The constitutional foundation
The 1972 Constitution of Panama, with amendments through 2004, is the legal foundation of Panama’s monetary arrangement. The constitution itself states the relevant provisions explicitly. Article 261 provides that the power of issuing money belongs to the State, which may transfer it to official banks of issue in the manner determined by law. Article 262 establishes that there shall not be in the Republic paper money of legal tender. Article 263 provides that there shall be created and regulated by law official or semi-official banks which function as Autonomous Entities supervised by the State [1]. Article 159(8) gives the Legislative Assembly the function to determine the standard, weight value, form, type, and denomination of the national currency [1].
The Articles’ combined effect is unusual among modern monetary systems. The State has the constitutional power to issue money, but cannot create paper money of legal tender. The State can transfer that power to official banks of issue, but no such bank has ever been created in the form that would constitute a central bank. The result is that the State exercises its monetary authority through the Superintendencia de Bancos (banking regulator) and through the Banco Nacional de Panamá (state-owned commercial bank), without creating a central bank.
The balboa and the dollar
The Panamanian balboa was introduced in 1904 following Panama’s independence from Colombia, replacing the Colombian peso. Wikipedia’s entry on the balboa records that the balboa replaced the Colombian peso in 1904 following the country’s independence, and that it has been tied to the United States dollar (which is also legal tender in Panama) at an exchange rate of 1:1 since its introduction and has always circulated alongside dollars; Panama has never had an official central bank [3]. The balboa has been pegged 1:1 to the U.S. dollar continuously since 1904, and Panama has never had an official central bank. The balboa circulates only as coins; the U.S. dollar circulates as the paper currency of legal tender.
The dollarization was a constitutional decision that emerged from Panama’s 1903 independence and the 1904 institutional establishment of the new republic. Wikipedia’s entry on dollarization records that Panama adopted the US dollar as legal tender after independence as the result of a constitutional ruling; that the substitution took place in 1904; that Panama is one of the longest-standing cases of currency substitution; and that the arrangement is classified as de jure official currency substitution [4]. The dollarization was not the result of a single legislative act but of the constitutional arrangement that the new republic inherited from the 1903 treaties with the United States and the practical monetary arrangements that followed.
The Banco Nacional and the Caja de Ahorros
The Banco Nacional de Panamá (BNP) is the principal state-owned commercial bank and the institution that performs some of the non-monetary functions that a central bank would typically perform in other countries. The BNP’s own corporate history records that the bank opened its doors on October 12, 1904 with an initial capital of 500 thousand pesos and a reduced staff; that its first directors, advisors and clients were some of the most respected and prestigious heroes of independence; and that beyond its initial mortgage operations, the bank made discounts and received deposits from farmers, ranchers and industrialists [6]. The bank’s initial capitalization was modest but the institution quickly became a major participant in the country’s commercial banking sector.
The Superintendencia de Bancos de Panamá’s Historical Review documents the early institutional development of Panamanian banking. It records that banking activity in Panama dates back to the beginning of the Republic with the establishment of two important banks in 1904: the International Bank Corporation (which changed its name to First National City Bank of New York and is today Citibank, part of Citigroup), and Banco Nacional de Panama. It also records that in 1934 the Caja de Ahorros was established, and that in 1970 the first Banking Law was approved [5].
The Caja de Ahorros (Savings Bank of Panama) is the second state-owned bank and serves primarily as a savings institution for retail depositors. Wikipedia’s entry on banking in Panama records that the two state-owned banks are the National Bank of Panama (BNP) and the Caja de Ahorros de Panama (Savings Bank of Panama); that as of January 2009 BNP held about US$5 billion in deposits and the Savings Bank held about US$1 billion; and that the average capital adequacy ratio in 2012 was 15.6 percent, nearly double the legal minimum requirement [2]. Together the two state-owned banks hold a meaningful share of the country’s bank deposits, but the bulk of the banking sector is privately held.
