Browse Profiles > Honduras > Core Principles for Effective Banking Supervision
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Honduras

Core Principles for Effective Banking Supervision

Summary
In a 2004 World Bank report, the writers concluded that Honduras complied with only one of the 30 Basel Core Principles (BCP), namely, BCP 1.5 relating to legal protection of supervisors. Honduras was rated as being partially compliant with four other BCPs, partially non-compliant with twenty three, and non-compliant with two. The report noted that significant efforts were still needed to improve the country's compliance with the BCPs. The areas that required particular attention were consolidated supervision, capital adequacy, loan classification and provisioning, corporate governance, risk management, and preventive and corrective action. According to a 2006 International Monetary Fund (IMF) report, the Honduran authorities responded to these challenges by embarking on a series of financial sector reforms that include the strengthening of the regulatory framework and ongoing supervision. The IMF report adds that Honduras passed a series of laws in 2004 to implement the World Bank's recommended financial sector reforms, including strengthening prudential norms, enabling consolidated supervision, increasing the supervisory powers of the National Banking and Insurance Commission, broadening the scope of corrective action, and improving bank resolution. Moreover, as part of the IMF's and World Bank's Heavily Indebted Poor Countries (HIPC) initiative, Honduras is required to comply with the BCPs. The report comments that the Honduran authorities are committed to promoting and applying the BCPs more comprehensively. A 2007 report by the IMF points to a similar conclusion and notes that Honduras is in the process of strengthening banking supervision and enhancing prudential norms.

    General Overview

    A 2007 International Monetary Fund (IMF) report finds that Honduras has revamped its legal, prudential, and regulatory frameworks in recent years, and this has resulted in continued recovery in its financial sector. Tighter prudential norms and rapid growth in bank credit in 2006 have led to decreased capital ratios in banks, although it remains above the minimum capital requirement. Other banking indicators have fared well. Honduras, per the report, is taking further steps to strengthen banking supervision and enhance prudential norms. The report advises Honduras to strengthen supervision of consolidated financial groups, monitor lending and provisioning practices of banks, and delay further reductions in liquidity requirements on dollar deposits till supervision in the area is further strengthened.
    A 2004 World Bank report found that Honduras complied with only one of the 30 Basel Core Principles (BCP), BCP 1.5 relating to legal protection of supervisors. With regards to the other BCPs, Honduras was rated as being partially compliant with four, partially non-compliant with twenty three, and non-compliant with two. However, the report does not provide a detailed assessment of Honduras compliance with each BCP. The report observed that Honduras needed to take urgent and significant steps to improve compliance with the BCPs. The areas that required particular attention, per the report, were consolidated supervision, capital adequacy, loan classification and provisioning, corporate governance, risk management, and preventive and corrective action. In addition, the report called for a "more risk-oriented, forward-looking, approach" (p. 67) to supervision by the National Banking and Insurance Commission (NBIC). The report also talked about the joint World Bank-IMF Financial Sector Assessment Program (FSAP) review in 2003, which provided recommendations on strengthening the Honduran financial system and noted that Honduras began implementing them with assistance from the World Bank, the IMF, and the Inter-American Development Bank (IDB).
    In 2006 the IMF published a report titled "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries" (hereafter referred to as the 2006 IMF report). The report's findings pertain primarily to the period 2003-2004 and expand upon the financial sector reform embarked on by Honduras with assistance from the World Bank, IMF, and IDB. The main thrust of the comprehensive reform was to improve the prudential regulatory framework and ongoing consolidated supervision, and strengthen central bank functions. Other areas that were expected to improve: (1) the capital adequacy ratio to be calculated in line with Basel standards; (3) loan-loss provisioning to be strengthened according to a timetable; (3) related lending and other risk-indicators to be gradually reduced; and (4) governance requirements to be further strengthened. The IMF report mentioned that the capital adequacy ratio had been raised from 9 percent to 10 percent as planned, and that the Honduran authorities were moving forward to enforce it effectively in all commercial banks. The IMF report maintained that to achieve strengthened supervision and prudential regulations, the NBIC needed to be given appropriate tools to ensure that the supervised entities "reach and maintain healthy solvency and liquidity indicators" (p. 77). The NBIC planned to introduce legal reforms in 2004 (the new Financial Institutions Law) that would enhance its autonomy and accountability and transfer certain central bank functions and supervisory authority to itself; strengthen sanctions against non-compliant institutions; introduce special supervision for weak banks; and train its supervisory staff to conduct consolidated supervision and enhance on-and-off-site supervision. Other legal changes included amendments to the NBIC Law, the Deposit Insurance Law, and the Central Bank of Honduras Law to strengthen financial regulation, supervision, and the financial safety net. These legal reforms were targeted for passage by June 2004. However, there is little subsequent information publicly available regarding the extent of implementation of these legal changes. The report also noted that as part of the IMF's and World Bank's Heavily Indebted Poor Countries (HIPC) initiative, Honduras is required to comply with the BCPs. The HIPC initiative, first launched in 1996 by the IMF and the World Bank, aims to ensure that no country faces a debt burden it cannot manage.
    According to a 2005 report by the U.S. Department of State (DoS), Honduras "strives to comply with the Basel Committee's Core Principles for Effective Banking Supervision, and the new Financial System Law, Decree No. 129-2004, is designed to improve compliance with these international standards." The Financial System Law, along with three other laws, was designed to strengthen the Honduran financial sector, reform both the Central Bank of Honduras (CBH) and the NBIC, and improve the regulatory capacity and effectiveness of the Honduran authorities with respect to the banking sector. In this context, the 2006 IMF report points out that Honduras passed a series of laws in 2004 to implement the financial sector reforms recommended in the FSAP. These reforms included strengthening prudential norms, enabling consolidated supervision, increasing the supervisory powers of the NBIC, broadening the scope of corrective action, and improving bank resolution. The report commented that the Honduran authorities are committed to apply the BCPs more comprehensively through continued reforms in prudential regulations, connected lending, and overall supervision
    As the 2004 World Bank report notes, the NBIC is the primary supervisory agency supervising, monitoring, and inspecting the banking institutions in Honduras. The CBH is in charge of regulating the minimum capital held by financial institutions, connected lending, and reserve requirements. A 2007 U.S. Department of Commerce report notes that the Honduran financial system is comprised of commercial banks, state-owned banks, savings and loans companies, and finance companies. As of 2007, there were 16 commercial banks operating in Honduras, accounting for approximately 90 percent of the assets in the financial system. Seven of the 16 banks were majority foreign owned and, as of November 2006, accounted for 39 percent of total bank capital. Off-shore banking in Honduras was limited. The report finds that the Honduran banking sector experienced major consolidation since 1999 and four banks failed or were liquidated between 1999 and 2002.


