COSTA RICA: REVIEW OF THE FINANCIAL SYSTEM December 2020 1 This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries. 2 REVIEW OF COSTA RICA BY THE COMMITTEE ON FINANCIAL MARKETS This review of the financial system in Costa Rica was prepared by the OECD Committee on Financial Markets (CMF) as part of the process of Costa Rica’s accession to the OECD. The OECD Council decided to open accession discussions with Costa Rica on 9 April 2015. On 8 July 2015, the Council adopted a Roadmap for the Accession of Costa Rica to the OECD Convention [C(2015)93/FINAL] (hereafter “the Roadmap”) setting out the terms, conditions and process for accession. The Accession Roadmap provides that in order to allow the Council to take an informed decision, Costa Rica underwent in-depth reviews by the relevant OECD committees, including the Committee on Financial Markets (CMF), which provided the Council with a formal opinion. The CMF reviewed Costa Rica’s financial system, including its market and regulatory structure, to assess whether it is market-oriented and sufficiently open, efficient and sound, based on high standards of transparency, confidence and integrity. This review presents the results of that assessment and highlights the significant reforms undertaken by Costa Rica to further align its practices with these standards. This report was prepared by the Secretariat to support the examination of Costa Rica’s position, and was finalised on the basis of information available as of July 2020. The Committee on Financial Markets has declassified this report on 27 November 2020. Progress made by Costa Rica since the 2017 Review by the Committee on Financial Markets Areas in which Costa Rica has made progress since its accession review by the Committee on Financial Markets in October 2017: Approved a legal reform to strengthen the independence of the Central Bank by eliminating the voting right of the Minister of Finance in the Board of Directors of the Central Bank and delinking the designation of the President of the Central Bank from the political cycle (Law No. 9670 which entered into force in March 2019). Approved a legal reform to allow banking services by branches of foreign banks, which has entered into force on 5 September (Law No. 9724). Abrogated the Law for Discouraging Foreign Capital Inflows (No. 9227). Reformed the lender of last resort function of the BCCR. Reformed the funding arrangements of the superintendencies by increasing the level of funding provided by supervised entities; 4 Approved a bill of law that widens the supervisory perimeter of SUGEF and of the other superintendencies, to include consolidated supervision (No 9768). Reformed the legal protection framework for supervisors, ensuring that legal assistance is granted to supervisors and regulators by their institutions, and protecting former supervisors and regulators for activities undertaken while they held the position. Passed the necessary amendments to become a full signatory to the Multilateral Memorandum of Understanding (MMoU) of the International Organisation of Securities Commissions (IOSCO) in a law that reforms the Law Regulating the Securities Market that was approved by the Legislative Assembly in September 2019. Has taken action to strengthen corporate governance in state-owned banks, inter alia by implementing the Corporate Governance Regulation (Regulation No. 16-16) in all financial entities supervised by the financial superintendencies; approving Regulation on Suitability of Members of the Management Body and Senior Management of Financial Entities (Regulation No. 22-18) which establishes fitness and propriety requirements for senior management and boards of directors of all entities supervised by SUGEF; implementing the Action Plan on Corporate Governance for state-owned enterprises (SOEs) to address the recommendations of the OECD Working Party on State Ownership and Privatisation Practices (WPSOPP).1 Presented to the Legislative Assembly a draft bill of law on financial consumer protection to develop a framework for financial consumer protection, assisted by the World Bank; created an inter-institutional task force that comprises technical representatives with expertise on financial consumer protection from the Ministry of Economy, Industry and Trade, specifically the Office for Consumer Protection; the financial superintendencies, CONASSIF and the Central Bank that will assessing the gaps in the legal framework and reforms necessary for Costa Rica to meet international standards and best practices in line with the G20/OECD High Level Principles on Financial Consumer Protection; prepared an Executive Decree that creates the National System for Consumer Protection, including a committee to discuss and coordinate the implementation of policy regarding financial consumer protection and education. Approved a bill of law that establishes a deposit guarantee fund and a bank resolution regime (Law 9816, voted on 6 February 2020 and which came into force on 12 February 2020). 1 OECD (2020), Corporate Governance in Costa Rica (available at http://www.oecd.org/publications/corporate- governance-in-costa-rica-b313ec37-en.htm). COSTA RICA: REVIEW OF THE FINANCIAL SYSTEM © OECD 2020 5 TABLE OF CONTENTS I. Financial system: structure and operations 8 A. Financial institutions and financial groups 8 Dollarisation of the financial system ............................................................................ 10 B. State-owned financial institutions and banks created by law 14 Competition in the banking sector and foreign participation ........................................ 20 C. Savings and credit cooperatives and mutuals 21 D. Financial groups 21 II. Financial infrastructure 24 A. Central Bank and monetary policy framework 24 Inflation targeting regime ............................................................................................ 25 Credit operations ........................................................................................................ 26 Public debt management ............................................................................................ 28 B. Payment system 29 III. Securities markets: structure and operation 31 A. Recent developments 31 B. Capital market intermediaries 32 Derivatives ................................................................................................................. 37 C. Custody, clearing and settlement 37 IV. Financial supervision and regulation 38 A. Institutional arrangement for supervision and regulation of financial market and intermediaries 38 Central Bank of Costa Rica (BCCR) ........................................................................... 39 Independence of the Central Bank and the conduct of monetary policy ...................... 40 National Council for Supervision of the Financial System (CONASSIF) and the Superintendencies ...................................................................................................... 41 General Superintendency of Financial Institutions (SUGEF) ....................................... 43 General Superintendency of Securities (SUGEVAL)................................................... 44 Regulatory process..................................................................................................... 45 Legal protection of supervisors ................................................................................... 45 Funding arrangements of supervision ......................................................................... 46 B. Supervision of financial institutions 47 Capital adequacy regime ............................................................................................ 48 Transition to risk-based supervision ........................................................................... 49 Financial accounting and reporting ............................................................................. 50 Corporate governance ................................................................................................ 52 Large exposures and related party transactions ......................................................... 54 Consolidated supervision of banking groups and cross-border supervision ................ 55 C. Financial stability oversight and macroprudential surveillance 57 Prudential and macroprudential policy to address the high dollarisation of the financial system ........................................................................................................................ 59 Macroprudential policy ................................................................................................ 60 COSTA RICA: REVIEW OF THE FINANCIAL SYSTEM © OECD 2020 6 Basel III implementation ............................................................................................. 64 Deposit insurance scheme and bank resolution regime .............................................. 65 Early intervention and bank resolution framework ...................................................... 66 BCCR as lender of last resort ..................................................................................... 70 Taxation ..................................................................................................................... 70 D. Financial consumer protection and education 72 Credit cards ...............................................................................................................