Colombia: Reserve Requirements, GFC

According to Deputy Governor Hernando Vargas and staff,^FNDeputy Governor Vargas and staff members (Carlos Varela, Yanneth R. Betancourt, and Norberto Rodríguez) of the Economic Studies Subdirectorate at the BR wrote a 2010 paper on the effects of reserve requirements in an inflation-targeting regime. the BR introduced a marginal reserve requirement in 2007 to “prevent excessive leverage of the private sector and control the credit risk of the financial system” (Vargas et al. 2010, 4). In June 2008, after market conditions had begun to deteriorate in the early stages of the Global Financial Crisis (GFC), the BR removed the marginal RR. However, the BR simultaneously raised ordinary reserve requirements at that time to sterilize the monetary expansion caused by its purchases of international reserves (Vargas et al. 2010).

In the last quarter of 2008, banks showed a slight deterioration in their liquidity profile, with the system showing a growing liquidity mismatch between assets and liabilities. The BR responded by lowering the ordinary reserve requirement to “ensure the availability of local currency liquidity” (Vargas et al. 2010, 5). It also allowed the currency to depreciate (Vargas et al. 2010).

In the September 2008 inflation report, the BR indicated that, in lowering the reserve requirement, the “idea was to free up nearly 1 trillion pesos by December” (BR 2008c).

Deputy Governor Vargas and staff argued in a 2010 report that reserve requirements served multiple goals: (1) enhancing monetary policy transmission, (2) curbing credit growth, (3) sterilizing FX purchases, and (4) guaranteeing liquidity in periods of stress (Vargas et al. 2010).^FNAs of 2016, the BR has stated its preference to “avoid the use of” reserve requirements, especially unremunerated reserve requirements (OECD 2016, 40).

The BR announced new RRs for foreign debt alongside the announcement of marginal RRs in May 2007 (Vargas et al. 2010). The BR required banks to set aside reserves to cover 40% of their foreign debt, which was priced at the “representative market rate”^FNArticle 80 of Resolution 8 defines the “representative market exchange rate” as the “exchange rate for foreign-currency purchase and sale operations that is calculated and certified by the Banking Superintendency…over-the-counter and derivate operations shall not be taken into account” (BR 2000, sec. 80). on the day of deposit, and with a redemption term of six months. Initially, the BR required banks to fulfill the foreign exchange RR with deposits in Colombian pesos; in November 2007, the BR allowed deposits in US dollars (OECD 2016).

The Superintendence of Financial (SFC) also introduced loan provisioning requirements for commercial loans in July 2007 and for consumer loans in July 2008 (Vargas et al. 2010).

Article 16(a) of the banking law, passed in 1992, specifies that the BR Board of Directors has discretion to establish and regulate required reserves of all credit establishments that receive demand, term, or savings deposits (Law 31 of 1992). Consistent with this authority, the Board of Directors of the BR updated reserve requirements through circulars, increasing reserves from 2007 to 2008, and decreasing reserve requirements through 2009 (BR n.d.; Vargas et al. 2010).

The Board of Directors of the BR set reserve requirements.

While the BR had sole authority to set reserve requirements, macroprudential policy was the joint responsibility of the BR, the Ministry of Finance, and Public Credit and the SFC. The Financial System Coordination Committee (FSCC) coordinated the actions of these three key financial regulators, and was made up of the minister of finance, the governor of the Bank of the Republic, the superintendent of finance, the director of the Deposit Guarantee Fund (FOGAFIN), and the director of the Financial Regulation and Financial Studies Unit (URF). The FSCC met at least quarterly to assess risks to financial stability (OECD 2016).

The BR updated its website with circulars communicating the reserve requirements (BR n.d.). Deputy Governor Vargas characterized reserve requirements as an unconventional monetary policy tool (Vargas et al. 2010).

As of June 20, 2008, reserves could be held in deposits at the BR or in cash on hand (BR 2008a).