    The Principles

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

    The 2004 World Bank report notes that the NBIC is the primary supervisory agency supervising, monitoring, and inspecting banking institutions in Honduras. The CBH is in charge of regulating the minimum capital held by financial institutions, connected lending, and reserve requirements. The 2006 IMF report notes that the NBIC planned to introduce legal reforms by June 2004 to strengthen its autonomy and accountability and to transfer some functions and powers from the CBH to itself. The IMF's 2005 Article IV report published in 2006 (hereafter referred to as the 2005 Article IV report) avers that several laws and regulations enacted in 2004 increased the powers of the NBIC. However, there is insufficient information publicly available as to Honduras's compliance with this principle.

    1.(2) Operational independence and adequate resources.

    There is insufficient information publicly available as to Honduras's compliance with this principle. The IMF's 2005 Article IV report avers that several laws and regulations enacted in 2004 increased the powers of the NBIC.

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

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

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

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

    1.(5) Legal protection for supervisors.

    The 2004 World Bank report indicates that Honduras is compliant with this principle. The report, however, does not elaborate on the basis of this conclusion.

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

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

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

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

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

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

    4. Authority to review and reject transfer of ownership.

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

    5. Authority to review major acquisitions and investments.

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

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

    According to the 2004 World Bank report, the capital adequacy requirement for banks is an important area where prudential regulations in Honduras require strengthening. In this context, the 2005 Article IV report mentions that several laws enacted in 2004 strengthened prudential norms on capital adequacy. A 2006 IMF report mentions that the December 2003 regulations brought the calculation of capital adequacy ratio "in line with the Basel standards" (p. 90). Further, the ratio was raised from 9 to 10 percent, as envisaged for compliance with the Basel Core Principles, and the Honduran authorities were taking steps to effectively enforce it across all commercial banks. However, there is little information publicly available addressing Honduras' actual compliance with this principle.

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

    According to the 2004 World Bank report, loan classification and provisioning are important areas where prudential regulations in Honduras require strengthening. In this context, the 2005 Article IV report mentions that several laws enacted in 2004 strengthened prudential norms on, inter alia, loan classification, and provisioning. A 2006 IMF report provides details on this improvement by mentioning the December 2003 regulations that provide new guidelines for loan classification on the basis of credit risk instead of quality of collateral. The regulations also reduce loan categories based on quality from 8 to 5 and increase required provisioning for some loan categories. Despite the above descriptive information, there is little information publicly available that addresses Honduras's actual compliance with this principle.

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

    See Principle 7.

