Fitch Ratings: Closer Alignment with Basel III Standards Will Improve Credit Profile of Colombian Banks

Colombia’s regulatory framework has been gradually moving to adopt Basel III international capitalization standards for financial institutions since 2011, and credit rating agency Fitch Ratings believes further progress toward this goal will benefit the nation’s banking sector.

Ongoing progress to adopt Basel III standards, which the government recently announced it is pursuing, should improve both the credit profiles and capital adequacy of banks in the country, said the New York-based credit rating agency.

“Capitalization,” said Fitch in a statement, “remains Colombian banks’ main credit weakness compared to similarly rated international peers…While current regulatory capital ratios in Colombia remain at good levels by local standards, they trail international peers that use more conservative and globally accepted capital standards.”

The position statement follows an announcement last month from the Ministry of Finance and Public Credit that outlined how it will evolve its framework in this area, which includes a five-year transition period for banks to comply with specified capital requirements.

Fitch categorized the efforts as a move that would “bring Colombian regulation more in line with other countries in the region such as Mexico and Brazil,” although it added the caveat that the “proposal still lags in comparison to regional peers, as the planned changes are not completely aligned with Basel III capital rules.”

Nevertheless, Fitch says that the proposed transition would improve the average Fitch Core Capital ratio of the banks it rates in Colombia by between 200 to 300 basis points. “This is due to increases in capital buffers and to reductions in risk-weighted assets, which should more than offset additional deductions
from Tier 1 capital that would have to be taken under the new standards,” stated Fitch.

Through its Financial Regulation Unit (URF), the ministry has outlined the various capital and leverage requirements and opened a period of public comment on the decree that runs through June 18.

The Basel III standards, which updated the pre-existing Basel II standards in the wake of the global financial crisis, were initiated by the Basel Committee on Banking Supervision in 2010 to strengthen the guidelines financial institutions must follow to avoid excess leverage and strengthen their books to better manage risk and absorb external shocks.