## CHILE — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [CHILE — EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2022/english/1chlea2022005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1chlea2022005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1chlea2022005.pdf.json) --- ### Financial system structure and risks - Chile has a large and well-developed financial system relative to Latin America; the market is well integrated into the global financial system. - The nonbank sector accounts for almost 50 percent of assets. - The banking sector is very concentrated: six banks—one state bank, two large private banks, and three foreign-owned banks—account for over 90 percent of banking sector assets. - Since the last FSAP, the banking sector has grown from 204 to 300 percent of GDP. - Bond funding makes up 15–20 percent of total liabilities for the largest banks in Chile at the end of 2020. - Equity market capitalization is equivalent to 65 percent of Gross Domestic Product. ### Key deficiencies in the statutory framework - No statutory resolution regime to facilitate the orderly failure of banks; compulsory liquidation is the only formal power for failed banks. - Forced liquidation is unsuitable for managing the failure of a systemic bank or a bank carrying out critical financial functions because it results in loss of access to these services and significant financial and economic disruptions. - Absence of a gone-concern loss absorbing capacity requirement for systemically important banks creates significant risk to financial stability in a future banking crisis. - BCCh and State guarantees of sight and time depositors (unlimited for sight deposits) create significant moral hazard risks and expectations of bailout. - Statutory limitations on government and state-owned enterprises capitalizing banks under the General Banking Act (GBL) coexist with a high likelihood that systemic bank failure costs would be borne by taxpayers. ### International standards and Chilean preparedness - Financial Stability Board (FSB) Key Attributes of Effective Resolution Regimes established since 2011. - Global authorities have developed resolution powers including “bail-in” and loss absorbing capacity (LAC) requirements akin to TLAC for G-SIBs. - Largest Chilean banks are well-positioned to comply with a future LAC requirement given active issuance of wholesale debt securities; such bank debt could be relied upon to meet LAC requirements at the point of refinancing, subject to eligibility criteria. ### Recommended reforms — overview - Establish an up-to-date bank resolution framework with a range of powers to meet international standards, reduce moral hazard, and limit fiscal risk. - Two broad reform categories: changes by banks and changes in the legislative and regulatory framework. ### Changes by banks (recommended) - Set a LAC requirement by the resolution authority for systemically important banks that cannot be placed into an orderly liquidation in the event of failure. LAC requirements should enable the resolution authority to: - recapitalize failing systemically important banks if they fail, - protect depositors, - minimize the risk to public funds while ensuring financial stability. - Require firms within scope of the resolution regime to make legal, financial and operational changes to improve resolvability and ensure resolution tools can be applied in an orderly manner. Structural changes should be mandated in peacetime to maintain continuity of essential banking services, protect depositors, and ensure creditors are exposed to losses instead of public funds. ### Changes in the legislative and regulatory framework (recommended) - Enhance cross-authority crisis coordination arrangements, including agreeing and publishing a MoF, CMF, BCCh crisis management memorandum of understanding (“MoU”). The MoU should describe peacetime crisis preparation, the crisis coordination forum, the full range of crisis management tools and when they would be used, and set public expectations about appropriate tools for different crisis types. - Develop a cross-authority systemic impact assessment framework and wider information sharing arrangements to support coordination. - Introduce a prudential supervisory recovery planning requirement on banks well before crises. - For non-systemic firms that may be liquidated, ensure CMF and BCCh have operational policies, processes, and procedures in peacetime to facilitate orderly pay-out or transfer of sight deposits given their importance to the payment system. - Establish a statutory bank resolution framework defining statutory resolution objectives, a full range of resolution tools, statutory safeguards, a clear statutory creditor hierarchy with depositor preference (general or tiered), and an assessment framework to identify when a bank is no longer solvent and should enter resolution. - Designate a new statutory resolution authority (RA) with powers to conduct bank resolution planning and set peacetime requirements (e.g., LAC). Ensure