Browse Profiles > Peru > Core Principles for Effective Banking Supervision
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Standards Compliance Index 35.83 out of 100 50
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Peru

Core Principles for Effective Banking Supervision

Summary
There is scant information publicly available in terms of both descriptive information and explicit compliance levels as to Peru's adherence to the Basel Committee on Banking Supervision's Basel Core Principles. According to information provided in the International Monetary Fund's (IMF) 2006 Article IV Consultation report, published in 2007, there was a Financial Sector Assessment Program (FSAP) undertaken on Peru in 2001 by the IMF and the World Bank. However, the results of this assessment are not publicly available. The report further indicates that Peru has a generally sound banking system with improving financial indicators such as asset quality and capitalization. The U.S Department of Commerce, in its 2007 Country Commercial Guide of Peru, notes that the Superintendence of Banks, Insurance and Pension generally applies the Bank for International Settlements' regulatory guidelines, and a 2007 report by the IMF based on its Fourth and Fifth Reviews on Peru indicates that the Peruvian authorities have finalized a roadmap for the implementation of the Basel II framework.

    General Overview

    There is little information publicly available regarding Peru's compliance with the Bank for International Settlements' Basel Core Principles (BCPs). The latest Article IV Consultation report by the IMF on Peru, published in 2007, indicates that Peru has a generally sound banking system with improving financial indicators such as asset quality and capitalization. Another report by the IMF, published in March 2007, indicates the authorities have "completed a road map for implementation of the Basel II framework, tightened regulations governing restructured loans, and improved consolidated and cross-boarder supervision" (p. 19). The March 2007 report adds that Peruvian authorities are in the process of developing a rating mechanism for banks by which banks can be monitored and corrective measure enforced by the supervisory authority.
    A Financial Sector Assessment Program (FSAP) by the IMF and the World Bank was conducted for Peru in May 2001 and a subsequent update was completed in June 2005, according to the IMF's 2007 Article IV report. Besides this reference of an FSAP in the IMF's Article IV report, no further information on an FSAP on Kenya or its results could be identified. A Letter of Intent from the Government of Peru to the IMF in 2005 stated that the banking supervisory agency in Peru, the Superintendence of Banks, Insurance and Pension (Superintendencia de Banca, Seguros y AFP, or SBS) reiterates its commitment to ensure effective implementation of regulations on credit risks and strengthen on- and off-site supervision, as well as implementing better reporting standards. The Letter of Intent also indicates that the SBS will ensure the effective implementation of consolidated supervision.
    The U.S Department of Commerce (DoC), in its 2007 Country Commercial Guide of Peru, notes that the SBS generally applies the Bank for International Settlements' regulatory guidelines. Thus, banks are required to follow internationally accepted auditing standards on their financial statements. The 2007 U.S. DoC report also notes that banks are required to have mandatory assessments every year by at least two independent rating agencies. The same report also notes that there are 11 commercial banks, 41 municipal and rural savings banks and microfinancial institutions, and 4 government-owned entities operating in the Peruvian banking system. The report adds that, as of October 2006, 75% of all loans and around 80% of deposits were being held by the three largest banks in Peru and total assets in the commercial banking system rounded to $24.1 billion.
    The Government of Peru's Letter of Intent to the IMF in 2007 notes that the "government will continue to strengthen financial sector regulation and supervision in order to enhance the resilience of the financial system" (p. 8). The report further states that "in line with the Basel II Accord, the government will also seek to modify the General Banking Law with a view to introducing specific capital requirements for exposure to foreign currency credit risks" (p. 8).


    The Principles

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

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

    1.(2) Operational independence and adequate resources.

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

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

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

    1.(5) Legal protection for supervisors.

    There is insufficient information publicly available as to Peru's compliance with this Principle. In its 2004 report, the IMF noted that Peruvian authorities needed to ensure the enactment of legislation aimed at improving the legal protection of bank supervisors.

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

    There is insufficient information publicly available as to Peru'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 Peru'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 Peru's compliance with this Principle. However, according to the 2003 World Bank Regulation and Supervision database, the following legal submissions are required to obtain a banking license: (1) draft by-laws; (2) intended organization chart; (3) first 3-year financial projections; (4) financial information on potential shareholders; (5) background/experience of future managers; (6) sources of funds to be disbursed in the capitalization of new bank; and (7) the intended market differentiation of the new bank.

    4. Authority to review and reject transfer of ownership.

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

    5. Authority to review major acquisitions and investments.

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

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

    There is insufficient information publicly available as to Peru's compliance with this Principle. According to the 2003 World Bank Regulation and Supervision database, the minimum capital-asset ratio requirement in Peru is 9% above Basel I requirement of 8% and this ratio is risk weighted in line with the Basle guidelines.

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

    There is insufficient information publicly available as to Peru's compliance with this Principle. However according to a 2004 report by the IMF, the SBS has "introduced norms on provisioning and loan classification that take into account borrowers' currency mismatches and promote the use of Value at Risk models for the measurement of exchange rate risks" (p. 11).

