The Central Reserve Bank of El Salvador (Spanish: Banco Central de El Salvador) is the central bank of El Salvador, which controls the currency rate and regulates certain economic activities within El Salvador.

The bank was originally privately owned, but was brought under state control through The Law of the Reorganization of Central Banking. The Banco Central de Reserva de El Salvador is active in developing financial inclusion policy and is a member of the Alliance for Financial Inclusion.

History

Central Reserve Bank of El Salvador was founded as a private company, on June 19, 1934. The objective of the institution was to control the volume of credit and demand for currency to insure stability of external value of the Colon and to regulate expansion or contraction of credit and to strengthen liquidity of commercial banks, through a central banking reserve fund under its control. In addition, it was empowered to issue currency in an exclusive manner. The Bank operated during 27 years as a private company, maintaining an image of austerity and soundness.

On April 20, 1961, through Law for the Reorganization of National Banking, Central Bank became a State owned entity of public character, suffering a reorganization and modifying its original functions. Organic Law for the Central Reserve Bank of El Salvador was approved on December 15, 1961, establishing therein the following objectives:

• To promote and maintain the most favorable monetary, exchange and credit conditions for orderly development of the national economy;
• To maintain the monetary stability of the country;
• To preserve international value of the Colon and its exchange rate;
• To coordinate monetary policy of Central Bank with economic policy of the State.

Superintendency of Banks and Other Financial Institutions was created within the organization and administration of the Bank.

On September 17, 1970, Law for Credit Institutions and Auxiliary Organizations was issued, allowing authorities to regulate monetary, credit, financial and exchange activities. On August 23, 1973, Law for the Creation of the Monetary Board was decreed, concentrating formulation and direction of financial policies in a new State body and the Central Bank became only executor of resolutions. Likewise, Superintendency of Banks and Other Financial Institutions would depend from the Monetary Board.

On March 7, 1980, Law for the Nationalization of Credit Institutions and Savings and Loan Associations was approved; Stocks became property of the State. On March 25, 1982 Monetary Regime Law was issued. It was considered the consolidation of the State's administration of monetary, exchange and credit measures, through the Monetary Board. However, during the decade of the 80's, state owned financial institutions, inadequate economic policy, political and social instability during the conflict and destruction of economic infrastructure placed the banks and savings and loan associations into a serious insolvency. Salvadoran financial system, in 1989, was technically broke. To reverse the crisis of financial system and considering the importance it had for economic and social development of the country, a Financial System Reform Program was initiated, becoming an essential part of the Economic Program.

Components of the Reform Program were financial policy and modernization of financial system. It was assigned a new role to the Central Bank and monetary, credit and exchange policies were redefined; legal and institutional framework was readjusted; and soundness, strengthening and privatization of institutions was carried out within this financial policy.

Fundamental Law for the Superintendency of the Financial System was approved on November 22, 1990, establishing it as autonomous institution regarding to its administration, budgets and exercise of its attributions. Its functions are to oversee Central Reserve Bank, as well as other financial system institutions; to authorize the constitution, operation and closing of banks, savings and loans, insurance institutions and other entities determined by law; and to realize other functions for inspection and vigilance of said entities.

On April 12, 1991, new Fundamental Law of the Central Reserve Bank of El Salvador was approved, establishing it as a public, autonomous institution of technical character. It stated that fundamental objective of the institution was to protect currency stability, and its essential finality was to promote and maintain most favorable monetary, exchange, credit and financial conditions for national economy stability.
Its institutional functions were modernized, eliminating control of the assignment of credit and prohibiting the concession of financing to the State and other public enterprises. It allows the Central Bank to comply in a better way its fundamental purpose of maintaining monetary stability. With the approval of the Law for the Creation of the Multisectorial Investment Bank, on April 21, 1994, responsibility for private sector credits was eliminated since it was assumed by the new institution.

Also, faculty to fix interest rates and exchange rates was eliminated to Central Bank, as it can only influence these variables through open market operations. On the other hand, Law compels Central Bank to inform people about its Monetary Program, statement of operations, economic reports and financial statements, enhancing transparency of its operations.

On January 1st., 2001, El Salvador started a monetary integration process since the Monetary Integration Act (LIM) became effective; it was approved by the Legislative Assembly on November 30th., 2000.

This Law established a fixed exchange rate between the Colon and the US Dollar, as of ¢8.75 Colones per US$1.00, and granted legal tender to the US Dollar, allowing its use as a mean of payment for liabilities, within the national territory of El Salvador. It also permitted contracting monetary liabilities in any other foreign legal tender currency and allowed the US Dollar to become the unit of account of El Salvador’s financial system.

LIM substituted some articles of the Fundamental Law of the Central Reserve Bank of El Salvador. These amendments removed the sole right of issuing money to the Central Bank, as well as the function of coordinating the monetary policy with the rest of economic policies of the Government of El Salvador. Law also eliminated the function of elaborating and publishing the Monetary and Financial Program.

Up to this date, the monetary integration process have developed successfully, contributing to consolidate macroeconomic stability in the country and to strengthen financial system development in El Salvador. Within its benefits are credits at low interest rates and longer terms; elimination of exchanging risk; protecting savings, salary and purchasing power values, with no devaluations.

Functions

Art. 3 of Fundamental Law of the Central Reserve Bank of El Salvador, states: "Central Reserve Bank will have as fundamental objective to watch over currency stability and to maintain favorable monetary, exchange, credit and financial conditions to preserve economic stability."

