Camilo Eduardo Sánchez-Quintoa Colombia’s post-pandemic recovery in 2021–2022 was marked by rapid consumer credit growth, followed by deteriorating credit quality indicators amid tightening financial conditions. In January 2023, the Superintendence of Finance of Colombia (SFC) introduced higher provisioning requirements for long-term consumer loans to strengthen financial resilience and to help moderate the rapid expansion of consumer credit observed prior to the reform. From the perspective of credit institutions (CIs), increased provisions imply higher expenses and potential profitability pressures, which could lead to adjustments in lending strategies. This study evaluates the effect of that regulatory policy on consumer credit dynamics and CI soundness. We find that the measure increased CIs’ coverage ratios, indicating progress toward the policy´s resilience objective, but it did not significantly affect overall credit supply conditions for longer-maturity loans in terms of loan amounts, interest rates, and collateral requirements. However, these average effects mask notable heterogeneity across institutions. Smaller lenders tightened credit supply for loans exceeding 108 months by reducing loan amounts and lowering loan-to-value ratios, while larger lenders absorbed the higher provisioning costs without altering credit terms.
The most recent
Approach
This document evaluates the impact of new provisioning requirements applicable to long-term consumer loan portfolios on the coverage indicators of credit institutions and on the supply conditions of newly originated loans, implemented in a context of robust credit growth. In accordance with External Circular No. 026 of November 29, 2022, issued by the Financial Superintendency of Colombia, the calculation of loan provisions was modified as of January 2023 in order to internalize the risk associated with long-term leverage in new disbursements.
Contribution
The paper makes three main contributions to the literature. First, using granular consumer credit data, it assesses the effects of a macroprudential measure on the supply conditions of new loans at the regulatory thresholds of 72 and 108 months, considering loan amounts, interest rates, and collateral requirements. Second, it examines heterogeneity in responses at the institutional level by analyzing how credit institutions of different sizes adjusted to higher provisioning requirements. Third, the analysis employs advanced matching methodologies that mitigate issues of imbalance, inefficiency, model dependence, and bias. In this way, the document provides new evidence on the interaction between macroprudential regulation, credit market behavior, and financial stability in emerging economies.
The analysis reveals significant heterogeneity across institutions of different sizes: smaller institutions significantly restricted their supply of loans with maturities longer than 108 months, reducing both loan amounts and the loan-to-value (LTV) ratio. In contrast, larger institutions absorbed the regulatory costs without modifying their credit supply conditions.
Results
The study documents three main findings. First, as expected, the regulation increased the level of loan provisions and improved the coverage indicators of credit institutions. Second, the measure did not significantly affect the aggregate supply conditions of new loans in terms of amounts, interest rates, and collateral requirements. This result suggests that maturity-targeted provisioning requirements have more limited effects than broad-based measures, such as the adoption of the expected loss approach in place since 2007. It also indicates that the higher intermediation costs associated with the regulatory measure were not immediately passed on to debtors. Third, the analysis reveals significant heterogeneity across institutions of different sizes: although the average effects are not statistically different from zero, smaller institutions significantly restricted their supply of loans with maturities longer than 108 months in response to the regulatory measure, reducing both loan amounts and the loan-to-value (LTV) ratio. In contrast, larger institutions were found to have absorbed the regulatory costs without changing their credit supply conditions.