adequate structural separation from prudential supervision to maintain operational independence and avoid conflicts of interest. - Ensure a bank in resolution can access temporary collateralized liquidity support if needed. Drop from statutes the powers for the BCCh to capitalize any loans to a bank facing solvency problems. BCCh should develop an internal emergency liquidity policy and operational facility capabilities for recapitalized banks, setting criteria for access, likely eligible collateral, rate, and term of lending. Banks in resolution seeking BCCh liquidity would need to meet the same BCCh conditions of access as going-concern banks, including demonstrating a credible prospect to maintain or restore adequate solvency in the near term. - Establish a premium-based partial deposit protection scheme (DPS) that is ex-ante funded to: - ensure market confidence and minimize the risk of runs, - support orderly liquidation of non-systemically important banks, - migrate over time to remove the current BCCh/State guarantees of sight and time deposits. - DPS authority to help fund transfers in resolution of insured deposits backed by assets of non-systemically important banks, with such use of DPS funds capped (not greater than the losses the DPS would have expected to incur if it had implemented a payout and made recoveries from winding up the institution). DPS should be implemented as the new resolution regime is established and have resources and capabilities to implement a rapid payout of covered depositors when failed non-systemically important banks are determined by the resolution authority to enter liquidation. - Expand legal protections for officials involved in crisis management (early intervention and resolution) except in cases of criminal activity, gross negligence, or bad faith. Address CMF and BCCh staff liability in regulations and require gross negligence as the threshold for civil liability of CMF and BCCh employees and any persons appointed by the CMF. ### Implementation priorities (selected) - Crisis Preparedness: - Early Intervention: Establish a statutory ex-ante recovery planning requirement for banks — MoF/CMF — High - Early Intervention: CMF to define internal early warning triggers for prompt intervention — CMF — Medium - Early Intervention: Formalize tools under existing framework for forced liquidation of failing non-systemically important banks — CMF/BCCh — Medium - Coordination Arrangements: Define and publish an authority Crisis Management Framework — MoF/CMF/BCCh — Medium - Coordination Arrangements: Formalize Inter-Authority Crisis Coordination Arrangements (e.g., MoU) — MoF/CMF/BCCh — Medium - Coordination Arrangements: Establish crisis information sharing and coordination infrastructure — CMF/BCCh — Medium - Coordination Arrangements: Develop a joint CMF/BCCh systemic impact assessment framework — CMF/BCCh — Medium - Resolution: - Establish statutory bank resolution regime including objectives, tools, safeguards, creditor hierarchy and depositor preference — MoF — High - Designate an administrative resolution authority (RA) with powers to conduct bank resolution planning and set requirements on banks (e.g., LAC) — MoF — High - Establish a loss absorbing capacity requirement for systemically important banks — MoF/RA — High - Drop from statutes BCCh powers to capitalize loans to insolvent banks; develop internal emergency liquidity policy and operational capabilities for banks in resolution — MoF/BCCh — Medium - Depositor Protection: - Establish an ex-ante funded premium based partial deposit protection scheme — MoF — Medium - Legal Protections: - Ensure legal liability only accrues in event of gross negligence or willful misconduct for CMF, BCCh and RA staff — MoF — High *High: within 12 months; Medium: within 1 to 2 years.* ### Institutional reforms since 2011 and supervisory architecture - CMF created in 2017; merged banking supervisor into CMF in 2019, consolidating an integrated supervisor. - CMF objective: ensure the proper functioning, development and stability of the financial market. - GBL reform introduced new coordination arrangements between BCCh and CMF in peacetime, including on activation of the countercyclical buffer determined by BCCh. - Banking regulatory framework revision increased supervisory powers and expanded CMF early intervention toolkit. - Most legislative framework for the financial safety net remains unchanged; powers for managing crises involving failing banks are narrow. - BCCh is lender of last resort and has statutory mandate including ensuring normal functioning of payment systems and currency stability; BCCh issues regulations for banks and depository institutions and oversees RTGS, ComBanc and retail payment systems. - CMF scope: prudential supervision, market conduct and surveillance of major financial institutions, insurance companies, securities issuers, fund managers, broker-dealers, financial market infrastructures, capital markets, banks, larger credit unions, credit card issuers and