Functions of the Central Reserve Bank are:

• To prevent and to moderate inflationary and deflationary tends;
• To preserve liquidity and stability of financial system;
• To favor the development of an efficient, competitive and solvent financial system;
• To regulate the expansion of the credit of the financial system;
• To watch over the normal operation of internal and external payment system;
• To maintain adequate levels of means of payments;
• To issue policies and rules for monetary, exchange, credit and financial subjects;
• To coordinate policies with government economic policy;
• To develop activities, operations and services stated by laws and other dispositions compatible to its central bank nature.

As one of their principal responsibilities, Central Reserve Bank of El Salvador has to contribute to achieve a transparent financial system for the country, managing Salvadoran people resources to support economic growth, to analyze, monitor, elaborate and divulge economic and financial statistics, obeying mandatory of its Fundamental Law.

Central Bank has a fundamental role in financial and economic environment and the commitment to be a technical, nonpolitical, transparent institution, that maintains a large term vision of the country, focused on contributing to economic stability of El Salvador.

Since Monetary Integration Law get in force, on January 1st., 2001, Central Reserve Bank of El Salvador concentrates in dealing with the following economic strategic areas:

• Regulation and Monitoring Financial System;
• International Reserves Administration;
• Payments System and Financial Services;
• Financial Agent to the Government
• Export Services;
• Economic and Financial Statistics, Projections and Studies;
• Economic Culture and Educational Commitment

Regulation and Monitoring of Financial System

Central Bank monitors and studies permanently the financial system performance and proposes regulations to promote its stability and development, on benefit of people, and as a contribution to country’s growth. It controls financial institutions to fulfill requirements of liquidity reserves. These are funds that each bank has to have as a reserve in proportion to its deposits, to guarantee people’s savings.

This is one of the most important functions of the Central Bank, as economic growth needs a competitive and modern financial system, that operates with stability and security for users.

International Reserves Administration

Central Bank administrates international reserves and has the challenge to obtain profitability levels that allow to preserve or increase their value, making investments abroad that assure a high availability and observing an investment policy limiting risks.

Payments System and Financial Services

Central Bank facilitates settlements within enterprises and people, through a Payments System. It pays checks through Bank/Currency Clearing House, charging them in deposits accounts banks held in Central Bank; money is available for the user the second day after the check is deposited, thanks to this action. Also, it pays operations within banks, charging them in deposits accounts that banks keep in Central Bank.

Financial Agent Services for the Government

Central Bank is the financial agent to the Government. Bank receives deposits from the Government, makes payment on its behalf, gives it advisory for bonds and debt securities issues and sales in international and domestic financial markets, administrates the issues and watches over the country pays punctually its loans’ responsibilities with other countries. The latest two actions are complimentary. Responsibility of El Salvador in paying acquired commitments is recompensed by international markets, as at the moment the country issues securities in those markets, selling them is easier and faster. Export Services

Export Procedures Center, in short CENTREX, is part of Central Bank since 1989. It provides information and authorization services, at real time, for Salvadoran exports, through efficient and reliable systems that help them to be competitive in foreign markets, specially since got in force Free Trade Agreements and commercial opening experienced through the last years.

Export documents, certifications, products visas and origin certificates are extended by CENTREX, making it easier for hundreds of small, medium and large exporters.

Economic and Financial Statistics, Projections and Studies

Central Reserve Bank shares responsibility in economic management of the State, through elaboration of technical studies and macroeconomic statistics and projections, based on methodologies fulfilling international standards that assure comparative data within countries. This information strengthen expectations of economic agents.

Central Bank generates financial and economic information used by the Government, private sector and foreign investors to take investment decisions and elaborate future plans. Monetary data, national accounts, balance of payments, fiscal sector statistics and other information divulgated, form part of statistics of expenditures, income, production, investment, debt and savings of the country.

Also, the Bank makes fundamental studies about national importance themes, as family remittances, employment generation originated by free trade agreements or financial stability, giving diagnoses of financial and economic evolution of the country, at current and at long term, focused to results in order to influence economic and financial expectations of different agents.

As part of advisory services the Bank offers to Government, it’s related to risk qualification agencies, as Standard and Poor’s, Fitch’s and Moody’s, and to international organizations, as the International Monetary Fund – FMI, World Bank and Economic Commission for Latin America – CEPAL, that comment, worldly and at Latin America level, about payment capability and economic stability of countries.

Economic Culture and Educational Commitment

As part of its social responsibility, Central Bank supports youth education through the Scholarship Fund of the Central Reserve Bank of El Salvador. It had financed technical, university and postgraduate studies for more than 4,000 students, academically outstanding, but limited of economic resources, to honor its ineludible commitment of promoting educative culture in the country.

Bank favors study of economic and financial themes, through its annually realized Technical Research Contest, inviting students cursing last year of high school, as a way to encourage the economic and financial research in the country.

Central Bank also has a Public Library, Biblioteca Luis Alfaro Durán, that has more than 30,000 economic and financial specialized books, that can be consulted by students, professionals and researchers. Technical discussion of macroeconomic and financial current issues is promoted, through Conferences. Central Bank contacts national and international experts to share their experience in economic science achievements and better international practices in specialized areas of finance and economy and other matters of interest for people.

Useful links

Currency of El Salvador:

Salvadoran colon

List of Central Banks:

Central Banks

Official website of Central Reserve Bank of El Salvador:

www.bcr.gob.sv

Fundamental Law of the Central Reserve Bank of El Salvador:

www.bcr.gob.sv

Ministry of Finance of El Salvador:

www.mh.gob.sv