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

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

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

    The 2006 IMF report notes that as part of its plan to strengthen financial sector regulation, Honduras gradually began reducing banks' related lending under a 2002 Congress mandate. A timetable was chalked out and provided to the IMF for banks to reduce their related lending to the new ceiling of 40 percent of capital. The quarterly targets set in the timetable were to culminate in full compliance by banks by December 2005. However, there is little information publicly available regarding the completion of these set targets or as to Honduras's compliance with this principle.

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

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

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

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

    13. Comprehensive risk management processes.

    According to the 2004 World Bank report, risk management is an important area where prudential regulations in Honduras require strengthening. The report also advises the NBIC to move towards a more risk-oriented approach to supervision. In this context, the government of Honduras, in a Letter of Intent to the IMF in 2004, agreed to establish a legal framework for better risk management practices by financial institutions through the enactment of new regulations. The authorities expected full compliance with such measures by December 2006. However, there is little subsequent information publicly available regarding the implementation of the above stated measures or Honduras's actual compliance with this principle.

    14. Adequate internal controls.

    The 2006 IMF report notes that Honduras aimed to put a regulation in place by June 2004 to "reinforce governance requirements for banks' boards of directors, with clear accountability rules" (p. 78). There is, however, insufficient information publicly available as to Honduras's compliance with this principle.

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

    As noted by the 2008 U.S. DoS report, anti-money laundering (AML) requirements apply to all financial institutions that are regulated by the NBIC, including state and private banks, savings and loan associations, and credit associations. Money laundering, as noted in the 2008 U.S. DoS report, has been a criminal offense in Honduras since 1998. Decree No. 45 of 2002 further strengthened the legal framework to combat money laundering and created the Honduran financial intelligence unit, Unidad de Información Financiera (UIF), within the NBIC. Per the report, banks and financial institutions are required to report any suspicious transactions and all transactions over $10,000, or its equivalent to the UIF. The UIF and reporting institutions are required to keep a registry of reported transactions for five years. Banks are required to know the identity of all their clients and depositors, regardless of the amount of deposits, and to keep adequate records of the information. Per banker negligence provisions, individual bankers are subject to two to five-year prison terms if, by carelessness, negligence, inexperience, or nonobservance of the law, they permit money to be laundered through their institutions. The NBIC has proposed major amendments to the Honduran money laundering law in 2007. The proposed amendments to the money laundering law would give the UIF oversight for collecting all suspicious transactions reports (STRs). The proposed reforms aim at giving the UIF sole oversight and responsibility for collecting STRs as well as analyzing and submitting them, if appropriate, for prosecution. Despite the above descriptive information, there is little information publicly available that addresses Honduras's actual compliance with this principle.

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

    The government of Honduras, in a Letter of Intent to the IMF in 2004, declares that the NBIC "will train staff to enhance on-and off-site inspections, and will continue to enforce the requirement that banks publish quarterly financial statements." Nevertheless, there is insufficient information publicly available as to Honduras's compliance with this principle.

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

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

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

    There is insufficient information publicly available as to Honduras's compliance with this principle. In a Letter of Intent to the IMF in 2004, the government of Honduras announced its intent to introduce regulatory measures by December 2004 to enable consolidated supervision, train the supervisory staff at the NBIC to conduct consolidated supervision from June 2005 onwards, and to require consolidated statements by all financial institutions regulated by the NBIC by December 2006. Nevertheless, there is insufficient information publicly available as to Honduras's compliance with this principle.

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

    There is insufficient information publicly available as to Honduras's compliance with this principle. In a Letter of Intent to the IMF in 2004, the government of Honduras announced that the NBIC would train its supervisory staff in enhanced on-and-off-site inspection methods, and would continue requiring banks to publish quarterly financial statements.

    20. Ability to supervise on a consolidated basis.

    The 2004 World Bank report had observed that the NBIC "lacks the authority to implement consolidated supervision in a meaningful way" (p. 67). In a Letter of Intent to the IMF in 2004, the government of Honduras announced its intent to introduce regulatory measures by December 2004 to enable consolidated supervision, train the supervisory staff at the NBIC to conduct consolidated supervision from June 2005 onwards, and to require consolidated statements by all financial institutions regulated by the NBIC by December 2006. In this context, the 2005 Article IV report notes that Honduras enacted several laws and regulations in 2004, thereby enabling consolidated supervision of affiliates, subsidiaries and offshore branches of Honduran banks. Despite the above descriptive information, there is little information publicly available that addresses Honduras's actual compliance with this principle.

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

    The World Bank, in a 2007 assessment of Honduran accounting and auditing practices, commends Honduras's efforts to improve financial reporting standards and notes that continued national initiatives were required for further alignment with international standards. The Accounting and Auditing Law mandates the application of International financial Reporting Standards beginning January 1, 2008, and earlier adoption is permitted. Nevertheless, there is insufficient information publicly available regarding Honduras's compliance with this principle.

