OBG talks to José Darío Uribe, Governor, Central Bank of Colombia

Interview: José Darío Uribe

What impact will the comprehensive public-private partnerships (PPP) law have on domestic banks?

JOSE DARIO URIBE: Law 1508 establishes a framework for PPPs, creating the conditions for the participation of pension funds and institutional investors in infrastructure development projects. The law sets the rules for participation, while other regulations specify operational details. At this early stage, the law will have little impact on local banks, as they are focused on other projects. However, as the public sector becomes more transparent it will inevitably boost project quality, as the overall investment will be larger.

How does the central bank balance economic growth with inflation?

URIBE: The primary objective of the central bank is to maintain a low and stable inflation rate and smooth attendant output fluctuations. With a credible inflation target, and in the absence of supply shocks, these objectives are compatible. Hence, we manage interest rates to keep help economic growth reach its full potential, so that inflation is not sparked. We follow a countercyclical interest rate policy under which the interest rate is raised when economic growth and consumption need to be slowed, and vice-versa. When transitory supply shocks hit the economy, we can accommodate them within reason. So far, these policies have enabled us to reach our targets.

Given the level of consumer debt, how can a surge in lending be managed?

URIBE: We expect nominal growth in consumer credit to be greater than that of GDP. This situation is acceptable if we do not experience a sharp and sudden surge of consumer loans. It is not easy to predict how much these loans could grow, so what the Financial Superintendence has done is apply appropriate monitoring tools, which have proven efficient so far. Three of these tools include the requiring financial institutions to add provisions to their consumer loans portfolio, reducing the time to consider non-payment to 90 days and establishing new guarantee valuation techniques. Additionally, the forthcoming implementation of the Basel III capital requirements will further enhance the loss-absorbing capacity of banks.

How can banks reach more unbanked citizens?

URIBE: There are several initiatives to help achieve this. Banking correspondents, which operate on behalf of financial institutions in rural areas and provide basic operations, are becoming more widespread. Other initiatives include facilitating online or mobile transactions and promoting microcredits and other loans with increased flexibility. A key aspect in this banking penetration process is, of course, promoting higher levels of financial education, and the central bank has made significant efforts in this regard.

What are the domestic implications of the Basel III capital adequacy and liquidity requirements?

URIBE: The Financial Superintendence is defining the components of capital following the Basel III recommendations. There is already a draft bill on new minimum levels of capital. The leading Colombian banks are all above that limit, and some smaller institutions could easily reach the minimum by transferring resources.

Additionally, Colombia adopted a liquidity model ( SARL) according to Basel III proposals. A main change is the supervisor’s ability to restrict market operations in institutions that are non-compliant.

At a time when the US and Europe are receiving rating downgrades, what are your stakes there?

URIBE: The central bank follows three criteria in managing its assets: safety, liquidity and return. Colombia’s foreign reserves are mostly invested in government securities in the US, Canada, Australia, Germany and the UK, all of which are rated “AAA” by at least two of the three leading global ratings agencies. All other investments must have a minimum rating of “AA-”.