retail payment systems. - Financial Sector Supervisory Committee and Financial Stability Board (CEF) are coordination fora; CEF chaired by MoF with BCCh as permanent advisor; CEF policy recommendations are nonbinding; required to meet at least monthly. ### Early intervention framework and enhancements - GBL early intervention has three phases: (i) regularization, (ii) appointment of an “inspector” or “provisional administrator,” and (iii) compulsory liquidation. - Article 112 triggers (Article 112): (i) capital requirements breached; (ii) losses observed during the past two or more months permit to predict that the bank will breach the capital requirements; (iii) repeated noncompliance with law/regulations; (iv) noncompliance with liquidity requirements; (v) recurrent need of Banco Central de Chile’s (BCCh) emergency financing; (vi) it is foreseeable that the bank will not be able to meet its obligations in the next 30 days; (vii) losses that surpass 10 percent of the paid capital and reserves; (viii) excess concentration in related party lending or in favorable terms relative to comparable loans; (ix) objections of external auditors to its financial statements; (x) noncompliance with the development plan approved with the granting of the license; and (xi) any other event that could indicate that there is threat to the financial stability of the bank or poor management. - Limitations: Article 112 triggers are generally late-stage indicators; provisional administrator actions subject to legal challenge; appointment can destabilize open banks; compulsory liquidation not credible for systemically important banks. - Recommended enhancements: - Ex-ante recovery planning requirement for D-SIBs and other firms whose liquidation could undermine confidence. - CMF to clarify internal early warning triggers and specify escalating interventions. - Formalize forced liquidation tools operationally for non-systemically important banks (SCV files, payout vs transfer mechanics, testing, and simulation exercises). ### Resolution powers, tools, and safeguards - RA should have a range of resolution tools: mandatory recapitalization, mergers, transfer of assets and liabilities (purchase and assumption transactions, bridge banks), mandatory debt restructuring, and administrative/operational control of the entity. - Legislation should provide administrative powers to: 1) transfer shares and property to a private sector purchaser, 2) transfer shares or property to a bridge bank on a temporary basis, 3) bail-in creditors without ex-ante consent but subject to ex-post appeal. - Temporary Public Ownership (TPO) should be a last resort for MoF with a high bar; creditors should be bailed-in first. - Two statutory conditions for entry into resolution: 1) firm is failing or likely to fail (first determination by CMF), 2) not reasonably likely that action will result in recovery (second determination by RA). - Safeguards: NCWO protections, independent valuation prior to resolution measures, respect for netting/set-off/collateral, ex-post appeal right for compensation. - Statutory creditor hierarchy and depositor preference needed to reduce disorderly market behavior at entry to resolution. ### Designation and institutional features of the Resolution Authority (RA) - RA should be a designated administrative authority; judicial review limited to procedural aspects; monetary compensation by Government is remedy. - Four RA institutional models: standalone agency, within prudential regulator (with operational independence), within central bank (with independence), or within depositor protection agency (not relevant in Chile). - Operational independence minimums: separate staff and leadership of same seniority, separate reporting lines, governance allowing RA decisions without supervisory consent. - In Chile, CMF could be lead authority but RA functions within CMF require structural separation; BCCh could be RA but must avoid perceived conflict with monetary operations. ### Resolution planning and resolvability powers - RA should conduct resolution planning well in advance for all institutions within scope. - Resolution planning powers include gathering legal/financial/operational information, setting preferred resolution strategy, assessing resolvability, and addressing barriers via rule-making or firm-specific directions. - RA should be able to require legal, financial and operational structure changes to remove impediments, including LAC requirements. ### Liquidity in resolution and BCCh ELA reforms - Banks in resolution should meet liquidity needs from private resources first; RA needs ability to provide temporary liquidity assistance secured against a wide range of collateral when private funding insufficient. - BCCh ELA current framework: - BCCh can extend ELA to banks; MoF is closely sighted but cannot stop BCCh decisions; MoF does not indemnify BCCh for ELA losses. - BCCh can dictate terms, including collateral eligibility. - BCCh internal ELA policies/procedures need development: clarify