Financial Services in the Colombia–United States Free Trade Agreement
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period of economic crisis, and the economy strongly contracted in 1999 (–4.2 percent of GDP). During the same year, the crawling-band regime was abandoned, and a floating exchange rate was adopted. Also in 2000, the central bank formally adopted a strategy targeting inflation. The increase in interest rates, the recession, and the devaluation had negative repercussions on the stability of the financial sector and resulted in a significant deterioration in its main indicators. Flaws in the regulation and supervision of the financial sector also became evident, especially with regard to risk assessment and risk management. In particular, although the requirements in terms of solvency seemed strict and adequate, once the crisis began it was clear that reserve levels were very low. The housing financing scheme (the UPAC system) also revealed regulatory flaws of the financial sector. The capitalization of interest, the inadequate assessment of collateral, and the level of household indebtedness made the UPAC system unsustainable. Finally, the poor management of public financial entities revealed the deficiencies of the system overseeing them, and substantial government expenditure was required to ensure their reorganization. The crisis forced the adoption of changes in the financial system. In 1999, a new strategy to finance housing was adopted, and the old savings and loan associations were converted into banks. In addition, regulation and supervision were strengthened, primarily to ensure better evaluation and risk management by credit institutions. At the same time, minimum capital requirements were adjusted. However, the model of specialized financial services provision was not significantly affected, except that the specialized housing bank vehicle was eliminated (de la Cruz and Stephanou 2006). As of 2005, two institutions in charge of regulation and supervision existed: the Banking Superintendency (Superintendencia Bancaria) oversaw deposit-taking institutions, pension funds, insurance companies, and fiduciaries, and the Securities Superintendency (Superintendencia de Valores) was in charge of mutual funds, stock market traders, and all activities related to the issuance of equity and bonds in the capital market. The different levels of regulation and supervision exercised by the two superintendencies generated regulatory arbitrage problems. To remedy this, the two institutions were, at the beginning of 2006, merged into the Financial Superintendency (Superintendencia Financiera). Some of the measures taken as a result of the crisis have been associated with financial repression. Certainly the forced investment, which was created to finance part of the mortgage crisis, and the introduction of