Central America: Financial Crisis Simulation Program

Central America: Financial Crisis Simulation Program

The Central American region has withstood the impact of the global financial crisis, with the adjustment taking place in an orderly way up to today. Ongoing financial sector integration and consolidation, aimed to help the region in taking advantage of economies of scale and promoting competition and efficiency, requires harmonization of prudential norms and financial supervision between countries. And strengthening the capacity to conduct consolidated supervision of growing of cross-border banking activities helps the region capitalize on the opportunities that integration offers.

Central to these efforts lies the work of the Council of Superintendents of Banks, Insurance and Other Financial Institutions (the Counsil - Consejo Centroamericano de Superintendentes de Bancos, de Seguros y de Otras Instituciones Financieras) in maintaining and promoting close cooperation and exchange of information between the Superintendencies, as well as testing and upgrading the policy, technical and procedural issues of cross-border cooperation  that the authorities need to address.

In order to achieve effective cross-border consolidated supervision according to the highest international standards, the Council requested FIRST Initiative to provide Central American government agencies (members of the Council:Superintendents of Banks, Insurance and Other Financial Institutions of Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Panama and the Dominican Republic) with means to test and enhance their practical tools for efficiently managing cross-border financial distress through the conduct of a crisis simulation exercise.

The objective of the FIRST project approved in February 2010 and worth $123,300 was to conduct regional crisis simulation exercise for Council members in order to test how the members would respond to the emergence of serious problems, including the failure, in one or more financial institutions with cross-border implications; to test cross-border procedures and arrangements, and to identify specific measures to be initiated as a result of the coordination problems determined during the simulation.

During the delivery of simulation exercise, which was conducted at the Superintendency of Banks of the Dominican Republic, using realistic and interesting scenario for the participant countries, participants became aware of the actual exchange of information and lack of agreement on the required policy action between jurisdictions, and, as a result - the need to establish a sound and effective regional framework to deal with severe distress of financial institutions with a regional coverage. Paraphrasing the words of a Superintendent that spoke during the meeting "there is a need for action because it is likely that a crisis involving an entity with a regional reach will happen in the next few years".

Moreover, as a result of the project, some jurisdictions have asked for further FIRST and World Bank support, which included conducting a crisis simulation exercise, a technical assistance on supervisory architecture, and a financial sector assessment. Additionally, the members of the Council are receiving technical assistance from the Inter-American Development Bank on cross border consolidated supervision, an important element to strengthen their oversight frameworks.

Continuous support of the donor community in supporting this type of exercise will ensure that countries of the region are as well prepared as possible to deal with crisis, which will benefit not only the citizens of the country directly affected, but also those living in other closely linked countries.