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    CMF Amends Treatment of State Guarantees for Calculation of RWAs

    August 24, 2020

    CMF published a regulation that modifies the treatment of State Guarantees for the calculation of risk-weighted assets, or RWAs, of banks. To this end, CMF published amendments to Chapter 12-1 of the Updated Compilation of Rules for Banks. The modified treatment applies to the amounts guaranteed by the Chilean State, the Production Development Corporation (CORFO), and the Guarantee Fund for Small Entrepreneurs (FOGAPE). As per the revised treatment, these amounts are incorporated into category 2 of the risk-weighted asset classification, which consequently passes from having a weighting for credit risk from 100% to 10%. CMF consulted on these amendments in July 2020.

    As part of the measures adopted by economic authorities to deal with the impact of COVID-19 outbreak, this modification is expected to increase the core capital indicators of banks, thus improving the conditions for institutions to transfer liquidity to markets. The new treatment is in line with the international standards and is especially important for banks that would not have enough room to use the additional provisions as effective equity. On April 20, 2020, CMF issued a circular (No. 2,250) that allowed banks to consider a proportion (15%) of the amount guaranteed by the Chilean State, CORFO, and FOGAPE to cover loans granted by banks as part of the voluntary provisions that make up the effective equity. The current regulation voids such treatment and these guarantees can be considered without any limits in the calculation of risk-weighted assets.

     

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    Keywords: Americas, Chile, Banking, COVID-19, Credit Risk, Basel, Regulatory Capital, State Guarantee, FOGAPE, Risk-Weighted Assets, CMF

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