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Crisis Simulation Exercise Project in Central America

Project Development Objective ( PDO )

This project aims to assist the financial sector regulators in the Central American Council of Superintendents of Banks, Insurance and Other Financial Institutions (CCSBSO) in enhancing crisis preparedness and crisis management capabilities towards greater financial sector stability.

Background

Financial sectors in Central America, Panama, and Dominican Republic (CAPDR) are dominated by banks which provide more than 90% of credit to private sector. Since the early 2000s, there has been a process of financial integration encouraged by economic ties, profit opportunities, and economies of scale. Consequently, financial conglomerates with cross-border operations are present in CAPDR. Financial integration has also promoted regulatory and supervisory cooperation in response to the increasing cross-border linkages. The CCSBSO is a non-profit association of banking and financial supervisors of Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, Panamá, Dominican Republic and Colombia. The Council is composed by the Superintendents of Banks, Insurance and Other Financial Institutions of all member countries. Since its origins in 1976, it has promoted the cooperation and exchange of information among its members.

A financial crisis simulation exercise was requested by the CCSBSO, to help its members to envision legislation and procedures needed in order to enhance cooperation between them as well as with other national financial authorities of CAPDR. Such cooperation could ultimately help to improve their response to possible contagion and lower financial risk levels in CAPDR. In addition, it will ensure that current heads of bank supervisory agencies are aware of their most probable reactions to a cross-border financial crisis and be familiar with contingency plans and tools that may be in place in jurisdictions with similar conditions to CAPDR.

Activities / Output

The project will support the following technical activities:
1. Conducting a crisis simulation exercise including high level authorities and staff focused on experiencing stress event(s) and action/reactions.
2. Drafting a report for the authorities, summarizing the results of the simulation
3. Developing recommendations and an implementation plan
4. Conducting a workshop to discuss the report/findings of the CSE

Expected Outcomes

The main expected outcomes of the project are as follows:
1. Increased capacity of the Authorities to use their existing policies and procedures for dealing with emerging cross border distress
2. Identification of gaps in existing arrangements and an action plan developed to address the gaps
3. Improved capacity of the Council to utilize simulation exercises as a routine supervisory practice in the future.
4. Enhanced skills of staff of the Superintendencies and Central Banks in preparing for and handling systemic financial crisis by improving the authorities’ ability to undertake crisis detection, mitigation and management;
5. Enhanced coordination among and collective preparedness of the authorities to respond to a financial crisis.