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

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

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

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

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

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

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

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

    13. Comprehensive risk management processes.

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

    14. Adequate internal controls.

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

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

    Peru largely complies with FATF requirements relating to record keeping and wire transfer rules (FATF/GAFISUD 2005). The 2007 U.S. Department of State report states that financial institutions are required to maintain reports on large cash transactions exceeding $10,000. The financial institutions are supervised by the Superintendence of Banks, Insurance and Pension and the Peruvian Securities and Exchange Commission. However, there is insufficient information publicly available that directly addresses Peru's compliance with this Principle.

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

    There is insufficient information publicly available as to Peru's compliance with this Principle. As per information provided in a Letter of Intent from the Government of Peru to the IMF in 2005, the SBS reiterates its commitment to strengthen on-site and off-site supervision.

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

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

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

    There is insufficient information publicly available as to Peru's compliance with this Principle. According to the 2003 World Bank Regulation and Supervision database accounting practices within Peruvian banks are up to international standards and banks are required to produce consolidated accounts covering all bank and any non-bank financial subsidiaries.

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

    According to the 2003 World Bank Regulation and Supervision database external audits of banks are compulsory and there are specific requirements for the extent of the audit. Moreover auditors have to be properly licensed or certified and the auditor's report is given to the SBS. Nonetheless there is insufficient information publicly available as to Peru's compliance with this Principle.

    20. Ability to supervise on a consolidated basis.

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

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

    There is insufficient information publicly available as to Peru's compliance with this Principle. According to the 2003 World Bank Regulation and Supervision database accounting practices within Peruvian banks are up to international standards and banks are required to produce consolidated accounts covering all bank and any non-bank financial subsidiaries.

    22. Adequate supervisory measures to ensure timely corrective action.

    According to the 2003 World Bank Regulation and Supervision database, the SBS can order directors or management to constitute provisions to cover actual or potential losses and banking legislation allows the SBS to suspend ownership rights of a problem bank. However, there is insufficient information publicly available as to Peru's compliance with this Principle.

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

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

    24. International exchange of information with other supervisors.

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

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    Sources of Assessment

    Government of Peru, "Letter of Intent of the Government of Peru to the IMF," January 2007. Available from Central Reserve Bank of Peru website. Accessed on August 30, 2007. (GoP 2007)

    Government of Peru, "Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding," May 2005. Available from International Monetary Fund website. Accessed on August 30, 2007. (GoP 2005)

    International Monetary Fund, "Peru: Request for Stand-By Arrangement--Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Peru," Country Report No. 04/226, Washington, D.C.: IMF, July 2004. Available from International Monetary Fund website. Accessed on August 30, 2007. (IMF 2004)

    International Monetary Fund, "Peru: 2006 Article IV Consultation and Request for Stand-By Arrangement - Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Peru," Country Report No. 07/54, Washington, D.C.: IMF, February 2007. Available from International Monetary Fund website. Accessed on August 30, 2007. (IMF 2007a)

    International Monetary Fund, "Peru: Fourth and Fifth Reviews Under the Stand-By Arrangement and Request for Waiver of Applicability - 2006 Staff Report; Staff Supplement; and Press Release on the Executive Discussion Consideration," Country Report No. 07/114, Washington, D.C.: IMF, March 2007. Available from International Monetary Fund website. Accessed on August 30, 2007. (IMF 2007b)

    World Bank, "Bank Regulation and Supervision Database," 2003. Available from World Bank website. Accessed on August 30, 2007. (WB 2003)

    Relevant Organizations

    Central Reserve Bank of Peru - Banco Central de Reserva del Peru (BCRP)

    Superintendence of Banks, Insurance and Pension - Superintendencia de Banca, Seguros y AFP (SBS) (website in Spanish only)



    Relevant Legislation/Regulation

    General Law of the Financial and Insurance Systems, Organic Law of the Superintendence of Banks, Insurance and Pension No. 26702, 1996 - Ley General del Sistema Financiero y del Sistema de Seguros y Orgánica de la Superintendencia de Banca, Seguros y AFP No. 26702, 1996

    Central Reserve Bank of Peru Organic Law No. 26.123, 1992 - Ley Orgánica del Banco Central de Reserva del Perú No. 26.123, 1992

    Penal Law Against Money Laundering No. 27.765, 2002 - Ley Penal Contra el Lavado de Activos No. 27.765, 2002 (in Spanish only)

    Decree-Law on the Criminalization of Terrorist Financing No. 25475, 1992 - Decreto-Ley que Establice la Penalidad para los Delitos de Terrorismo y los Procedimientos para la Investigacion, la Instruccion y el Juicio No. 25475, 1992 (in Spanish only)



    Supplementary Sources

    Central Reserve Bank of Peru, "Annual Report 2006," 2006. Available from Central Reserve Bank of Peru website. Accessed on August 30, 2007. (BCRP 2006)

    Financial Action Task Force and the Financial Action Task Force of South America, "Informe de Evaluación Mutua Sobre Lavado de Activos y Financiamiento del Terrorismo: Peru," July 2005, Available from the GAFISUD website. Accessed on August 30, 2007. (FATF/GAFISUD 2005)

    Government of Peru, "Letter of Intent and Technical Memorandum of Understanding," March 17, 2003. Available from International Monetary Fund website. Accessed on August 30, 2007. (Peru 2003)

    U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs, "International Narcotics Control Strategy Report 2007," March, 2007. Available from U.S. Department of State website. Accessed on August 30, 2007. (U.S. DoS 2007)
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