GOVERNANCE ASPECTS OF THE BANCO DE GUATEMALA UNDER ITS NEW ORGANIC LAW
FRAMEWORK UNDER THE NEW CENTRAL BANK´S LAW
The new Organic Law of the Banco de Guatemala (the central bank of
Guatemala) was approved by Congress on 23 April 2002,
and came into force on 1 June 2002. Among the key features of the new central bank legislation, it is
worth mentioning that it:
price stability the main policy objective of the central bank;
the president of the bank a four-year term that does not coincide with
the political cycle and sets limits on the causes for dismissal of the
the central government to cover all past and future losses of the central
lender-of-last-resort facilities to short-term credit to banks with liquidity
problems; these credits should not amount to more than 50 percent of
the bank’s net worth;
central bank role as implicit guarantor of clearing house settlements;
requires reserves to serve as collateral for clearing; states that failure
to meet these payments triggers liquidation;
an external audit of Banco de Guatemala’s financial statements; and,
an Executive Committee, separate from the board of directors, to implement
with the central bank legislation, a new Banking law was enacted, establishing
a framework for consolidated supervision of financial conglomerates; a new
law of financial supervision was also enacted, clearly defining the Superintendecy
of Banks as the supervisory agency of the central bank, banks and other financial
institutions, including conglomerates. The Banco de Guatemala and the Superintendency
of Banks, although independent agencies, are both under the aegis of the same
Board of Directors.
Policy Formulation and Implementation
new central bank law clearly establishes as a primary objective the maintenance
of price stability; other responsibilities and functions of the central bank
are subject to the prevalence of the primary objective.
specific target (a given rate of inflation) is defined by the Board of Directors
which, according to the new law, must formulate monetary policy for a twelve-month
period. It is understood that monetary policy formulation refers to the process
of setting the main quantitative goals, among which there is not only the
inflation target but also other intermediate goals or estimates (money issue,
domestic credit, international reserves), as well as of establishing the main
strategic guidelines (including the definition of the exchange rate regime)
to be followed by the central bank for monetary and exchange rate policy implementation.
The approval of monetary policy by the Board must be based on its discussion
of the proposals made by the Bank’s Governor and staff
monetary policy formulation, the Board is in charge of determining the central
bank’s budget and strategy, as well as of ensuring the efficient use of the
bank’s resources, reviewing the bank’s performance regarding its objectives
and strategy, and monitoring its management.
The composition of the Board of Directors is defined in
the Constitution of the Republic
. Although the structure of the Board, comprising representatives of
the government and the corporate private sector, brings useful outside expertise
and fresh views to the process of monetary policy discussion and approval,
at the same time it may give rise to conflicts of interest and may lessen
the operational autonomy of the central bank, thus affecting the timeliness
of its decisions.
in order to give more effectiveness to the operational autonomy of the central
bank, the new law entrusts the implementation of monetary policy to a newly
created Executive Committee. Although the boundaries within which the Executive
Committee can act are delimited by the monetary policy framework approved
by the Board of Directors, the Committee is supposed to have, in practice,
a great deal of instrument independence. The law establishes that the Committee
is composed by the Governor, the Vice-Governor, and by other members appointed
by the Board; currently these other members are central bank staff responsible
for monetary analysis and for monetary operations
. The by-law of the Committee, issued by the Board of Directors, says
that the Committee must meet at least once a week and that it must report
its activities to the Board (which must meet at least once a month), including
the submission of its minutes.
president of the Executive Committee is also the Governor of the central bank
and the chairman of the Board of Directors. Thus, the new central bank law
also enhances the central bank’s operational autonomy by giving the governor
of the bank (who is appointed by the President of the Republic) a four-year
term that does not coincide with the political cycle and also by establishing
that the grounds for his dismissal are strictly legal in nature and clearly
defined, avoiding any political interference.
The Central Bank’s Finances
Guatemalan Constitution explicitly prohibits central bank credit to the government.
Nevertheless, for fifteen years before the enactment of the new central bank
law, Banco de Guatemala has incurred in financial losses resulting from its
open market and exchange rate operations. The new law clearly states the
rules regarding the financial relations between the central bank and the government,
including the absorption by the latter of past and future central bank losses/profits
and its obligation to maintain the central bank capital.
new law requires the central bank to keep proper accounts, compliant of international
standards. It also requires an external audit of the bank’s financial statements.
The central bank law and the Monetary law entrust Banco de Guatemala with
the administration of its international reserves.
