Despite the global and domestic shocksof 2008-2009, the banking sector remains sound. Salvadoranbanks were not directly exposed to the global financialcrisis. However, the parent banks of several majorSalvadoran banks were and directed subsidiaries to conserverisk capital. The higher risk aversion and recession in theUnited States, combined with uncertainty about the 2009elections, led to a sharp economic downturn, and a declinein both credit demand and supply. Banks' nonperformingloans increased and profitability declined. Even so,capitalization remained high. Stress tests indicate thatmost banks would be able to withstand large depositwithdraws and severe deterioration in credit quality arisingfrom large macroeconomic or sectoral shocks. However, creditconcentration risks appear significant. Regulated non-bankfinancial institutions do not pose significant risks, butpension funds' poor profitability is a concern for thelong-term. Regulated cooperative banks and insurancecompanies report healthy financial indicators. Brokeragehouses have reduced drastically their fund managementactivities, which until recently posed systemic risks due toinadequate regulations and unsound commercial practices.Pension funds have grown considerably and now amount to 25percent of total financial sector assets. However,investments are mostly in low-yielding public sectorsecurities. To ensure a sound financial footing for thepension system, an in-depth actuarial analysis shouldevaluate pension reform costs and calculate replacementrates. The type of investments available to pension fundsshould be expanded progressively to increasediversification, improve returns and foster capital markets.
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