CMF Issues Updates on Basel Framework and Loan Guarantee Provisions
The Commission for the Financial Market (CMF) in Chile published the capital adequacy ratios (as of December 2021) and updated provisions for the Guarantee Fund for Small and Medium-Size Entrepreneurs (FOGAPE). The provisions ease conditions to grant FOGAPE-guaranteed financing and ensure adequate credit risk management of institutions that make use of such guarantees.
CMF published the capital adequacy ratios (as of December 2021) for 17 banks and for the banking system as a whole, before Basel III A as well as under the new Basel III standards. CMF had completed the process of issuing certain Basel III rules in 2020 and had begun implementing these. CMF also outlined the Basel III implementation schedule, noting that the new requirements will be implemented gradually until 2025. In line with the outlined implementation schedule, CMF shall begin monthly publication of capital adequacy ratios (CARs) applying the new definitions set out in the General Banking Act. The denominator of the new CAR incorporates market and operational risks to the measurement of risk-weighted assets, whose prior calculation only considered credit risk. Furthermore, the new ratios consider the 2020 CMF methodology to measure credit risk. In the CAR numerator, effective equity incorporates adjustments and exclusions of accounting items of assets and liabilities, in addition to the new instruments, including perpetual bonds, that qualify as regulatory capital. Alongside the monthly report on Basel III solvency standards, CMF will publish this month, and for the next two months, the solvency indicators under the regulations that were in force until November 2021.
Coming back to FOGAPE-guaranteed financing, by virtue of the powers granted to CMF by Article 1 of the Decree Law No. 3,472, the aim is to permanently incorporate certain flexibilities—which the "FOGAPE Reactivación" Program created at the beginning of the COVID-19 pandemic and which were in force until December 31, 2021—into the traditional FOGAPE Program; these involve:
- Easing the way to measure annual sales of companies eligible to access the fund's guarantees as well as allowing the fund manager (BancoEstado) to establish measurement criteria for companies with no activity or less than 12 months of activity as part of the bidding conditions
- Requiring the titles representing financing to contain a statement by borrowers indicating the way such funds will be used and responsibilities assumed if false information is submitted in the application, or the funds are used for different purposes
- Establishing the responsibility of financial institutions regarding criteria to both grant FOGAPE-guaranteed loans and the debtor's subsequent follow-up while the contract is in force
- Easing the conditions for financial institutions to demand payment of the fund's guarantees, should debtors incur in default of their obligations. This includes extending the timeframe for a FOGAPE complaint from 425 to 500 days and the possibility of requesting such payments as soon as the judicial collection for amounts below CLF 400 starts after filing the collection claim with the competent court
- Incorporating a transitory provision extending timeframes to collect the fund's guarantees for entities unable to notify debtors during a constitutional state of exception due to catastrophe, or due to public calamity declared by Supreme Decree No. 104 of March 18, 2020, issued by the Ministry of the Interior and Public Security, plus any subsequent extensions
Related Links
- Press Release on Loan Guarantee Scheme
- Press Release on Capital Adequacy Ratios
- Capital Adequacy Ratios (in Spanish)
Keywords: Americas, Chile, Banking, Covid-19, SME, Loan Guarantee, FOGAPE, Credit Risk, Market Risk, Operational Risk, Basel, Regulatory Capital, Risk Weighted Assets, CMF
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