1. Act 31 of 1992 provides the general framework of reference on the functions conferred to Banco de la República as the Central Bank, and to its Board of Directors (BDBR) as credit authority.
The Constitutional Court1 has ruled on several occasions about the scope of credit regulation established by the Political Constitution and the law, consistently recognizing the status of the BDBR as regulatory authority of credit and its autonomy to carry out its functions. These functions must be performed in accordance with the law issued by Congress, which cannot ignore or undermine the Board’s autonomy.
2. Within the framework of instruments assigned by the legislator, the Board of Directors can execute macro-prudential measures, whose implementation is exceptional and temporary, whenever there is evidence of market failures and financial risks, such as asset overpricing, in order to maintain an adequate operation of the payment system, as well as to support financial stability.
The administrative intervention of interest rates is considered herein an executable measure that includes establishing maximum limits on interests of asset-and-liability operations by credit institutions, preventing these limits from inducing real negative rates. The Board has exercised this power rarely and for very limited periods, exclusively on asset-side operations2.
Additionally, the Board of Directors may establish controls on credit operations growth and, in general, controls on the growth of asset-side operations of the credit institutions3.
3. Another instrument that the Board of Directors has at its disposal is setting reserve requirements to financial institutions that receive deposits from the public. This measure seeks to maintain a liquidity reserve that allows intermediaries to solve transitory problems of this nature. Considering the role of financial institutions in the transformation of maturities (short-term liabilities to longer-term assets), an unexpected outflow of resources may result not only in cash-flow difficulties, but also in a reduction in the value of its assets. In these cases, the reserve requirements help in mitigating those risks.
This instrument can also be a complementary monetary policy tool, which has been rarely used in Colombia through the imposition of marginal reserves. These instruments seek to control monetary and credit excesses, as well as to strengthen the transmission channels of changes in the benchmark interest rate.
4. On the other hand, among other credit functions, the Board of Directors is empowered to determine the financial conditions to which public entities must adhere in order to purchase or place bonds so that these operations are performed under market conditions. Additionally, the law has assigned powers to the BDBR regarding the funding of the agricultural sector. To this effect, it is authorized to set the amount of mandatory investments in Agricultural Development Securities (TDA in Spanish) that financial entities must subscribe, determine the characteristics of such bonds (terms and interest rates), and decide on the substitute placements of mandatory investments. The BDBR is also empowered to draw general limits on interest rates for agricultural loans.
5. Since 2000, within the framework of the new housing funding system created by Act 546 of 1999 and strictly complying with the criteria and procedures established by the Constitutional Court in Judgment C-955 of 2000, the BDBR sets the value of the UVR (real value unit) in pesos, based on inflation and on the limits to the maximum interest rates of the credits intended for the financing of housing in UVR and in pesos.
6. For its decision-making processes as monetary and credit authority, in general, Banco de la República performs a follow-up on the financial system as a whole and on the financial markets (debt, foreign exchange, money market, among others) with the purpose of identifying situations that may compromise macroeconomic and financial stability or fulfillment of the inflation target. This macro-prudential analysis allows to identify trends and risks of the system so that the Board of Directors may take action in a timely manner to achieve its policy objectives.
3 This control was implemented in March 1994, when a limit on the growth in the total amount of asset-side operations was imposed (including portfolio, acceptances, and guarantees). This measure was abolished in August 1994.