Ensuring financial stability and protecting public savings are key objectives of financial regulation. Concepts such as the solvency ratio, the value at risk methodology and the classification of financial instruments as part of the regulatory capital required for certain financial institutions, are all tools available to the regulator in order to achieve such objectives. Within this framework, and with the purpose of strengthening the solvency ratios of financial institutions authorized to manage third-party assets, the Colombian Ministry of Finance and Public Credit enacted Decree No. 175 of 2022 (the “Decree”). Through the Decree, (i) the instruments that make up the regulatory capital were modified, (ii) the risk measurement methodologies were updated and (iii) the standards applicable to this type of entity were homogenized. We hereby put forward some comments on this regard.
As a starting point, we must note that not all financial institutions are authorized to manage third-party assets. Even though credit establishments are authorized to conduct such activity, the new rules of the Decree are only applicable to pension and severance managers, trust companies, stockbroker companies and investment management companies.
Beyond the purely technical-financial issue, the importance of these new rules stands in the following two ways. On the one hand, the Colombian regulation is being adjusted and is including the best practices and international recommendations of prudential regulation to the national legal system. On the other hand, the incorporation of the new rules entails the overcoming of a regulatory failure, to the extent that, by homogenizing the standards applicable to third-party asset managers, the possibility of regulatory arbitrations derived from the diversity of regimes applicable to different institutions with similar activities.
With these rules, the Colombian financial regulation not only continues to develop so as to increase the levels of protection of public savings, but also advances towards the goal of ensuring a safe and stable financial system. As noted above, the regulatory framework is being updated with the purpose that third-party asset managers strengthen their assets and have more and better resources to withstand stress scenarios and unexpected losses.
