In one day the Central Bank sold $30 million on the wholesale foreign exchange market in order to moderate the upward trend that had been seen in the price of the dollar against the Colon.
The transaction was made in order to prevent sharp fluctuations in the exchange rate, which since the beginning of the year has shown an upward trend in the wholesale Monex market.On Thursday, March 23, alone the Central bank sold $30.9 million, the highest figure of the year.
In Costa Rica several banks expressed their disagreement with the new standard which will prevent them from deciding how much of their capital will be denominated in dollars and how much in colones.
In an attempt to gain more control of the risk involved in foreign exchange transactions by banks and their impact on the exchange rate, the Central Bank has changed therules for foreign exchange cash operations, forcing banks to change the composition of their assets so that the proportion denominated in dollars is equal to the proportion of assets in that currency.
Starting December 22nd 2016 a new rule applies that prevents banks in Costa Rica from deciding how much of their capital they want to hold denominated in dollars and how much in colones.
In an attempt to gain more control of the risk involved in foreign exchange transactions by banks and their impact on the exchange rate, the Central Bank has changed the rules for foreign exchange cash operations, forcing banks to change the composition of their assets so that the proportion denominated in dollars is equal to the proportion of assets in that currency.
Moody's warns of the risks faced by banks in Central America in the context of a rising trend in interest rates and dollarization of their loan portfolios.
From a report by Moody's:
Mexico, September 14, 2016 -- Banks in Central America face rising asset risks as interest rates look set to rise in the region, pushing up debt service costs for borrowers, according to a report from Moody's Investors Service.
The Central Bank is not ruling out intervening in the exchange market when it considers that the movement of the dollar against the Colon could jeopardize keeping inflation under control.
At a time when exporting companies insist on giving more flexibility to the exchange rate in order to favor a devaluation to improve their competitiveness abroad, the central bank is standing firm in its position to intervene in the exchange rate when necessary to maintain stable inflation.
If the measures which the Central Bank plans to implement come to fruition, banks will have to seek authorization from the entity in order to borrow abroad in dollars.
This measure would be in addition to the latest implemented by the Central Bank, raising reserve requirements to 15% on new business loans from abroad.In June this year the increase in the loan portfolio in dollars compared to the same month of 2015 was 14%.
New regulations are being prepared for measuring currency risk for banks, whose loan portfolio in dollars grew by almost 13% in one year, while 78% of those who borrow in dollars receive their income in local currency.
Figures from the General Superintendent of Financial Institutions (SUGEF) indicate that 41% of the principal balance of outstanding loans is denominated in foreign currency and the rest in colones.Added to this it is the fact that 78% of borrowers of these loans in dollars earn their money in colones.
The Financial Superintendency plans to increase reserve requirements for banks that lend in dollars to companies that do not generate revenue in that currency.
As a measure to prevent the growth of dollar loans to individuals and companies that do not generate income in this currency, the Superintendent of Financial Institutions (SUGEF) said it plans to raise reserve requirements for financial institutions and banks in order to address payments in arrears by debtors. Currently the requirement is 0.5% of the balance due.
The Central Bank of Costa Rica has officially eliminated the exchange rate band which has been in place since 2006, and let the exchange rate float, reserving the right to "participate in the market to prevent violent fluctuations".
From a statement issued by the Central Bank of Costa Rica (BCCR):
The Sugef in Costa Rica has demanded tighter controls on banks when lending in dollars.
As part of the measures proposed by the Superintendent of Financial Institutions (Sugef), financial institutions must conduct a capacity analysis on the borrower, as well as requiring collateral and credit history, a test now only done when the loan is for more than $130,000.
Hedges are instruments whose results depend on an ongoing risk analysis of the exchange rate differential.
An article in Elfinancierocr.com states that "monitoring leading indicators, accounting, and using averages for time periods and curves are some of the recommendations provided by Amedeo Gaggion, HSBC's financial markets manager in the country."
Banks in Guatemala will have to increase their capital from 10% to 14% when granting loans in U.S. dollars to people with incomes in quetzales.
Banking Superintendent Edgar Barquín explained that the measure, which affects a third of the entire loan portfolio in dollars -$982 million-, will force banks in the system to increase their capital in $48 million.
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