No Compliance Summary

The International Monetary Fund's (IMF) Financial System Stability Assessment (FSSA), published in 2003, concludes that efforts are still needed to bring the Costa Rican supervisory system into compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision, despite substantial improvements in the banking regulatory and supervisory system. The lack of consolidated supervision is highlighted as one of the main causes for Costa Rica's limited compliance with the BCPs. The staff of the National Council for the Supervision of the Financial System (CONASSIF) also lack the resources and independence to carry out their duties in an effective manner. The supervision of the banking system in Costa Rica is under the responsibility of the General Superintendent of Financial Institutions, which reports to the CONASSIF. The IMF's 2003 FSSA reveals additional shortcomings in the following areas: legal framework, regulatory compliance and market discipline, prompt corrective actions, and accounting and auditing systems. Finally, the offshore financial sector remains an area of concern. The IMF recommends amending the regulatory framework to adopt best international practices in the area of consolidated supervision; fully eliminating asymmetries in the regulatory treatment of public and private banks; improving disclosure and reporting of financial statements; strengthening oversight of external auditors and training programs; and enhancing collaboration between the external auditors and supervisors.

General Overview

The National Council for the Supervision of the Financial System (CONASSIF) reports to the Central Bank of Costa Rica (BCCR), and is responsible for governing Costa Rica’s financial system. The CONASSIF oversees four supervisory agencies: the Superintendence of Financial Institutions (SUGEF) for banks and other financial institutions; the General Superintendence of Securities Markets (SUGEVAL) for the securities exchange; the Superintendence of Pensions (SUPEN) for pension funds; and the newly created General Superintendence of Insurance (SUGESE) for insurance companies. The SUGESE works within the SUPEN to regulate the insurance industry. The SUGEF, SUGEVAL and the SUPEN share a common board, which is separate from the BCCR's board of directors. According to the U.S. Department of Commerce's (DoC) 2009 Country Commercial Guide, the banking regulator, the SUGEF, "enforces compliance with central bank policies on the establishment, registration, capital requirements, and operations of financial institutions and groups." The BCCR is also responsible for policies affecting the banking sector.

In February 2003, the International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Costa Rica, including an assessment of the country's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision. The FSSA is based on the work of the Financial Sector Assessment Program (FSAP) team, which visited Costa Rica during October and December 2001. The report concludes that while Costa Rica has considerably strengthened its banking regulatory and supervisory system, "much still remains to be done to bring the supervisory system into full compliance with the BCPs" (p. 36). In particular, the lack of consolidated supervision is "one of the main causes for Costa Rica's limited compliance with the BCPs" (p. 22). Weaknesses also remain with regards to the legal framework, regulatory compliance and market discipline, prompt corrective actions, and accounting and auditing systems. The U.S. Department of State's (DoS) 2009 International Narcotics Control Strategy Report adds that while the formal banking industry in Costa Rica is tightly regulated, the offshore financial sector remains an area of concern.

Short-term and medium-term recommendations of the IMF's 2003 assessment include amending the regulatory framework to adopt best international practices in the area of consolidated supervision; fully eliminating asymmetries in the regulatory treatment of public and private banks; improving disclosure and reporting of financial statements; strengthening oversight of external auditors and training programs; and enhancing collaboration between the external auditors and supervisors.

The U.S. DoC's 2009 report indicates that, since 1996, private banks have been authorized to administer checking and savings accounts and short-term deposits, leading to an increase in the market share of private commercial banks. As of December 2008, according to the IMF's 2009 Staff Report, private banks' assets totaled USD 7.7 billion, representing 27.2 percent of Costa Rica’s GDP. Nevertheless, the three state-owned commercial banks are still dominant, accounting for USD 11.8 billion or 41.7 percent of GDP.

The Principles

II1. (1) Clear responsibilities and objectives for each supervisory agency.

