1. 1 Superfinanciera, Primera en Transparencia Superfinanciera, Number 1 in Transparency

2. 2 Superfinanciera, Primera en Transparencia An Integrated Supervisory Authority for Financial Sector Supervision: The Colombian Experience Washington, November 17th 2011 Gerardo Hernández Correa Financial Superintendent of Colombia ASBA-FSI 6th High-Level Meeting “Strengthening Financial-sector Supervision and Regulatory Priorities in the Americas”

3. 3 Superfinanciera, Primera en Transparencia Agenda 1.Supervisory integration: The Colombian Experience 2. Supervisory integration: Key issues 3. The Challenges Ahead

4. 4 Superfinanciera, Primera en Transparencia Integrated Supervision: An Overview AdvantagesChallenges Economies of scale and scope. Reduction of costs (industry and supervisor). Better supervision of financial conglomerates. Better coordination, communication and more transparency (accountability). Elimination (reduction) of regulatory and supervisory arbitrages. High transition costs (industry and supervisor). Difficulty in maintaining coherence across types of institutions and supervisory objectives. Predominance of banking framework over other non-bank institutions.

5. 5 Superfinanciera, Primera en Transparencia 1. Enable a global view of the entire financial sector and its risks. 2. Different kinds of financial sector institutions performing similar activities, and exposed to common risks. 3. Elimination of regulatory and supervisory arbitrages. 4. Conglomerate supervision (high concentration of market share in few financial groups). 5. Financial System stability and consumer protection highly dependent on adequate and specialized risk management. 6. Efficiency gains and reduction of costs (for industry and supervisor). Integrated Supervision: The Colombian Experience Colombia’s need for integrated supervision

6. 6 Superfinanciera, Primera en Transparencia Law 964 & Decree 4327 (Merger) Kemmerer Mission Law 45 / Banking Industry Risk Based Integrated Supervision: Financial System (Banks, Insurance, Securities) Traditional (Checklist) Supervision: Banks and Insurance Independence from Central Bank in all the cases Law 68 / Insurance Sector 1923 1924 70’s – 80’s 20052005-2011 2010 2011-2014 2009 Trust Sector 90’s Pension System Decree 2555 (Unique D.) & Latinoamerican Integrated Market (MILA) Traditional (Checklist) Supervision: Securities Market 1992 Law 32: National Securities Commission (NSC): Securities Mkt. 1979 Decree 2115: NSC into Securities Superintendence + Strategic Guidelines according to PND 1. Institutional Strengthening 2. Risk-based Supervision 3. Strengthening prudential req. 4. Financial Inclusion 5. Capital Market’s Development 6. Financial Consumer Protection 1st approach to Risk Management Syst. (RMS): Credit 2002 Consolidation & improvement of RMS (Credit, Operational, Market, Anti-Money laundering and terrorist financing, Liquidity) 1982 Deposits Insurance 1993 Decree 663 / New Financial System Organic Statute Law 1328 / Financial Reform Integrated Supervision: The Colombian Experience Financial Regulation’s General Direction

7. 7 Superfinanciera, Primera en Transparencia Financial Superintendent of Colombia Secretary general Judicial direction Consumer Protection Technology Research and Development Financial Intermediaries Institutional Supervision Insurance Companies Pension and Trust Funds Issuers and investment portfolios Securities Intermediaries Risk and Market Conduct Supervision Credit Risk Anti-money laundering (ALM/FT) Market Risk and Integrity Operational Risk Conglomerate Risk and Corp. Governance SFC’s Integrated Supervisory Structure

8. 8 Superfinanciera, Primera en Transparencia Institution CreditMarketConglo- merates AML/FTOpera- tional Social Security Technical (Insurance) Pension, Severance and Trust Funds Insurance Companies Issuers, investment portfolios and other agents Financial Intermediaries Securities Intermediaries and other agents Global RisksSpecific Risks The core supervisory structure was designed to account for the relationship between global and specific industry risks for each type of financial institution. SFC’s Integrated Supervisory Structure

9. 9 Superfinanciera, Primera en Transparencia Perimeter of Supervision in Colombia Financial intermediaries 122* Securities intermediaries 111* Market infrastructure providers and other agents 32 Mutual funds and private equity funds 216 Portfolio managers (APT) 1371 Non financial sector securities issuers 127 Pension and Trust Funds 41* Insurance companies 110* * Includes off-shore representation agencies Overseen institutions (416) Supervised institutions (not overseen) Portfolio

10. 10 Superfinanciera, Primera en Transparencia The Colombian financial system has experienced significant growth in the past decade, led not only by banking institutions (credit growth) but also due to and important growth in the allocation of investments performed by non-bank intermediaries. The Colombian Financial Sector

11. 11 Superfinanciera, Primera en Transparencia The Colombian Financial Sector The Colombian financial system has seen an interesting evolution of its asset composition, with a higher participation of investments over loans.