The 1970 Banking Law and the international banking sector
The 1970 Banking Law was a landmark piece of banking regulation in Panama’s modern history. According to Wikipedia’s entry on banking in Panama, the 1970 law established a very liberal and open banking system, without any government agency of consolidated banking supervision, and confirmed that no taxes could be imposed on interest or transactions generated in the financial system. Banks grew from 23 in 1970 to 125 in 1983 [2]. The 1970 law created the framework that made Panama’s banking sector into a large Latin American financial center and that produced the international banking center that operates today.
The 1970 law’s defining features were its openness to foreign banks, its tax neutrality for financial transactions, and its minimal regulatory burden. The system’s vulnerabilities became apparent in the 1980s with the Noriega-era sanctions and the post-1989 reform. Wikipedia’s entry on banking in Panama records that since 2010 US citizens opening Panamanian accounts have been subject to FATCA, and that in April 2011 Panama entered into a treaty with the United States on the exchange of financial information [2]. The FATCA compliance and the 2011 tax-information exchange treaty were the principal post-1989 regulatory developments that brought Panama’s banking sector into closer alignment with international transparency standards.
The licensing framework
The contemporary banking licensing framework distinguishes between Class A licenses (which allow operation both inside and outside Panama) and Class B international licenses (which restrict business to foreigners and non-Panamanian residents). Wikipedia’s entry on banking in Panama records this distinction and adds that banks are regulated by the Superintendencia de Bancos, with Class A licenses allowing both domestic and offshore operations and Class B licenses restricted to foreigners and non-Panamanian residents [2]. The two-tier licensing framework has been the structure that supports both the domestic banking sector and the international banking center that the 1970 law created.
The Superintendencia de Bancos de Panamá (SBP) is the regulatory authority that supervises both license classes. Wikipedia’s entry on banking in Panama records that the SBP regulates the banks and that the average capital adequacy ratio was 15.6 percent in 2012, nearly double the legal minimum requirement [2]. The SBP’s regulatory framework has been substantially aligned with international standards since the post-2011 reforms, and the banking sector is heavily regulated within the Panamanian economy.
The international banking center
Panama’s international banking center is a large Latin American financial center and serves a diverse client base of Latin American and international depositors. The center’s principal structural attractions are the dollarization of the economy and the regulatory framework that the SBP administers; the international banking center’s vulnerabilities are the post-2011 regulatory tightening (FATCA and the 2011 tax-information exchange treaty recorded in Wikipedia’s entry on banking in Panama [2]) and the periodic political cycles that have produced regulatory uncertainty.
For a researcher, the IMF’s Article IV consultation reports for Panama are a useful document for tracking the contemporary banking system. The SBP’s annual reports are the principal Panamanian-source documents, and the Banco Nacional de Panamá’s annual reports provide a state-owned perspective on the system. Wikipedia’s entry on banking in Panama is an accessible secondary source for the contemporary licensing framework and the post-2011 regulatory developments.
The post-1998 framework in detail
The 1998 reform that established the post-1998 regulatory framework was anchored in the Superintendencia de Bancos de Panamá’s reorganization and the introduction of consolidated supervision that the earlier 1970 framework had explicitly omitted. The post-1998 framework brought Panama into closer alignment with the Basel Committee’s banking-supervision standards, with the FATCA and 2011 tax-information exchange treaty as additional international transparency instruments. The 2012 capital-adequacy ratio of 15.6 percent (per Wikipedia’s entry on banking in Panama) is the empirical record of how the post-1998 framework was implemented; the system’s pre-1998 average capital-adequacy ratio was substantially lower. The SBP’s annual reports are the principal Panamanian-source documentation of the contemporary system’s structure and performance.
The territorial tax system in context
Wikipedia entry on banking in Panama records that the 1970 banking law was the foundation of the contemporary international banking center and that the post-1998 framework has substantially modified the system openness to international regulation. The territorial tax system - under which foreign-source income is generally not taxed - is part of the broader policy environment that has made Panama an attractive financial-services jurisdiction. The combination of dollarization, territorial taxation, and the post-1970 banking framework has produced a financial center that is a large Latin American financial center. The contemporary regulatory framework, including the post-2011 FATCA compliance and the bilateral tax-information exchange treaty with the United States, has tightened the international transparency regime but has not changed the underlying territorial tax structure.
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