The supervision of the banking system is under the responsibility of the SUGEF, which reports to the CONASSIF. More specifically, the SUGEF has supervisory authority over private banks, public banks, and non-bank financial institutions (NBFIs) and cooperatives. According to the IMF's 2003 FSSA, the mandate of the CONASSIF should be better aligned with its capacity to fulfill its obligations. Indeed, CONASSIF staff lack the resources and independence to carry out their duties in an effective manner. In addition, staff only work part-time. The IMF stresses that the Council's inability to delegate its functions could interfere with effective supervisory enforcement and resolution of troubled banks. The IMF recommends modifying the functions and structure of the CONASSIF. Legal reform is also needed to avoid potential conflicts of interest between the CONASSIF and superintendents. However, the report does not explicitly address Costa Rica's compliance with this principle.

II1.(2) Operational independence and adequate resources.

The 2007 Working Paper on Equity and Private Debt Markets for the IMF by Shah et al. indicates that the common board shared by the SUGEF, SUGEVAL and the SUPEN, which is separate from the BCCR's board of directors, provides the regulators with a certain degree of independence. However, this independence might be impeded by the presence of the BCCR's President and the Minister of Finance on the common board. In order to improve the regulatory capacity and independence of SUGEF, the authors recommend reviewing the role and composition of CONASSIF. At the time of the IMF's 2003 FSSA, already, it was advised that the mandate of the CONASSIF be better aligned with its capacity to fulfill its obligations. However, the report does not explicitly address Costa Rica's compliance with this principle.

II1.(3) A suitable legal framework for authorization and ongoing supervision.

The IMF's 2003 FSSA underlines that the SUGEF lacks the legal authority to directly regulate and supervise offshore banks and certain NBFIs. However, the report does not explicitly address Costa Rica's compliance with this principle.

II1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

See Principle 1.(3).

II1.(5) Legal protection for supervisors.

There is insufficient information publicly available as to Costa Rica's compliance with this principle.

II1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

The SUGEF, SUGEVAL and the SUPEN share a common board, which is separate from the BCCR's board of directors. In their 2007 IMF Working Paper, Shah, H. et al. indicate that "coordination and exchange of information between the regulators is still a challenge" (p. 65). The common board shared between the supervisors, and the creation of a committee of Superintendents has led to improvements in this area. However, the report does not directly address Costa Rica's compliance with this principle.

II2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

The Law on Regulation of Financial Institutions and Banks of 1972 defines the permissible activities of supervised NBFIs. Pursuant to the law, NBFIs are not authorized to take saving deposits from the public, states the IMF's 2003 FSSA. However, due to the SUGEF's lacks of legal authority over offshore subsidiaries of Costa Rican financial groups, the latter are able to raise deposits from the public without proper supervision. However, the report does not explicitly address Costa Rica's compliance with this principle.

II3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

The CONASSIF has the power to license banks, taking into consideration the opinion of the SUGEF, notes the IMF's 2003 FSSA. However, the CONASSIF lacks the legal authority to withdraw licenses once they have been granted, even if these licenses have been issued based on false information. Opaque bank ownership structures further hinder the licensing authority's ability to evaluate the expertise and integrity of directors and senior management (fit and proper tests). However, the report does not explicitly address Costa Rica's compliance with this principle.

II4. Authority to review and reject transfer of ownership.

There is insufficient information publicly available as to Costa Rica's compliance with this principle.

II5. Authority to review major acquisitions and investments.

The criteria for the creation and merger of banks are defined under a BCCR resolution. The IMF's 2003 FSSA underlines that information provided to the SUGEF with regards to bank shareholders' investments in other companies is limited. In addition, major acquisitions of bank shares do not require the prior approval of the supervisor. However, the report does not explicitly address Costa Rica's compliance with this principle.

II6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

The BCCR resolution mentioned above sets minimum initial capital requirements for banks, notes the IMF's 2003 FSSA. In 2002, per the same report, the CONASSIF adopted a Capital Adequacy Norm to calculate capital adequacy requirements for financial groups on a solo and consolidated basis. Specifically, the Capital Adequacy Norm "requires the holding company of a financial group to hold capital equivalent to at least 20 percent of the assets in the mentioned onshore nonbank intermediaries. This capital requirement can be reduced to 10 percent under the condition that the SUGEF conducts on-site inspections of the nonbank intermediaries. The IMF recommends setting capital requirements for financial groups. However, the report does not explicitly address Costa Rica's compliance with this principle.

