CMF Consults on Leverage Ratio and Hybrid Instruments Requirements

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

For the leverage ratio, the General Banking Act has considered that the ratio between core capital (numerator) and total assets (denominator) may not be lower than 3%; the proposed regulation introduces refinements in the measurement of both components pursuant to the Basel standards. The numerator makes deductions for items that do not have the effective capacity to absorb unexpected losses (in line with Chapter 21-1). The denominator considers a broader spectrum of exposures, giving them a treatment consistent with the provisions of Chapter 21-6 on the determination of credit risk-weighted assets. At the system level, the leverage ratio would be reduced by approximately 1% without breaching the minimum 3% required by law for any institution. Therefore, the regulation would not have a direct impact in terms of additional capital requirements.

Consultation on Hybrid Instruments

With respect to hybrid instruments for the constitution of effective equity, the requirements established for the issuance of preference shares, bonds without fixed maturity (Additional Tier 1 capital), and subordinated bonds (Tier 2 capital) seek to provide alternative regulatory capital tools that absorb losses when the capital of an issuing bank decreases under the pre-established conditions. This may facilitate the restoring of solvency levels or avoid a bank resolution. It is estimated that there would be no need for banks to issue Additional Tier 1 capital during the first year of implementation of the standard. Six institutions would need to issue nearly USD 3.2 billion of instruments between the second and fourth years.

Postponing Implementation of Basel III Standards

CMF, in coordination with the Central Bank of Chile, decided to postpone the implementation of the Basel III requirements for a year, as well as to maintain the current general regulatory framework for banking capital requirements until December 2021. The aim is to prevent the increase in capital requirements from accentuating the effects of the negative shock and to limit the operational challenges for banks in adopting a new regulatory framework. Nevertheless, CMF will continue its regulatory work in compliance with the current legal framework by outlining the following principles:

• CMF will issue the regulations that establish the standard methodology for the calculation of credit, market, and operational risks. These regulations will become effective no later than December 01, 2020.
• The regulations will consider, in their transitional provisions, that market and operational risk-weighted assets will equal zero until December 01, 2021. Credit risk-weighted assets will be calculated considering the current weights associated with the same five categories that are currently in force. This will keep the calculation unchanged for an additional year.
• The first determination of the additional core capital charge for systemically important banks will be made in March 2021 at 0%, with the possibility of a gradual increase in the following years.

In addition, CMF has resolved that:

• For calculating the requirements of Article 66 of the General Banking Act, the discounts to the actual assets shall be extended to a five-year period. There will be no discounts in 2021 but progressive increases in the following years will add up to 100% on December 01, 2025.
• The new disclosure requirements associated with Tier 3 of Basel III will take effect after December 01, 2022.
• The additional core capital requirement associated with the conservation buffer will be implemented in accordance with the current legal framework. It will be 0.625% on December 01, 2021 and will increase by the same amount in the following years until it reaches its full amount of 2.5% on December 01, 2024.
• The Tier 2 regulation will be in force by the fourth quarter of 2020. It will expand the powers of CMF to establish additional capital charges on specific entities, should their conditions warrant it.

Related Links

• Press Release on Consultations
• Consultations (in Spanish)
• Press Release on Basel III Deadlines

Comment Due Date: May 29, 2020

Effective Date: December 01, 2020

Keywords: Americas, Chile, Banking, Basel III, Leverage Ratio, Hybrid Instruments, Deadline Extension, Credit Risk, Regulatory Capital, COVID-19, CMF