Programmatic Financial Sector Adjustment Loan I

closed

Closed

The Financial Sector Adjustment Loan Project seeks to strengthen the financial condition of the private, and public banking sector, in order to reduce vulnerability to future shocks, and negative impacts on economic growth. The project will provide financial support to the Government of Paraguay for the formulation, and approval of key financial sector laws and regulations, including the implementation of the recently approved deposit insurance and banking resolution law, new loan loss provisioning regulations, revision of the general banking law, approval of a new anti-money laundering law, as well as approval of a law to restructure the state owned banks. The rationalization of the public banking component, is primarily geared towards improving access to credit by the micro, and small rural, and agricultural businesses, by inter alia, limiting first tier public lending to these sectors, and excluding large corporate borrowers from preferential lending. For the banking system, the implementation of bank resolution and deposit insurance schemes will, as a priority, protect the smallest depositors with the least economic assets, and assure prompt repayment. Main risks pertain to political, macroeconomic, governance and institutional capacity. The main risk is that Congress will not approve some of the key legislation supported by this operation, in particular, the restructuring of the state banks, which would undermine the adjustment program. Stricter capital and provisioning regulations may lead to further contraction in commercial bank credit available to the private sector, especially if the macroeconomic environment is less conducive to improvements in banks' financial condition. A public information campaign and consultation with the banking industry would encourage participation in the reforms, as well as a gradual phasing in of some reforms, such as the increase in base capital, and loan loss provisioning requirements. Institutional capacity constraints are being mitigated with the support of an accompanying technical assistance loan. Governance risks are being addressed through the implementation of audits of state institutions, involved in the reforms, the continuation of the Government's public transparency campaign, and the implementation of the new anti-money laundering legislation, to prevent the flow of illicit funds, under more effective institutional arrangements.

FY17 - Financial Sector,FY17 - Public Administration

World Bank Group

Project

Raw Materials, Commercial, Government