    22. Adequate supervisory measures to ensure timely corrective action.

    The 2004 World Bank report observes that Honduras needs to take urgent steps to "develop a smooth framework for taking prompt corrective actions when banks encounter problems" (p. 67). The report recommends the NBIC to expand the scope of its preventive and corrective instruments, and enact regulations clearly stating the circumstances triggering the use of such instruments, The 2005 Article IV report notes that Honduras enacted several laws and regulations in 2004 that "broadened the circumstances that require corrective actions by banks; and improved the bank resolution framework" (p. 12). Despite the above descriptive information, there is little information publicly available that addresses Honduras's actual compliance with this principle.

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

    The 2005 Article IV report notes that Honduras enacted several laws and regulations in 2004, thereby enabling consolidated supervision of affiliates, subsidiaries, and offshore branches of Honduran banks. Nevertheless, there is insufficient information publicly available regarding Honduras's compliance with this principle.

    24. International exchange of information with other supervisors.

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

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

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

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    Sources of Assessment

    International Monetary Fund, "Honduras: 2005 Article IV Consultation, Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Requests for Modification and Waiver of Performance Criteria, and Financing Assurances Review; and Enhanced Initiative for Heavily Indebted Poor Countries - Completion Point Document - Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Honduras," Country Report No. 06/35, Washington D.C.: IMF, February 2006. Available from International Monetary Fund website. Accessed on April 14, 2008. (IMF 2006a)

    International Monetary Fund, "Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries - Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Honduras," Country Report No. 06/48, Washington D.C.: IMF, February 2006. Available from International Monetary Fund website. Accessed on May 14, 2008. (IMF 2006b)

    International Monetary Fund, "IMF Executive Board Concludes 2006 Article IV Consultation with Honduras," Public Information Notice No. 07/31, Washington D.C.: IMF, March 2007. Available from International Monetary Fund website. Accessed on April 14, 2008. (IMF 2007)

    World Bank, Central America Department, Latin America and Caribbean Region, "Honduras Development Policy Review: Accelerating Broad-Based Growth," Report No. 28222-HO, November 2004. Available from World Bank website. Accessed on April 14, 2008. (WB 2004)

    World Bank, "Honduras: Report on the Observance of Standards and Codes - Accounting and Auditing," May, 2007. Available from World Bank website. Accessed on April 15, 2008 (WB 2007)

    Relevant Organizations

    Accounting and Auditing Standards Technical Board - Junta Tecnica de Normas de Contabilidad y de Auditoria (JTNCA) (website in Spanish only)

    Central Bank of Honduras - Banco Central de Honduras (CBH) (website in Spanish only)

    Financial Intelligence Unit, NBIC - Unidad de Información Financiera, NBIC (UIF)

    National Banking and Insurance Commission - Comisión Nacional de Bancos y Seguros (NBIC) (website in Spanish only)



    Relevant Legislation/Regulation

    Central Bank of Honduras Law No. 53, 1950 - Ley del Banco Central de Honduras No. 53, 1950 (in Spanish only)

    Law of the National Banking and Insurance Commission Decree No. 155, 1995 - Ley de la Comisión Nacional de Bancos y Seguros Decreto No. 155, 1995 (in Spanish only)

    Financial System Law, Decree No. 129, 2004 - Ley del Sistema Financiero, Decreto No. 129, 2004 (in Spanish only)

    Financial Institutions Law, Decree No. 170, 1995 - Ley de Instituciones del Sistema Financiero, Decreto No. 170, 1995 (in Spanish only)

    Decree Against Money Laundering No. 45, 2002 - Decreto Contra el Delito de Lavado de Activos No. 45, 2002 (in Spanish only)

    Code of Commerce No. 73, 1950 - Código de Comercio No. 73, 1950 (in Spanish only)

    Criminal Procedure Code, Decree No. 189, 1984 - Código de Procedimientos Penales, Decreto No. 189, 1984 (in Spanish only)



    Supplementary Sources

    Government of Honduras, "Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding," February 2004. Available from International Monetary Fund website. Accessed on April 14, 2008. (GoH 2004)

    International Monetary Fund website. Accessed on May 20, 2008. (IMF website)

    U.S. Department of Commerce, "Doing Business in Honduras: A Country Commercial Guide for U.S. Companies," U.S. & Foreign Commercial Service and U.S. Department of Commerce, August 2007. Available from U.S. Department of Commerce website. Accessed on April 16, 2008. (U.S. DoC 2007)

    U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs, "International Narcotics Control Strategy Report 2005," March 2005. Available from U.S. Department of State website. Accessed on April 14, 2008. (U.S. DoS 2005)

    U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs, "International Narcotics Control Strategy Report 2008," March 2008. Available from U.S. Department of State website. Accessed on April 14, 2008. (U.S. DoS 2008)
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