Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Financial Sector Assessment Program (FSAP) [1]with Ecuador on August 29, 2023 without convening formal discussions.[2]The Financial Sector Stability Assessment [SD1](FSSA) report was completed on July 31, 2023. The report is based on the work of joint IMF/World Bank FSAP missions to Ecuador during November-December 2022 and April-May 2023.
Ecuador's financial system is dominated by banks and credit cooperatives. While dollarization provides an important anchor for the Ecuadorean economy, systemic liquidity risks are high due to the limited capacity of the central bank to provide liquidity. The financial sector is overall resilient to adverse macrofinancial shocks but some institutions have meaningful solvency and liquidity vulnerabilities. To preserve confidence it is key to enhance capitalization, promptly recognize loan losses, and address unviable institutions.
The FSSA concluded that institutional framework for financial sector oversight is complex, uncoordinated, and prone to political intervention. Reforms are needed to enhance supervisory independence, prioritize safety and soundness, separate prudential supervision from other functions, and substantially strengthen the supervisory approach. The macroprudential framework needs further progress by developing stronger financial sector-wide analytical capacity, improving information sharing and coordination, and clarifying the roles between multiple agencies.
Similarly, the legal framework for bank resolution should be enhanced by establishing clearer responsibilities for the involved agencies, expanding the resolution toolkit, and ensuring that resolution decisions are not reversed. The deposit insurer's access to information and back-up funding should be improved, and the existing arrangements should be reviewed to provide more flexible emergency liquidity assistance. Governance and internal controls of public banks also need urgent strengthening and interest rate caps should migrate to a usury rate.
[1]The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country's financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 47 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).
[2]The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
