The Executive Board of the International Monetary Fund (IMF) concluded with Ecuador the Financial Sector Assessment Program (FSAP) and published the corresponding Financial Sector Stability Assessment (FSSA) report.

The report, which was concluded on August 29, talks about the structure of the financial system, which is mostly made up of banks and cooperatives. It also indicates that “while dollarization represents an important anchor for the Ecuadorian economy, systemic liquidity risks are high due to the limited capacity of the central bank to provide liquidity.”

That is, since there is a dollarized economy, the Central Bank is forbidden to issue dollars, so it is not an actor that could fulfill that role, as a lender of last resort.

He also indicated that the financial sector is generally resistant to adverse macro-financial shocks. However, he noted that some institutions “exhibit significant vulnerability in terms of solvency and liquidity.” He also indicated that to preserve confidence, it is crucial to “strengthen capitalization, quickly recognize losses from bad loans and resolve unsustainable institutions.”

The report is based on the work of joint IMF and World Bank missions that visited Ecuador between November and December 2022 and between April and May 2023.

The report is critical of supervision, i.e. of control structures such as the Bank Administration. Therefore, it is indicated that the EESF’s conclusion is that the institutional framework for the supervision of the financial sector is complex, lacks coordination and is susceptible to political intervention. “Reforms are needed to strengthen the independence of the supervisory function, prioritize safety and health, separate prudential supervision from other functions and significantly strengthen the supervisory approach,” the multilateral said.

It also ensures that the new progress needed in the macroprudential framework must be achieved by developing greater analytical capacities for the entire financial sector, improving information exchange and coordination, and clearly defining the functions of multiple institutions.

Similarly, the legal framework for bank resolution (restructuring) should be strengthened by establishing clearer responsibilities for participating entities, expanding the set of resolution instruments and ensuring that resolution decisions are not overturned, it said.

Furthermore, the IMF report states that deposit insurers’ access to information and back-up funding must be improved, and existing mechanisms must be examined to make the provision of emergency liquidity assistance more flexible.

It is also necessary to urgently strengthen state management and internal controls of public banks, and interest rate limits should migrate “according to the usurious rate”. Usury rate is a technical term that indicates that if there are ceilings on rates, they must be high to ensure financial inclusion.