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Financial Institutions Risk Management in Dominican Republic: A Success Story

The global economic downturn of 2001, coupled with the events of September 11, 2001, and the banking crisis of 2003, sent shockwaves through the Dominican Republic’s already fragile financial system. The country’s macroeconomic framework was severely tested, leaving its growth prospects hanging in the balance.

Swift Response to Crisis

However, the government’s swift response to the crisis helped limit contagion in the banking sector by honoring all deposits, including off-shore and off-balance sheet exposure. While this move helped prevent a complete collapse of the financial system, it placed a significant fiscal burden on the country, particularly the Central Bank, which was severely de-capitalized.

World Bank Intervention

To address these challenges, the World Bank launched a strategic approach to supporting the financial sector, focusing on addressing fundamental weaknesses in the system and encouraging medium- to long-term institutional and policy reforms. The Financial Sector Technical Assistance Loan, designed to support these reforms, helped strengthen the regulatory institutions and improve the overall performance of the banking system.

Impressive Results

The results have been impressive:

  • Past due loans declined significantly from 7.5% in 2005 to 1.7% in 2011
  • The banking system’s capitalization rose from 8.8% to 9.7%
  • The ability of the banking system to withstand external shocks has also improved, as demonstrated by its resilience during the international financial crisis of 2008

Pension System Growth

The pension system has also experienced strong growth:

  • The size of the investment portfolio expanded at an average annual rate of 41.6% between 2005 and 2011
  • This trend is expected to increase demand for investible securities, providing greater opportunities for domestic companies to access capital markets

Key Components of the Project

A key component of the project was the introduction of a new Real Time Gross Settlement System, which has improved market efficiency and reduced risk. The system:

  • Applies rigorous validation standards to each transaction
  • Reduces settlement time from 24 hours to minutes
  • Enhances liquidity and safety in securities transactions

The project also supported the creation of a joint Central Bank-Banking Superintendency web-based portal, which has improved the timeliness and quality of information available to these institutions. Additionally, it contributed to the introduction of a modern platform for managing public debt more efficiently.

Project Funding

The World Bank contributed US$12.01 million through a technical assistance loan, while the government of the Dominican Republic contributed US$1.19 million. The project’s principal partners included government agencies directly involved with the financial sector, as well as international institutions such as the International Monetary Fund and the Inter-American Development Bank.

Future Plans

Moving forward, the World Bank and the government are discussing options for non-lending technical assistance in areas such as crisis simulation exercises, financial services to micro, small, and medium enterprises, and consolidation of financial cooperatives. The beneficiaries of this project include:

  • Financial institutions whose performance improved after strengthening the regulatory framework and financial system infrastructure
  • Individuals who have seen their savings become less vulnerable to losses due to a more stable financial system