Both the ordinary and marginal reserve requirements applied to checking accounts, savings accounts, CDs maturing within 18 months, and bonds maturing within 18 months. Liabilities maturing in greater than 18 months did not face any reserve requirements (Vargas et al. 2010).

The BR based ordinary RRs on the arithmetic average of liabilities in each relevant category—checking accounts, savings accounts, and time deposits—between Wednesday and Tuesday, covering two-week periods, on a lagged basis (BR 2008a).^FNLagged reserve requirements allow for more certain calculations, so banks don’t have to “over-provision in order to meet reserve requirements” (Montoro and Moreno 2011). 

The BR based marginal RRs on the increases in the balances of deposits since May 6, 2007 (BR 2008b).

Credit institutions fall broadly into three categories in Colombia: commercial banks, investment banks, and financing companies (OECD 2016). The reserve requirements applied to all credit institutions (BR 2008a).

The BR raised reserve requirements, both the ordinary requirement and the marginal requirement, between June 2007 and June 2008, prior to the GFC, to curtail excessive credit growth. They then lowered them between June and October 2008, in response to the GFC (Vargas et al. 2010).

Ordinary Reserve Requirement

Ordinary (referred to by the BR as “average”) RRs were 13% on checking accounts, 6% on savings accounts, and 2.5% on time deposits between 2000 and 2007 (see Figures 1 and 2). On June 15, 2007, the BR equalized the reserve requirement on savings and checking accounts at 8.3%. Deputy Governor Vargas stated in a 2010 report that the rationale for the change was that “the distinction between these types of deposits in terms of liquidity had been blurred” (Vargas et al. 2010).

Marginal Reserve Requirement

The BR implemented marginal RRs on May 6, 2007, and kept them in place until June 20, 2008 (see Figures 1 and 2). Initially, marginal RRs were set at 27% for checking accounts, 12.5% for savings accounts, and 5% for time deposits. On June 15, 2007, the BR equalized the marginal RR on checking and savings accounts at 27%. On June 20, 2008, the BR eliminated marginal RRs entirely, to ease conditions given the onset of the GFC (Vargas et al. 2010).

Source: Vargas et al. 2010.

Between 2000 and 2007, the BR paid an interest rate set at 75% of its inflation target for the reserve requirement on savings accounts and 100% of the target for the reserve requirement on time deposits.^FNFull remuneration of reserves is relatively rare. See (OECD 2018). In June 2007, the central bank set remuneration at 37.5% of the inflation target for reserve requirements on checking accounts and savings accounts. According to Vargas et al., because these types of deposits “had been blurred” in terms of liquidity, it made sense to apply the same remuneration to them (Vargas et al. 2010).

The BR did not remunerate marginal reserves (Vargas et al. 2010).

The BR continued to update its remuneration policy for ordinary reserve requirements, until it eliminated remuneration entirely on July 24, 2009 (BR 2009). In their paper, Deputy Governor Vargas and staff suggest that remuneration’s effects on the marginal cost of bank funds influenced the BR’s decision to lower and ultimately eliminate remuneration (Vargas et al. 2010). See Figure 3 for a timeline of the BR’s remuneration policies.

Figure 3: Timeline of Remuneration

Source: Vargas et al. 2010.

There do not appear to have been any other conditions attached to reserve requirement adjustments.

Beginning in June 2008, the BR adjusted RRs to sterilize a program of international reserve purchases, by eliminating the marginal RR and raising the average RR. Deputy Vargas and staff found that active use of ordinary reserve requirements reinforced monetary policy transmission; their results suggest that pass-through improved from monetary policy to lending rates. After the BR lowered ordinary reserve requirements, the spreads between the policy rate and the commercial bank treasury and prime lending rates began to fall in early 2009 (Vargas et al. 2010).

The BR did not communicate an end date for changes in its reserve requirement policy. The BR eliminated the marginal reserve requirement on June 20, 2008, effective from the second half of August 2008 (Vargas et al. 2010).