CMF Proposes Rules on Credit Risk-Weighted Assets and Capital Buffers
CMF is consulting on two new regulations: one regulation covers the methodology for determining credit risk-weighted assets while the other one relates to the assessment of compliance with capital buffers. These regulations are in context of the adoption of Basel III standards by local banks. The consultation on methodology for determining credit risk-weighted assets ends on April 15, 2020 while the one on assessment of compliance with capital buffers ends on March 31, 2020. The new regulations will become effective on December 01, 2020. Additionally, CMF has published regulatory reports evaluating the impact of these proposals, frequently asked questions, and presentations on the mentioned regulatory proposals.
Consultation on Methodology for Determining Credit Risk-Weighted Assets. In accordance with Article 67 of the General Banking Act, the regulatory proposal presents a standard methodology and principles for the use of internal methodologies to determine credit risk-weighted assets by banks operating in Chile. The current mechanism estimates credit risk-weighted assets using a methodology in the Basel I standard. The current methodology distinguishes only five categories of assets and does not allow the use of internal methodologies or techniques to mitigate exposure by collaterals or qualified guarantors. In contrast, the standardized approach proposed with the Basel III standards is more risk-sensitive, as it has categories that depend on the type of counterparty and different risk factors. The new framework will also allow the use of internal methodologies subject to the fulfillment of minimum requirements. The standard under consultation also proposes the possibility of reducing credit risk-weighted assets by considering the credit risk mitigants such as netting agreements, guarantors, collaterals, financial guarantees, and balance-sheet compensations.
Consultation on Assessment of Compliance with Capital Buffers. CMF has published a regulatory proposal for the assessment of compliance with capital buffers, in accordance with certain articles of the General Banking Act and the latest agreement of BCBS. According to the regulatory proposal, the capital conservation buffer (CCB) is a fixed amount equivalent to 2.5% of the risk-weighted assets, after excluding mandatory provisions. Although the CCB is of a permanent nature, it is expected to be used when the bank faces the materialization of idiosyncratic or systemic risks, thus avoiding default and credit supply contraction. Meanwhile, the countercyclical buffer (CCyB) is a variable amount ranging from 0% to 2.5% of the net risk-weighted assets after excluding mandatory provisions. The implementation of the regulation considers a four-year transition period. From December 01, 2021, the maximum value of both the conservation buffer and CCyB will be 0.625% each. The threshold will be raised by the same amount in 2022, until reaching full implementation in 2024.
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Comment Due Date: April 15, 2020/March 31, 2020
Effective Date: December 01, 2020
Keywords: Americas, Chile, Banking, Credit Risk, Risk-Weighted Assets, Capital Buffer, CCyB, Basel III, Standardized Approach, Minimum Requirements, CCB, CMF
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