II7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

While acknowledging the considerable progress made in banking supervision, the IMF's 2003 FSSA recommends improving supervisory attention on banks' own risk management systems "in part through incentives for banks to classify and provision correctly their loans" (p. 54). However, the report does not directly address Costa Rica's compliance with this principle.

II8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

There is insufficient information publicly available as to Costa Rica's compliance with this principle.

II9. Prudential limits and management information system on concentration of exposure.

According to the U.S. DoC's 2009 report, the equity multiplier (i.e. total assets divided by common stockholders' equity), which measures leverage, should not exceed a ratio of 11 for private banks, and 10 for public banks. However, the report does not explicitly address Costa Rica's compliance with this principle.

II10. Arm's length rule and monitoring for connected lending.

The lending limit for banks is set at 20 percent of total capital per customer, notes the U.S. DoC's 2009 report. However, the report does not explicitly address Costa Rica's compliance with this principle.

II11. Policies and procedures for country risk and transfer risk.

The IMF's 2003 FSSA highlights the importance of setting up training programs to improve the supervisors' understanding of risks, other than credit risk. However, the report does not explicitly address Costa Rica's compliance with this principle.

II12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

See Principle 11.

II13. Comprehensive risk management processes.

While acknowledging the considerable progress made in banking supervision, the IMF's 2003 FSSA recommends improving supervisory attention on banks' own risk management systems "in part through incentives for banks to classify and provision correctly their loans" (p. 54). The IMF highlights the importance of setting up training programs to improve the supervisors' understanding of risks, other than credit risk and recommends that authorities in Costa Rica move towards a risk-based supervisory approach, focusing on the quality of bank management. However, the report does not explicitly address Costa Rica's compliance with this principle.

II14. Adequate internal controls.

There is insufficient information publicly available as to Costa Rica's compliance with this principle.

II15. Strict "know-your-customer" rules and high ethical and professional standards.

The regulatory framework with regards to this principle is "in line with best international practices" (p. 38), states the IMF's 2003 FSSA. The Law Concerning Narcotics, Psychoactive Substances, Use of Unauthorized Drugs, Legalization of Capitals and Related Activities No. 8204 was enacted in 2002 to criminalize the laundering of proceeds from all serious crime. Pursuant to the anti-money laundering (AML) Law, the Unidad de Analisis Financiero (UAF) was established as the country's financial intelligence unit. While Costa Rica is not a major regional financial center, its offshore financial sector makes it vulnerable to money laundering, states the U.S. DoS's 2009 report. The SUGEF was also found to lack authority to regulate offshore operations due to discrepancies between the Organic Law of the Central Bank of Costa Rica of 1995 and the AML Law. Draft legislation is under consideration by the national assembly of Costa Rica to address this issue. With regards to combating the financing of terrorism (CFT), Costa Rica is a party to the United Nations Convention for the Suppression of the Financing of Terrorism, but does not criminalize terrorist financing. A draft CFT Law was adopted in 2002, and was expected to be enacted in February 2009. To this date, however, there is insufficient information regarding the implementation of the CFT Law. Costa Rica is a member of the Caribbean Financial Action Task Force (CFATF), a regional body, which published a mutual evaluation of Costa Rica in May 2007. The CFATF report highlighted challenges with regards to the sanctioning system of supervised financial institutions, and insufficient resources of the UAF.

II16. Effective supervisory system consisting of on-site and off-site supervision.

The IMF's 2003 FSSA commends Costa Rica for progress achieved in on-site and off-site supervision. The SUGEF conducts and coordinates on-site and off-site supervisory activities. However, the report does not explicitly address Costa Rica's compliance with this principle.

II17. Regular contact with bank management and understanding of bank's operations.

There is insufficient information publicly available as to Costa Rica's compliance with this principle.

II18. Analytical reports and statistical returns on solo and consolidated basis.

