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    CMF Consults on Methodology to Determine Market Risk-Weighted Assets

    July 24, 2020

    CMF is consulting on a regulation that establishes a standardized methodology for determining the risk-weighted assets for market risk at banks. The regulation aims to improve internal capital management and risk coverage in the banking industry, in line with international standards and the recent amendment to the General Banking Act (LGB). CMF also published a regulatory report evaluating the impact of the proposal, along with a set of frequently asked questions and a presentation on the proposal. The consultation process will be open until August 31, 2020.

    The new regulation in consultation is based on the Basel III simplified standard model for market risk management, which includes four types of risk—interest rates, foreign currencies, stock prices, and commodities. This consolidated approach considers the risk of stock prices and raw materials due to possible exposures that a bank's subsidiaries may have in such assets. Furthermore, a specific risk oriented to measure idiosyncratic aspects of the issuer is incorporated within the interest rate and stock exchange risks. All parameters presented in the standard in consultation were calibrated using updated information (1999-2018 for foreign currency risk and 2007-2018 for interest rate risk).

    In March 2020, CMF had decided to postpone the implementation of Basel III requirements by one year and to maintain the current general regulatory framework for banking capital requirements until December 2021. CMF is postponing the implementation of the internal methodologies for measuring market risk-weighted assets to a date after the entry into force of these standards in the member countries of the Basel Committee (scheduled in January 2022). This is because CMF is expecting that international experience will be gained from the application of these methodologies in jurisdictions with more developed markets as well as from gradually implementing the new standards in Chile.

    The General Banking Act empowers CMF to establish, through a general regulation and subject to a favorable agreement by the Central Bank of Chile, standardized methodologies to determine risk-weighted assets of banking companies. This measure covers relevant risks faced by such companies, including credit risk, market risk, and operational risk. Prior to the amendment to the General Banking Act in 2019, the calculation of risk-weighted assets for the determination of banks' capital requirements considered only the credit risk component. Market risk was managed through an exposure limit, whose estimation methodology is set in Chapter III.B.2.2 of the Compendium of Financial Regulation of the Central Bank of Chile.

     

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    Comment Due Date: August 31, 2020

    Keywords: Americas, Chile, Banking, Basel, Market Risk, Risk-Weighted Assets, General Banking Act, Regulatory Capital, Central Bank of Chile, CMF 

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