Matematicas financieras

TOWARDS MULTIBANKING IN COLOMBIA: FROM ‘PATCHWORK’ TO FINANCIAL HOLDINGS

(Abstract) The financial system of Colombia has been evolving from specialization towards a scheme of subsidiaries, aiming timidly at multibanking. In spite of recent reforms (Law 510 and 546 in 1999) which promote fusion of commercial banking and mortgage activities, the system remains impaired to consolidate amultibanking system. Overcoming the current patchwork structure will reduce excessive financial wedges and promote competition among bettercapitalized financial holdings that could exploit “economies of scale and scope.” We propose that commercial banks further absorb the tasks currently being performed by mortgage institutions (CAVs), near-banks (CFCs) that deal with consumer credit and leasingoperations, and the mutual funds (Fiduciaries). Financial holdings should consolidate around multibanks, insurance and broker companies, while investment banks (CFs) and pension funds administrators (AFPs) focus on medium and long-term projects and portfolios. Stronger prudential regulations and a proper setting of a “fire-wall” will then be required, as well as higher solvency indicators.

By: SergioClavijo * / June of 2000

JEL Classification: Financial Markets (E-440), Financial Institutions (G-280), Economic Development (O-160).

Member of the Board of Directors of the Central Bank of Colombia (Banco de la República). This paper was prepared for the ASOBANCARIA’s Convention, June 8-9th , 2000, Bogotá. The views contained herein are personal and not necessarily are shared by the Board ofDirectors of the Bank. The author is indebted to Lorena Silvani and Lucía Cuevas, for helping with financial data, and to Nicolas Torres for able discussions regarding legal issues. E-Mail: sclavive@banrep.gov.co

* /

TOWARDS MULTIBANKING IN COLOMBIA: From ‘patchwork’ to financial holdings I. Introduction

During the last two decades, the financial system in Colombia has been evolvingtowards a system that has some features of multibanking. In the early 1980s, lending activities were deregulated so that commercial banks could operate with different sectors of the economy. However, some saving instruments continued to operate according to their specialization by economic sectors: those indexed to inflation (UPAC) were the monopoly of mortgage institutions (CAVs), while consumeractivities had to be funded through CDs denominated in pesos, offered by commercial banks and the near-banks (CFCs). Demand deposits remained the monopoly of the commercial banks. The result over the 1980s was a hybrid system, which pointed to a “universal treatment” in the asset side of the balance sheet, while maintaining a certain degree of “specialization” in the liability side.

In the early1990s, crucial reforms were approved (Laws 45 in 1990 and 35 in 1993) aiming at a gradual movement towards multibanking by recurring to the scheme of subsidiaries and financial holdings. Unfortunately, the fear of cross-operations and improper financial

leverage led the authorities to strongly regulate the operations of near-bank dealing with mutual funds, leasing and consumer credit. This settingimpaired an adequate exploitation of the existing economies of scale and scope.

The financial system in Colombia experienced a credit boom over the 1993-97 period, which ended-up with a financial crisis during 1998-2000. The over-expansion of the financial system through subsidiaries and branch-outs resulted in a costly scheme, which combined with real asset depreciation resulted in capitallosses of about -32% for mortgage institutions and 21% for banks. The average overhead of the banking system was close to 8% over the years 1988-95, maintaining undue pressure on the financial wedge. In turn, the average banking wedge was 6%, significantly higher than the 2.7% observed in developed countries. As the crisis erupted, the financial wedge had to be compressed and the operational costs...