regulatory framework, solvency/viability assessment frameworks, risk control documentation and accountability. - ELA should be reserved for solvent banks facing temporary liquidity issues; ELA to banks with uncertain solvency or under some resolution scenarios should be accompanied by a government guarantee. - Standing legislative powers for BCCh to capitalize loans to a bank facing solvency problems should be dropped. - BCCh should clarify how lending under ELA can be tailored to banks recapitalized via resolution and develop internal emergency liquidity policy with criteria for access, joint solvency assessments with CMF, collateral framework, rate and term of lending. ### Loss-Absorbing Capacity (LAC) requirements - Recommend LAC requirement for any bank that could be systemically important or critical if it fails given the highly concentrated system. - LAC reduces direct link between financial sector and sovereign risks, reduces moral hazard, and aligns incentives. - Proposed minimum includes a minimum one-third debt requirement (as opposed to CET1); any entity subject to LAC must meet at least one-third of it with LAC debt. - Not all liabilities suitable for LAC (deposit-taking liabilities, debt with maturity less than one year). - Chilean largest banks are positioned to comply due to active wholesale debt issuance; bond funding ranges between 15 to over 20 percent of total liabilities in some cases. - High reliance on domestic investors, including pension funds; need LAC disclosure and pension fund risk management to manage impact on pensioners. - Measures: define debt eligibility criteria and minimum maturities; establish LAC deductions for cross-holdings; market disclosure requirements similar to Basel Pillar 3; multi-year transition periods and flight paths; encourage international investor bases for LAC debt. ### Depositor protection arrangements and DPS reform - Current arrangements: - State guarantees term deposits of natural persons (Articles 144–153 GBL): benefits individuals only; covers 90 percent of obligations contracted with an individual; ceiling up to UF 200 (about US$8,000) per Bank per calendar year and UF 400 for the system; acceptance implies renouncing remaining insolvency receivables. System is not pre-funded. - BCCh has an unlimited legal guarantee of sight deposits and other obligations (Articles 65, 132 GBL; Article 36 N° 2 BCCh Law). Banks required to hold technical reserve in the central bank or Treasury securities against sight deposits in excess of 2.5 times their own funds or equity capital (or in excess of 1.5 times regarding systemic banks, if applied). - BCCh has a “super preference” for sight deposits paid under its guarantee in liquidation. - Recommendations: - Replace BCCh sight deposit guarantee via adoption of effective resolution framework ensuring continuity of sight deposits and creation of an industry-funded deposit protection scheme (DPS) with ex-ante funding. - DPS should be able to fund orderly transfers in resolution for protected deposits of non-systemically important banks subject to caps (not greater than expected payout losses). - DPS implementation provides opportunity to review MoF levy on commercial banks and BCCh technical reserve requirement; part or all MoF portion could fund CMF financial stability work, RA operations, or contribute to DPS prefunding. - Ensure supervisor financing remains consistent with Basel Core Principle 2. ### DPS operational design and SCV requirements - DPS institutional arrangements: options include autonomous agency or under control of another institution; role of RA in DPS warrants consideration for RA responsibility over DPS. - Single Customer View (SCV) requirement for non-systemically important banks: - Identify each unique deposit accountholder and report covered/uncovered balances depending on DPS coverage. - SCV electronic reporting capability required; Board and senior management responsible for operational robustness. - Firms expected to provide an up-to-date SCV file within 24 hours of request. - SCV file can include: Unique customer identifier, name, address, bank account details, recent transaction history, currency split, aggregate balance and compensation due. ### Crisis management staff legal protection - Legal liability in crisis management should accrue only in event of gross negligence or willful misconduct. - Current CMF staff protections cover defense and trial costs; defense available after leaving position. - Recommendations: - Statutory clarity that cases without criminal activity, gross negligence, or bad faith have no chance of success. - Ensure employees have access to resources for defending proceedings, including indemnity for costs. - Amend GBL to include indemnity from personal and institutional liability for acts in good faith. - Require gross negligence as civil liability threshold for CMF and BCCh authorities or employees and persons appointed by CMF. - Extend protections to acts or omissions taken in support of foreign resolution measures. ### Key