that will probably remain unanswered until there is an actual loss absorption event in the Colombian market.
In this context, the URF and the Colombian Superintendence of Finance are likely to issue clear guidance as to how these rules should be interpreted, in order to have a better understanding of the complex and intricate matters of these capital requirement regulations, which remain subject to discussion and interpretation by all the interested parties and market participants.