COSTA RICA Law and Practice Contributed by: Douglas Soto, Miguel Elizondo-Soto and Osvaldo Madrigal Méndez, Zurcher, Odio & Raven
8. Insolvency, Recovery and Resolution 8.1 Legal and Regulatory Framework A special administrative procedure is estab - lished for financial entities such as banks, called the “Administrative Procedure in Case of Finan - cial Instability Situations”, which is handled by SUGEF and is a pre-emptive procedure imposed when a supervised financial institution exhibits instability as determined by SUGEF. In such cases, SUGEF appoints a comptroller to take control of the financial institution, according to the rules of the Organic Law of the Central Bank of Costa Rica. This is a temporary intervention and cannot exceed a term of one year. Financial Institution Ratings To evaluate the financial stability of supervised entities, SUGEF issues a rating for each finan - cial institution, composed of a quantitative and a qualitative rating. The quantitative classification consists of six elements subject to analysis:
Levels of Financial Instability or Irregularity There are three levels of financial instability or irregularity for supervised entities, correspond - ing to the rating assigned to them based on the analysis and the evaluation model: • Level 1 – slight instability or irregularity that can be overcome by adopting short-term cor - rective actions; • Level 2 – more severe instability or irregularity that can only be overcome by adopting and executing a recovery plan; and • Level 3 – requires intervention in the entity. Level 3 covers the following cases: Level 2 situations of instability that have not complied with the recovery plan; (a) entities involved in fraudulent or illegal operations; (b) entities with suspended or interrupted payments; (c) a refusal to provide information about the financial and operational status of the entity to SUGEF; (d) management of the business in a way that endangers its security and solvency; (e) involvement in money laundering activi - ties; (f) entities that have suffered losses which reduce their equity to an amount that is less than half of their initial equity; and (g) entities that are not complying with the capital adequacy rules. Irregular Situations If an irregular situation is declared, SUGEF must inform the board of directors or management (manager and internal auditor) of the institu - tion about such situation, and will require the submission of an action or recovery plan within
• capital; • assets; • management; • performance evaluation; • liquidity; and • sensitivity to market risks.
The qualitative qualification results from an on- site evaluation carried out by SUGEF. The evalu - ation approach is according to the risk-based supervision approach, with the qualitative part of the assessment being allocated a higher weighting in the overall rating of the bank and the supervisor assigning the final qualitative assessment of the financial entity.
125 CHAMBERS.COM
Powered by FlippingBook