CMF Finalizes Regulations Under Basel Framework in Chile

Regulation on Implementation of Pillar 2 Requirements

Prior to the amendment to the General Banking Act in 2019, CMF was not empowered to impose higher capital requirements on banking companies with insufficient capital or management levels according to its supervisory assessment. The new regulation corrects this gap by virtue of the powers granted by the General Banking Act to CMF. To this end, it amends Chapter 1-13 of the Updated Compilation of Rules for Banks (RAN) on management and solvency assessment, with some consistency adjustments and additional management principles. The regulation adds the new Chapter 21-13 to the RAN, which distinguishes two processes:

• The equity self-assessment process, in which banks determine their own internal effective equity target required to cover their risks over a three-year timeframe
• The CMF assessment of the adequacy of banks' effective capital to support their risk profile, as determined in the annual supervisory review process

The regulation will be in force immediately. The self-assessment report of effective equity to be presented by banks in 2021 will be based only on credit risk while the 2022 report will incorporate market and operational risks. A full report with all the sections will be required from 2023 onward.

Regulation on Assessment of Compliance with Capital Buffers

CMF published a regulation that sets conditions for implementation and supervision of capital buffers, in accordance with certain articles of the General Banking Act and the Basel III standards. According to the regulation, the capital conservation buffer (CCB) is a fixed charge equivalent to 2.5% of the risk-weighted assets, after excluding required provisions. Although the CCB is permanent, banks may temporarily "non-comply" when facing materialization of idiosyncratic or systemic risks. Meanwhile, the countercyclical buffer (CCyB) is a variable charge ranging from 0% to 2.5% of risk-weighted assets after excluding required provisions. The implementation of the regulation considers a four-year transition period. From December 01, 2021, the maximum value of both the CCB and CCyB will be 0.625% each. The threshold will be raised by the same amount in 2022, until reaching full implementation in 2024.

Regulation on Calculation of the Ratio of Core Capital to Total Assets

The regulation will provide additional protection against modeling risk while limiting regulatory arbitrage and facilitating data comparability among banks. The regulation improves both the measurement of basic capital (numerator) and of banks' total assets (denominator). In the numerator, deductions are made for items that do not have the effective capacity to absorb unexpected losses, in line with Chapter 21-1 of RAN. The denominator also considers a broader spectrum of exposures, giving them a treatment consistent with the provisions of Chapter 21-6 of the RAN on determination of credit risk-weighted assets. The regulation creates the necessary instructions for auditing any additional requirements for systemically important banks, pursuant to the terms set by certain article of the General Banking Act. The regulation will enter into force on December 01, 2020, notwithstanding the transitory provisions for the calculation of regulatory capital stated in Title V of Chapter 21-1 of the RAN as well as the transitory provisions for additional capital requirements applied to systemically important banks set in Number 7 of Chapter 21-11 of the RAN.

Regulation for Calculation of Effective Equity

The regulation considers the definition of three levels of capital, as used in the BCBS terminology—that is, common equity tier 1 (CET 1), additional tier 1 (AT1), and tier 2 capital. The modifications introduce prudential adjustments to determine the available amount of the different levels of capital, isolating those components that are of low quality or uncertain economic value or that are difficult to liquidate in conditions of financial stress. Hybrid instruments issued by subsidiaries abroad will no longer be recognized in consolidated effective equity. The basic capital of a bank will correspond to CET1 post deductions. In turn, the sum of the three components will be understood as effective equity, after deductions have been made, for the purposes of applying the provisions of the General Banking Act. The regulation will be effective as of December 01, 2020, without prejudice to the transitory provisions that it contemplates.

Related Links

• Press Release on Implementation of Pillar 2 Requirements
• Press Release on Assessment of Compliance with Capital Buffers
• Press Release on Calculation of the Ratio of Core Capital to Total Assets
• Press Release on Calculation of Effective Equity (in Spanish)
• Regulatory Reports, FAQs, and Presentations (in Spanish)

Effective Date: September 14, 2020 (Pillar 2)/December 01, 2020

Keywords: Americas, Chile, Banking, Pillar 2, Basel, Regulatory Capital, Supervisory Review Process, CCyB, CCB, Leverage Ratio, Hybrid Instruments, CMF