New free trade agreement provides capital and regulatory controls that help protect Colombian consumers while increasing local competition among banks in Colombia.

A new trade agreement between the United States and Colombia, the U.S.-Colombia Trade Promotion Agreement (also known as the Free Trade Agreement (FTA)), provides new opportunities in Colombia for U.S. banks. The FTA, which went into effect on May 15, requires Colombia to permit banks established in the United States to establish branches in Colombia within four years. Importantly, the FTA provides that Colombia generally may not impose limitations on such branches with respect to the following: (i) the number of branches established; (ii) the total value of financial service[1] transactions or assets; (iii) the total number of financial service operations or the total quantity of financial services output; or (iv) the total number of natural persons the bank may employ (a) who are employed in a particular financial service sector or (b) who are necessary for, and directly related to, the supply of a specific financial service. In addition, Colombia has agreed not to require the local branches to be organized as specific types of legal organizations or to require the local branches to be organized through joint ventures. Thus, U.S. banks should be able to establish wholly owned branches in Colombia in the legal form that best meets their needs.

Capital Requirements

There are nevertheless some barriers to entering the Colombian market. For example, Colombia may impose capital requirements on local bank branches, require that the capital assigned to such branches be brought into Colombia and converted into local currency, and limit a branch's operations by the amount of capital maintained by the branch in Colombia. By imposing capital requirements, Colombia hopes to guarantee itself and its consumers some protection from the failure of a U.S. bank's Colombian operations and perhaps from the failure of the U.S. parent bank. The capital requirements also provide certain protections that may help Colombian creditors to avoid standing in line with other creditors in a U.S. bankruptcy proceeding.

Additional Bank Branch Requirements

In the FTA, Colombia committed to promoting regulatory transparency. However, Colombia retained the power to choose how to regulate U.S. bank branches established in Colombia, including the regulation, to a large extent, of the branches' characteristics, structure, relationship to their parent company, technical reserves, and obligations regarding risk patrimony and investments. The FTA specifically provides that Colombia may establish the following requirements, among others:

1. Require branches to comply with the same obligations currently required or that may be required in the future of banks established under Colombian law.
2. Ensure that mechanisms exist to ensure the availability to Colombian authorities of information pertaining to a particular U.S. bank from the bank's financial supervisory or regulatory authorities before permitting the establishment of a branch by that bank.
3. Require a bank that seeks to establish a branch to demonstrate that it fulfills the regulatory and prudential supervision requirements in its country of origin, in accordance with international practices.
4. Require that the acts undertaken and contracts entered into in Colombia by branches established in Colombia be subject to Colombian law and authorities.
5. Issue regulations for such branches, which may relate to the following aspects of their operation, among others: the licensing regime; accounting; the responsibility of administrators; the authorized operations, including operations with the central bank; and responsibility vis-à-vis local creditors.
6. Require that any subsequent capitalization have the same treatment as the branch's initial capital.
7. Require that, for the purposes of transactions between a branch established in Colombia and its parent company or other related companies, each one of these entities be considered as an independent institution and that, without prejudice to this requirement, a U.S. financial institution be liable for the obligations contracted by its branch in Colombia.
8. Require the owners and representatives of branches established in Colombia to comply with the solvency and moral integrity requirements established by law in Colombia pertaining to the shareholders of financial entities organized in Colombia.
9. Allow branches established in Colombia to make transfers of their net profits, provided that no deficiencies arise in the solvency margin and other capital requirements contemplated in local regulations.

These bank branch requirements will most likely be clarified and spelled out in greater detail over the next few years, but the FTA provides that such requirements generally may not discriminate against U.S. banks. The FTA requires Colombia to treat U.S. banks and investors in the branches in the same manner it treats Colombian institutions and investors in similar circumstances with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of financial institutions and investments in financial institutions in Colombia. Moreover, the FTA contains a most-favored-nation clause whereby any liberalized regimes that Colombia provides to investors and banks of other nations will be afforded to U.S. banks and their investors.

Implications

The FTA provides for flexibility and regulatory transparency with respect to establishing and maintaining bank branches in Colombia, which should make Colombia more attractive to U.S. banks. The FTA does not, however, create similar opportunities for U.S. banks that wish to market their services from the U.S. without establishing a local branch in Colombia. Although the FTA explicitly allows Colombians to purchase financial services from U.S. banks, it also states that Colombia is not required to permit banks in the U.S. to engage in "solicitation" or to be "doing business" in Colombia, as such terms are defined by Colombian authorities. With respect to U.S. banks' cross-border and local bank operations in Colombia, Colombian regulators appear to have retained significant controls as well as consumer protections while increasing local competition in the banking sector, which may benefit Colombian consumers as well as U.S. banks.

[1]. Financial services include, among others, acceptance of deposits; lending (including consumer and mortgage lending); trading for own account or for the accounts of others; participation in issues of all kinds of securities, guarantees and commitments; financial leasing; money broking; asset management; investment advice; and settlement and clearing services for securities and other financial assets. To the extent Colombian banks are subject to specific restrictions with respect to the provision of these financial services, U.S. bank branches may be subject to the same limitations. The FTA also includes some specific limitations on the provision of financial services, e.g., to pension funds and collective investment schemes.