There is insufficient information publicly available regarding Bolivia's compliance with the Basel Core Principles for Effective Banking Supervision. The International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) for Bolivia in 2003, the results of which were not published. A 2007 IMF report mentions the FSAP recommendations, and enumerates the steps taken by the country to implement them. The report notes that the autonomy and regulatory role of the Superintendency of Banks and Financial Institutions (SBEF), the country's financial sector supervisor, have been strengthened and regulations on prompt corrective action, central bank intervention in bank resolution, and liquidity risk, have been issued and enforced. However, some important recommendations pertaining to consolidated supervision, anti-money laundering, deposit insurance scheme, risk management, and corporate restructuring have not been acted upon. The report does point to ongoing efforts by Bolivia to implement these recommendations including the plan of the SBEF to issue prudential regulations to deal with market risk.

General Overview

Bolivia has made improvements in financial sector stability, mentions the 2007 Article IV consultation report by the International Monetary Fund (IMF). Liquidity levels are reasonably high with high deposits, and comparatively low credits. Banks have also become more profitable and their capitalization remains above the minimum capital requirement. Aggregate capital adequacy ratio is 14 percent of the risk-weighted assets; however asset quality and dollarization give cause for concern. Other vulnerabilities also exist. Credit risk is high due to the potential of restructured loans going bad. High provisioning is imperative at some banks where non-performing loans have not been adequately provisioned for. Bank loan provisioning and solvency need to be closely monitored and prudential regulations need to be introduced to enhance banks' assessment of the market risks they undertake. The 2007 IMF report also recommends the issuance of prudential regulations mandating banks to factor in risks related to dollarization in their lending procedures, and an increase in the capital requirements for banks to cover market risk. However, the latter two recommendations have not been agreed upon by the Bolivian authorities. They did, however, agree to work towards implementing structural reforms recommended in the (unpublished) 2003 IMF's Financial Sector Assessment Program (FSAP).

Some of the 2003 recommendations of the FSAP have already been implemented, per the 2007 report. They include the strengthening of the autonomy and regulatory role of the Superintendency of Banks and Financial Institutions (SBEF), the country's financial sector supervisor; and the issuance and enforcement of regulations pertaining to prompt corrective action, central bank intervention in bank resolution, and liquidity risk. However, some important recommendations have not been acted upon, including: (1) amendment of the corporate bankruptcy/restructuring law; (2) consolidated supervision through greater coordination among the domestic financial supervisors; (3) amendment of the anti-money laundering (AML) legislation and enhancement of the financial intelligence unit's (UIF) powers; (4) creation of a deposit insurance scheme to reduce central bank intervention during bank resolutions; (5) issuance of prudential regulations to capture risks of dollarization and market risks; and (6) elimination of the financial transactions tax to boost financial growth. The ongoing efforts by Bolivia to implement these recommendations include the plan of the SBEF to issue prudential regulations to deal with market risk.

Bolivia also passed a law in June 2005 that enhanced the SBEF's as well as the Central Bank of Bolivia's (BCB) autonomy, and established the Financial Restructuring Fund as a legal entity, a November 2005 IMF report adds. Further, provisioning and reserve requirements for banks were tightened. Another IMF report from the same year (April 2005) talks about the improvements in Bolivia's early warning systems, issuance of regulations for effective supervision of financial conglomerates and for improved liquidity management of banks.

In 1995, the World Bank approved a technical assistance project for Bolivia titled the Financial Markets and Pension Reform Technical Assistance (FMPRTA) project to strengthen, inter alia, the regulation and supervision of banking and financial activities in the country. The result of the project, which started in 1997 and reached completion in 1998, is deemed moderately unsatisfactory by the Independent Evaluation Group (IEG) Project Performance Assessment Report published in 2006 in light of the high fiscal cost associated with the design of the pension reform and the mismanagement of the reform process by the Bolivian government. Among other disappointments of the project, the IEG report cites the continued weakness in the banking sector, and laments that the re-capitalization of banks could have been started earlier for it to have a positive impact on the project. However, the report does note that institutional development, especially in terms of the advancement of the SBEF, was substantial. Banking supervision practices of the SBEF were reinforced and new prudential norms were established, bolstering the SBEF's institutional capacity and strengthening the regulatory environment of the financial sector. The SBEF developed new regulations for risk-based loan evaluations and trained its supervisory staff in the use of these new methods. Off-site and on-site supervision of the SBEF were strengthened, as were its data collection, credit bureau, and financial reporting systems. In sum, risk management tools were strengthened. However, these improvements, especially in terms of regulations on loan-loss provisioning, came at a time when the banks had expanded their credit portfolios considerably and they were resulting in problem loans. The government did take decisive action in reinforcing the banks by underwriting a subordinated debt problem, but it was not enough in shoring the commercial banks from their problem loans. The same report observes that regulatory forbearance exhibited by the supervisory authorities during the implementation of the prudential norms could be the result of paucity of resources.

The Bolivian banking sector includes the central bank, commercial banks and state-owned second-tier banks, the National Financial Institution of Bolivia and FONDESIF. Deposits of commercial banks have improved considerably, though credits have lagged. Of the 13 banking institutions, the six largest account for almost 82 percent of the banking system's assets, indicating a highly concentrated banking system. Bolivia also created a second tier public development bank (BDP) to replace an existing public bank and assures the IMF that it will not be financed by the Treasury, it will be prudentially regulated like the rest of the banking sector, its credit procedures will be subject to SBEF's technical assessments, and it will not compete with other micro-finance institutions in Bolivia.

