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November 09, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Chile. Directors noted that the financial sector remains healthy; however, they emphasized that macro-financial linkages deserve close monitoring. They welcomed the recently approved general banking law, which will bolster the resilience of the banking sector by closing the gap with Basel III minimum solvency requirements, enhancing stabilization tools, and improving corporate governance. Directors highlighted the importance of strengthening the tools for early intervention and bank resolution, while establishing a national deposit-insurance scheme funded by member banks. Directors underlined that cybersecurity and fintech regulation frameworks need to be strengthened and welcomed the authorities’ ongoing efforts in these areas.

The staff report notes that the financial sector is healthy and resilient, but risks remain especially via macro-financial linkages. The banking system is generally well-capitalized at present and non-performing loans (NPLs) remain low at about 2% of total loans, notwithstanding the prolonged economic slowdown. Going forward, banks will need to increase capital to meet Basel III minimum solvency requirements in line with the new banking law and higher global rates will pass through onto local rates; however, better economic prospects should lower credit risks. The planned pension reform could provide higher long-term stable funding for banks and more room for credit expansion, though possible risks from limited absorptive capacity may arise.

Although the new general banking law will bolster resilience of the sector, additional efforts are necessary. The new law is an important step forward toward enhancing the resilience of Chile’s financial system. It aims to close the gap with Basel III minimum capital requirements, providing new financial stabilization tools and improving the governance of supervisory and regulatory agencies. Banks have six years to increase the minimum total solvency requirement to 10.5% from 8% of risk-weighted assets (RWA). The law also mandates a capital surcharge of up to 3.5% of RWA for systemically important domestic banks. In addition, the authorities already passed a regulation imposing, on banks, a minimum liquidity requirement equivalent to 60% of the liquidity coverage ratio (LCR), which will gradually increase to 100% over five years. The law provides additional macro-prudential tools and gives the central bank the authority to set countercyclical capital buffers (CCyB).

The report also mentions that fintech is a rapidly growing business in need of regulation. Most fintech companies still operate in a grey area outside regulatory perimeters. Staff encourages the authorities to speed up ongoing efforts to tackle the capacity, regulatory, and legal challenges, based on international experience. Additionally, the report notes that cybersecurity needs to be strengthened. A series of important cyber attacks affected the financial system in recent months. While these incidents did not negatively affect financial stability, they likely point at regulatory gaps and underinvestment in cybersecurity, which may affect market confidence if left unaddressed.

The selected issues report notes that recent developments in household debt highlight the importance of broadening financial sector surveillance and systemic risk. Increasing household borrowing from non-bank financial intermediaries imply that financial surveillance should be deepened also beyond banks, to monitor and contain any risks from this expanding source of finance. Second, these trends indicate a need to improve data quality and comparability as well as to closely monitor housing market and mortgage loans to assess any build-up of systemic risk over time. Other topics covered in the selected issues report include impact of debt on sovereign credit ratings and spreads, anchoring Chile’s fiscal framework, trends in Chile’s composition of exports, and the macroeconomic effects of external and domestic shocks in Chile.

 

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Keywords: Americas, Chile, Banking, Basel III, Macro-prudential Tools, Fintech, Article IV, CCyB, Systemic Risk, IMF

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