CMF Consults on Treatment of State Guarantees in Calculation of RWAs
CMF is consulting on a regulation that would modify the treatment of the State loan guarantees for calculation of risk-weighted assets, or RWAs, by banks. CMF proposes amendments to Chapter 12-1 of the Updated Compilation of Rules for Banks. The amendment will modify the treatment of the amounts guaranteed by the Chilean State, Production Development Corporation (CORFO), and Guarantee Fund for Small Entrepreneurs (FOGAPE). As per the proposed treatment, these amounts would be assigned to Class 2 for the purpose of calculating risk-weighted assets. CMF also published a regulatory report evaluating the impact of the proposal. The consultation period for this regulation closed on July 31, 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 a bank, thus improving the conditions for institutions to transfer liquidity to markets. This also considers the strengthening of the State's role through FOGAPE and other support mechanisms. The new treatment is in line with 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 regulatory proposal voids such treatment and these guarantees can be considered without any limits in the calculation of risk-weighted assets. The proposed amendment would be in effect until December 01, 2021.
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Comment Due Date: July 31, 2020
Keywords: Americas, Chile, Banking, COVID-19, Credit Risk, Basel, Regulatory Capital, Loan Guarantee, FOGAPE, CMF
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