The Principles

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

1.(2) Operational independence and adequate resources.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The November 2005 IMF report mentions that a June 2005 law "fully restores the SBEF's regulatory, operational and budgetary autonomy" (p. 16). The 2007 IMF report also confirms that Bolivia has implemented one of its 2003 FSAP recommendations and strengthened the SBEF's autonomy and regulatory role.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

4. Authority to review and reject transfer of ownership.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

5. Authority to review major acquisitions and investments.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The 2007 IMF report notes that the capitalization of commercial banks in Bolivia remains above the minimum capital requirement. Aggregate capital adequacy ratio is 14 percent of the risk-weighted assets.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The 1997-1998 FMPRTA project for Bolivia funded by the World Bank helped the SBEF develop new regulations on risk-based loan evaluations and loan-loss provisioning and train its supervisory staff in the use of these new methods, the 2006 IEG report notes.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. In 2005, provisioning and reserve requirements for banks were tightened, as the IMF November 2005 report mentions. However, the 2007 IMF report observes that the quality of bank assets is a cause for concern and credit risk is high due to the potential of restructured loans going bad. The report therefore feels that it is imperative for some banks to have higher provisioning to adequately cover non-performing loans. Bank loan-loss provisioning also needs to be closely monitored, per the report. One of the IMF's 2007 recommendations that the Bolivian authorities have not agreed to is to introduce prudential regulations requiring banks to factor in the risks associated with dollarization in their lending procedures.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The 2007 IMF report recommends an increase in the capital requirements for banks to cover market risk. However, the Bolivian authorities have not agreed on the need to implement this recommendation. Nonetheless, they do declare their intent to issue prudential regulations to deal with market risk.

13. Comprehensive risk management processes.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

14. Adequate internal controls.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. As the 2007 IMF report notes, the 2003 FSAP recommendations to Bolivia to amend its AML legislation and strengthen its financial intelligence unit (FIU) has not yet been implemented. The 2008 U.S. Department of State (DoS) report notes that Law No. 1768 of 1997 criminalizes money laundering in Bolivia and created the country's FIU, the Unidad Investigaciones Financieras (UIF), in the SBEF. Further, Supreme Decree No. 24771 of 1997 stipulates the powers and functions of the UIF. Under Decree No. 24771, banks and other financial institutions are required to identify their customers, retain transaction records for at least ten years, and report to the UIF all unusual and suspicious transactions. However, entities are not required to report cash transactions above a designated threshold. The UIF may, nonetheless, request additional information from reporting entities to aid investigations. The UIF is also empowered to request the SBEF to sanction its supervised entities if they are non-compliant with their reporting obligations. To add, the UIF can conduct on-site inspections to assess the reporting entities' compliance with their suspicious transaction reporting (STR) obligations. The U.S. DoS report observes that obliged entities' compliance with their reporting requirements is low; however, banks were more frequent reporters in 2007.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The 1997-1998 FMPRTA project aided by the World Bank helped strengthen the off-site and on-site supervision of the SBEF, as well as its data collection and financial reporting systems, the 2006 IEG report notes.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The 1997-1998 FMPRTA project aided by the World Bank helped strengthen the off-site and on-site supervision of the SBEF, as well as its data collection and financial reporting systems, the 2006 IEG report notes.

20. Ability to supervise on a consolidated basis.

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The April 2005 IMF report mentions that the SBIF issued in December 2004 a norm "to ensure the effective supervision of financial conglomerates (in compliance with Basel core principle 20)" (p. 54).

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The Inter-American Development Bank (IDB) website notes that although Bolivia has its national accounting standards issued in 2006, they are not consistent with International Financial Reporting Standards (IFRSs). Moreover, the domestic accounting framework is incomplete since Bolivia has 14 accounting standards as compared to more than forty IFRSs. In March 2006, the IDB approved the funding of a project to aid the adoption of IFRSs and International Standards on Auditing in Bolivia. The main objective of the project, per the IDB website, is to ensure that business financial reporting in Bolivia is "technically reliable" and transparent. The 36-month long project is expected to harmonize Bolivian standards with international standards and provide access to the harmonized standards to Bolivian accounting professionals.

22. Adequate supervisory measures to ensure timely corrective action.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle. The April 2005 IMF report mentions that in December 2004, the SBIF established procedures to strengthen early warning systems to help identify individual and systemic bank vulnerabilities so that prompt corrective actions could be taken. The 2007 IMF report also attests to this fact by mentioning that Bolivia has implemented one of its 2003 FSAP recommendations and issued and enforced regulations on prompt corrective action and central bank intervention in bank resolution. However, the FSAP had also called for the creation of a deposit insurance scheme to reduce central bank intervention during bank resolutions. This recommendation has not yet been implemented. Nevertheless, the November 2005 IMF report does attest to the establishment of the Financial Restructuring Fund (FRF), "the Bolivian version of a deposit insurance scheme" (p. 16), as a legal entity, "thereby correcting legal risks entailed in earlier legislation" (p. 16) and "empower[ing] the SBEF to enforce corrective action" (p. 16). Partial BCB's contribution to the Fund was retained till the end of 2005 to allow the latter to further build resources.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

24. International exchange of information with other supervisors.

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.

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

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There is insufficient information publicly available as to Bolivia's compliance with this Principle.