Credibility, Transparency and Accountability
effectiveness that Banco de Guatemala may have in achieving its objective
of price stability depends very much on the degree of credibility that the
society assigns to its actions. Enhancing that credibility, in time, depends
on how transparent and accountable the bank is perceived to be. The new central
bank law states that it must be held accountable and its governor has to appear
twice a year before Congress to report on the conduct of monetary policy and
the achievement of policy objectives.
bank must also publish every six months a monetary policy report explaining
the actions taken to achieve its objectives. A summarized version of the
bank’s financial statements must be published monthly and the externally audited
statements must be published each year under international accounting standards.
The central bank must also publish and disseminate an annual study of the
Guatemalan economy, its annual operations report and accounts, and the monetary
policy and the monetary program approved by the Board of Directors. The minutes
of the Board involving monetary policy formulation must be published too.
Overseeing the Payment System Health
the new central bank law the Banco de Guatemala is obligated to oversee the
payment system health and vitality. Until now, efforts have concentrated
on improving the clearing house functioning. The new law eliminates the central
bank role as implicit guarantor of settlements, requires that participant
banks´ reserves serve as collateral for clearing and, together with the banking
law, establishes that failure to meet clearing obligations triggers bank liquidation.
responsibility for the overall stability of the financial system is shared
by the Superintendency of Banks, the Banco de Guatemala and their Board of
Directors. The Superintendency has the responsibility for supervising individual
banks and other financial intermediaries that, together with a bank, are part
of a conglomerate. Thus, the central bank concentrates on analyzing systemic
financial risk through continuous monitoring of the payment system. For that
purpose, Banco de Guatemala is in the initial steps of formally organizing
its areas of risk assessment and risk administration. With regards to financial
risk, a newly crated Risk Analysis Unit is in charge of market risk evaluation
concerning the bank’s international reserves, as well as credit risk assessment
concerning the banking system. With regards to operational risk, it is managed
by the Risk Audit Unit at the Internal Audit Office, which activities are
a standard central bank responsibility, the Banco de Guatemala is the lender
of last resort for the banks operating in Guatemala
. The new central bank law limits the lender-of-last-resort facilities
to short-term credit to banks that prove to have only liquidity problems,
as to limit the risk of such problems spreading to other parts of the banking
system; therefore these central bank credits are short-termed, with an interest
rate penalty, and should not amount to more than 50 percent of the recipient
bank’s net worth.
passage of the new central bank law has largely addressed many of the policy
and governance issues related to the Banco de Guatemala’s monetary and administrative
framework. However, many significant tasks, details and vulnerabilities remain
to be addressed. Among these issues, the following deserve priority measures.
Inflation Targeting: The
central bank authorities are considering the adoption of an inflation-targeting
framework, and plan to devote important resources (as well as to request technical
assistance from foreign institutions) to fully assess the implications of
an inflation targeting framework for Guatemala. It has to be noted that the
new legal framework sets price stability as the primary objective for the
central bank and grants it instrument independence; therefore, an inflation
targeting framework might provide the right environment to achieve log run
price stability, though the central bank may need several years to put it
Risk analysis and the payment system:
Although the Banco de Guatemala is obligated, by the new law, to oversee the
payment system, it must move from the sidelines (where traditionally it has
been acting) into the game to fulfill this obligation, and in advance, to
prevent rather than react to a payment system crisis. The challenges in this
area include establishing and/or strengthening risk management and payment
system units (or task forces); establishing a real-time gross-settlements
system; and promulgating new regulations for the payment system.
Executive Committee Functioning:
The Committee is a new institution whose strength and credibility are crucial
for the central bank’s autonomy and for the effectiveness of monetary policy.
The Committee has to gain his place in the governance structure of the central
bank, which implies that its technical capacity and muscle must be enhanced.
Vice-governor of the Banco de Guatemala. This paper
was prepared for the seminar on Central Bank Corporate Governance at the
Centre for Central Banking Studies, Bank of England, October 9 to 11, 2002.
The proposals are prepared mainly the Department of
The Board is composed of the Governor and the Vice-Governor
of the Banco de Guatemala and three ministers (Finance, Economy, and Agriculture),
all appointed by the President of the Republic, two members (a titular and
an alternate) appointed by the banks, two members (titular and alternate)
appointed by the chambers of production of Guatemala, two members (titular
and alternate) appointed by the (autonomous) State University, and two members
(titular and alternate) appointed by the Congress of the Republic. The
Vice-Governor and all the alternates have voice, but have no vote.
Currently these other members are the General Manager,
the Economics Manager, the Financial Manager, the Director of the Economic
Studies Department and the Director of the Open Market Operations Department.
There are thirty-two private banks and one state-owned