Pursuant to the law, according to the IMF's 2003 FSSA, private financial conglomerates are required to report their financial statements on a consolidated basis. However, the information provided to the SUGEF for supervisory purposes is insufficient. The IMF underlines that the lack of consolidated supervision is "one of the main causes for Costa Rica's limited compliance with the BCPs" (p. 22). In addition, the authorities in Costa Rica have not established clear accounting norms for the consolidation of financial statements. According to the IMF, there is a need for a more risk-based supervisory process, both on a solo and consolidated basis. However, the report does not explicitly address Costa Rica's compliance with this principle.

NC19. Independent validation of supervisory information through on-site examination or external auditors.

The information provided to the SUGEF for supervisory purposes is insufficient, and the norms do not allow for effective validation of the information through on-site examination, states the IMF's 2003 FSSA. There is a need for better disclosure and more accurate reporting of financial statements by the Costa Rican authorities. The IMF recommends strengthening oversight of external auditors and training programs. Collaboration between the external auditors and supervisors should also be enhanced.

NC20. Ability to supervise on a consolidated basis.

The supervision of financial conglomerates on a consolidated basis is not required under the law. According to the IMF's 2003 FSSA, the lack of consolidated supervision is "one of the main causes for Costa Rica's limited compliance with the BCPs" (p. 22). The IMF recommends amending the regulatory framework to adopt best international practices in this area. According to the IMF, there is a need for a more risk-based supervisory process, both on a solo and consolidated basis.

II21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

Accounting and auditing standards must be approved by the CONASSIF, specifies the 2006 regulatory and standard-setting framework assessment published by the Institute of Public Accountants. In turn, the SUGEF supervises compliance with these standards. A new chart of accounts came into effect on January 1, 2003, which "generally follows International Accounting Standards" (p. 10), states the IMF's 2003 FSSA. However, gaps remain with regards to accounting rules where banks can apply different criteria when recording similar operations. Banks are also able to conceal their financial condition due to the lack of accounting guidelines on prudential issues. The IMF recommends addressing the voids in prudential and accounting norms, and strengthening oversight of external auditors and training programs. Collaboration between the external auditors and supervisors should also be enhanced. However, the report does not explicitly address Costa Rica's compliance with this principle.

NC22. Adequate supervisory measures to ensure timely corrective action.

The IMF's 2003 FSSA stresses that the supervisor has "insufficient legal powers and tools for effective Prompt Corrective Action system" (p. 41). As a result, the system does not penalize infractions committed by bankers. The IMF suggests introducing a graduated system of penalties. It is further recommended that penalties and enforcement measures be disclosed.

NC23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

According to the IMF's 2003 FSSA, the authorities lack the power to supervise the foreign activities of subsidiaries of Costa Rican financial groups. The IMF indicates that Costa Rica has made considerable progress in signing memoranda of understanding (MoUs) with the supervisory authorities where Costa Rican offshore banks are incorporated, namely Panama, Colombia, El Salvador, Honduras, and the Dominican Republic. The MoU enables the SUGEF to conduct on-site inspections of Costa Rican offshore banks, and cooperate with local supervisors. The IMF recommends establishing an effective system to ensure "systemic information exchange" (p. 40) with all countries where Costa Rican financial groups have subsidiaries.

II24. International exchange of information with other supervisors.

Costa Rica has signed MoUs with the supervisory authorities of Panama, Colombia, El Salvador, Honduras, and the Dominican Republic. The MoUs enable the SUGEF to conduct on-site inspections of Costa Rican offshore banks, and cooperate with local supervisors. The IMF recommends establishing an effective system to ensure "systemic information exchange" (p. 40) with all countries where Costa Rican financial groups have subsidiaries. However, the report does not explicitly address Costa Rica's compliance with this principle.

II25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

The supervision of subsidiaries of foreign banks operating in Costa Rica is conducted by the SUGEF using similar procedures applied to domestic private banks, notes the IMF's 2003 FSSA. However, the report does not explicitly address Costa Rica's compliance with this principle.