SSF Faces Challenges in Ensuring Banks’ Suitability

The Superintendency of Financial Systems (SSF) has been criticized for its handling of prudential regulation and supervision of banks in El Salvador. According to a recent report, the SSF’s powers are limited, and there is a need for improvement in several areas.

Capital Adequacy

El Salvador’s required capital adequacy ratio of 12% is higher than other Central American countries, but the framework does not fully align with international standards. The statutory minimum requirement needs to be reviewed, particularly regarding intangible assets and risk weights.

• Intangible assets are not adequately considered in the calculation of capital adequacy.
• Risk weights need to be reevaluated to ensure they accurately reflect the level of risk associated with different types of assets.

Asset Classification and Provisioning

The SSF has made progress in improving the management of problem assets, but there are still gaps. For example:

• Provisioning levels do not take into account the repayment capacity of debtors.
• Corporate loans are only downgraded based on past-due days, rather than considering other factors that may indicate default risk.

Regulatory Framework

There are significant gaps in El Salvador’s regulatory framework, particularly in areas such as:

• Corporate governance: The SSF lacks standards for corporate governance practices and risk management.
• Credit risk: There is no clear guidance on credit risk assessment and management.
• Liquidity risk: Banks are not required to maintain adequate liquidity buffers.
• Market risk: There is no standardized approach to measuring market risk.
• Operational risk: Banks are not required to implement effective operational risk management systems.
• Interest rate risk: The SSF lacks standards for interest rate risk management.
• Information technology: There is a lack of guidance on information technology risk management and cybersecurity.
• Investment valuation: The SSF does not have standards for investment valuation.

Ongoing Supervision

The SSF’s methods of ongoing supervision need upgrading, particularly in terms of:

• Risk-based supervision: The regulator lacks the resources and expertise to conduct effective risk-based supervision.
• Human capacity constraints: Organizational issues and a lack of resources hinder the regulator’s ability to assess the quality of risk management.

Accounting and Disclosure

The accounting manual used by banks is outdated and does not conform to international standards. This limits the SSF’s ability to receive comprehensive information on:

• Market risks: The regulator lacks data on market risks, making it difficult to monitor and supervise banks.
• Interest rate risks: Banks are not required to disclose interest rate risk exposure.

Corrective and Remedial Powers

The remedial action framework has limited powers for the SSF to take preventive action at an early stage. This can lead to undercapitalization. The regulator needs more tools to address inadequate practices or vulnerabilities before they become major issues.

In conclusion, the SSF faces significant challenges in ensuring banks’ suitability, particularly regarding capital adequacy, asset classification and provisioning, regulatory framework, ongoing supervision, accounting and disclosure, and corrective and remedial powers. Addressing these gaps is essential to maintaining financial stability in El Salvador.