Towards A More Resilient Financial Sector

Panama is a small and fully dollarized economy that positions itself as an international banking center of Latin America. The resilience of its banks (which hold assets double the size of its GDP), is critical for domestic macroeconomic stability. Conservative banking and improvements in supervision and regulation have helped Panamanian banks to remain sound. However, increasing complexity and concentration in Panama’s banking system call for strengthening the regulatory framework to further safeguard financial stability. This paper suggests policy options to make the financial sector more resilient. First, it provides an overview of the financial system and recent trends, summarizes financial stability oversight and the prudential framework, analyzes the implementation of Basel III standards, and proposes steps to improve financial oversight and update the macroprudential toolkit. Second, it advocates the introduction of an effective financial safety net and upgrading the bank resolution framework. Third, it advises advancing regulatory framework reforms and coordination, and creating a regulatory sandbox for the growing fintech industry.