12. 12 Superfinanciera, Primera en Transparencia Agenda 1. Supervisory integration: The Colombian Experience 2. Supervisory integration: Key issues 3. The Challenges Ahead

13. 13 Superfinanciera, Primera en Transparencia Integrated Supervision: Key Issues In general terms, the integrated supervisory framework implemented in Colombia proved successful in achieving it’s main objectives. Financial Stability Market Integrity Consumer Protection

14. 14 Superfinanciera, Primera en Transparencia The Supervisory Framework Rule Based Supervision Risk Based Supervision Strict compliance of defined rules (checklist). Based on a historical analysis of the performance of the institution. Case-to-case evaluation of individual operations. Strict compliance of defined rules (checklist). Based on a historical analysis of the performance of the institution. Case-to-case evaluation of individual operations. Emphasis on the activities developed by the institution (lines of business) Evaluation of risk profile is based on the institutions capacity to manage risk and the implementation of adequate controls to mitigate them. Emphasis on the activities developed by the institution (lines of business) Evaluation of risk profile is based on the institutions capacity to manage risk and the implementation of adequate controls to mitigate them. Advantages of Risk Based Supervision Promotes higher level of transparency Incorporates “early-warning” signals, enabling for a more prospective approach to supervision. Promotes an auto-evaluation of risk on behalf of supervised institutions. Enhances efficiency and effectiveness in the supervisory process (scarce resources are better allocated, according to risk profile and systemic importance).

15. 15 Superfinanciera, Primera en Transparencia In its transition towards risk based supervision, the SFC has implemented an Integrated Supervisory Framework (MIS), following international best practices (OSFI). The SFC’s Integrated Supervisory Framework (MIS) The Supervisory Framework Inherent Risks Risk controls and corporate governance Impact of risk realization Supervisory response -+ Identification of risks by activities or “line of business” Ability to manage and mitigate risks Importance of the firm within the system Efficient allocation of supervisory resources

16. 16 Superfinanciera, Primera en Transparencia Definition Set of elements that entities must accomplish, in order to manage their corporate purpose’s activities’ inherent risk. Characteristics Continuous process within the entity. Its good management provides reasonable assurance to shareholders and depositors. Oriented towards achieving objectives’ (means to an end and not an end in itself). Credit (SARC) Opera- tional (SARO) Market (SARM) Anti- money laundering (SARLAFT) Liquidity (SARL) Insurance (SEARS) Risk Management Systems (RMS) ElementsStages 1. Policies 2. Procedures 3. Documentation 4. Organizational Structure 6. Control Departments 7. Technological Infrastructure 8. Information Disclosure 9. Accounting Disclosure 1. Identification 2. Measurement 3. Control 4. Monitoring

17. 17 Superfinanciera, Primera en Transparencia Macroprudential Approach to Financial Stability Availability of resources for capital strengthening of troubled institutions. Supervision of financial institutions. Adoption of resolution measures. Adoption of macroprudential policies. Supervision of payment systems. Lender of last resort Implementation of public policies related to the financial sector. Financial sector regulatory agency. Ministry of Finance (Ministerio de Hacienda) Central Bank (Banco de la República) Deposit insurance Superintendencia Financiera Financial Sector Coordination Commitee CCSSF Financial Sector Coordination Commitee CCSSF

18. 18 Superfinanciera, Primera en Transparencia Agenda 1. Supervisory integration: The Colombian Experience 2. Supervisory integration: Key issues 3. The Challenges Ahead

19. 19 Superfinanciera, Primera en Transparencia 1. Consolidation of risk based supervision Ongoing improvements to risk based framework and supervisory standards Supervision of conglomerates and off-shore operations Continued revision to risk management systems 2. Strengthening of macroprudential tools Adjustment of prudential regulatory framework (capital and liquidity) according to international standards Implementation of macroprudential policies in a timely manner Enhanced disclosure of information disclosure 3. Strengthening SFC’s institutional structure Re-organization of current institutional structure Strengthening SFC independence Widespread adoption of Corporate Governance standards, both within SFC and supervised institutions. 4. Perimeter of supervision… when should integration some to a halt? The Challenges Ahead

20. 20 Superfinanciera, Primera en Transparencia Thank you Superfinanciera, Number 1 in Transparency