# **I. Introduction**

**The objective of this policy paper**<sup>**1**</sup> **is to identify and propose legal and regulatory reforms to the financial system structure that would enhance efficiency and/or mitigate risks** by:

- Removing unnecessary regulatory barriers or filling in existing gaps in order to let market forces determine the most appropriate financial structure

- Clarifying, completing and ensuring consistency in the prudential framework.

**Given the breadth of this topic, only selected high-level reform proposals are considered** . The financial system structure can be addressed from many different dimensions, and the paper does not aim to cover all of them<sup>2</sup> . Its starting point is the current organizational set-up of the Colombian financial system and not an idealized model. Given tight time constraints and in light of fine-tuning and timing considerations that are beyond the scope of this exercise, an in-depth analysis of each reform proposal has not been attempted; this means that some proposals may require further research in order to provide sufficient details to policymakers for the elaboration of the required regulations. The document does not attempt to cover in detail the historical evolution of the financial structure and its characteristics, or specific modifications to existing laws and regulations. The current supervisory and antitrust framework is also not evaluated in detail, although potential implications stemming from the proposed reforms (and vice versa) will be identified and highlighted.

**An analytical approach is developed to qualitatively assess the benefits of proposed reforms, given the difficulties of a priori quantifying their impact** . The merits of each proposed reform (either legal or regulatory), which have been identified in the literature or through conversations with policy makers and the industry, are evaluated based on an analytical approach developed in this paper. The experience of structures in other countries is used to compare and contrast (where appropriate) the different approaches that have been taken in each area. However, although these reforms generate positive results in terms of the cost-benefit trade-off and impact, their quantification is hampered for several reasons. Firstly, many of the benefits – especially those related to the prudential framework – are indirect and are derived from a more transparent and sound financial system. Secondly, greater market choice implies that much will depend on the voluntary response of market participants, who may decide (for other reasons) not to take advantage of the additional flexibility in some of these measures. Finally, there are many details to be worked out among relevant parties for each reform proposal that would affect the end result, thus making it difficult to a priori estimate its (positive) impact.

> 1 The document draws from recently-completed operational work undertaken as part of the World Bank’s non-lending technical assistance program in Colombia.

> 2 For example, the impact on financial system structure stemming from the tax code and from Central Bank foreign exchange regulations that influence onshore versus offshore bank operations is not considered.

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