financial system statistics (selected) - Financial system totals (end-2011 vs end-2020, billion USD and percent of total assets): - Total institutions: 163 - Total assets: 476.5 (2011) and 845.5 (2020) - Financial Sector as % of GDP: 204% (2011) and 300% (2020) - Banks: - Number of banks: 18 - Total assets: 242.2 (2011) and 454.3 (2020) - Banks as percent of total financial assets: 51% (2011) and 54% (2020) - Domestic banks: 8; assets 111.7 (2011) and 192.5 (2020) — 46% (2011) and 42% (2020) - Foreign banks: 9; assets 90.5 (2011) and 187.1 (2020) — 37% (2011) and 41% (2020) - Subsidiaries: 5; assets 89.5 (2011) and 185.3 (2020) — 37% (2011) and 41% (2020) - Branches: 4; assets 1.0 (2011) and 1.8 (2020) — 0% (both) - State-owned banks: 1; assets 40.0 (2011) and 74.7 (2020) — 17% (2011) and 16% (2020) - Insurance companies: 69; assets 44.8 (2011) and 76.7 (2020) — 9% (both) - Pension fund administrators (1): 8; assets 158.1 (2011) and 209.5 (2020) — 33% (2011) and 25% (2020) - GDP (nominal): 234.0 (2011) and 281.9 (2020) ### Top 10 banks — Dec 2020 (Total assets USD billion; share of total banking; % growth 2011–20) - Banco de Crédito e Inversiones: 80.4 — 17.7% — 253% - Banco Santander-Chile: 78.4 — 17.3% — 126% - Banco del Estado de Chile: 74.7 — 16.4% — 154% - Banco de Chile: 64.8 — 14.3% — 112% - Scotiabank Chile: 51.7 — 11.4% — 537% - Itaú Corpbanca: 50.2 — 11.0% — 702% - Banco Bice: 12.9 — 2.8% — 157% - Banco Security: 11.4 — 2.5% — 107% - Banco Consorcio: 8.3 — 1.8% — 660% - Banco Falabella: 8.2 — 1.8% — 364% - Top 5 total: 350.0 — 77% — 179% - Top 10 total: 440.9 — 97% — 204% - National totals: 454.3 — 100% — 156% ### Status of 2011 FSAP resolution recommendations (selected) - Recommendation 1: Strengthen legal framework for bank resolution — Priority H, Timeframe M — Not implemented. There is no statutory resolution process in Chile. Liquidation remains the only tool available when a firm becomes insolvent. - Recommendation 2: Consider introduction of a premium-based limited deposit insurance system — Priority M, Timeframe M — Not implemented. There is a State guarantee for bank time deposits held by natural persons up to a limit of about US$ 8,000 and a BCCh guarantee of 100% of bank sight deposits. - Recommendation 3: Examine options to establish a framework for dealing with a systemic crisis and with the potential failure of a financial conglomerate — Priority M, Timeframe M — Not implemented. CMF is exploring recovery planning requirements and how existing powers can support a solvent wind-down. *CHILE — EXECUTIVE SUMMARY, INTERNATIONAL MONETARY FUND* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Financial system structure and risks - Chile has a large and well-developed financial system relative to Latin America; the market is well integrated into the global financial system. - The nonbank sector accounts for almost 50 percent of assets. - The banking sector is very concentrated: six banks—one state bank, two large private banks, and three foreign-owned banks—account for over 90 percent of banking sector assets. - Since the last FSAP, the banking sector has grown from 204 to 300 percent of GDP. - Bond funding makes up 15–20 percent of total liabilities for the largest banks in Chile at the end of 2020. ### Key deficiencies in the statutory framework - There is no statutory resolution regime to facilitate the orderly failure of banks. - Forced liquidation is recognized as unsuitable for managing the failure of a systemic bank or a bank carrying out critical financial functions (e.g., payment services, custody, or instant access deposit accounts) because it results in loss of access to these services and significant financial and economic disruptions. - The absence of a gone-concern loss absorbing capacity requirement for systemically important banks creates significant risk to financial stability in a future banking crisis. - The BCCh and State guarantees of sight and time depositors (unlimited in the case of sight deposits) create significant moral hazard risks and expectations of bailout. - The current statutory limitations on government and state-owned enterprises capitalizing banks under the General Banking Act (GBL) coexist with the high likelihood that systemic bank failure costs would be borne by taxpayers. ### International standards and Chilean preparedness - Since 2011 the Financial Stability Board (FSB) established The Key Attributes of Effective Resolution Regimes for Financial Institutions (the “Key Attributes” or “KAs”). - Authorities globally have developed resolution powers including “bail-in” and loss absorbing capacity (LAC) requirements similar to the TLAC Term Sheet for G-SIBs. - The largest Chilean banks are well-positioned to comply with a future LAC requirement given their active track record issuing wholesale debt securities; such bank debt could be relied upon to meet LAC requirements at the point of refinancing, subject to eligibility criteria. ### Recommended reforms — overview - It is imperative Chile establishes an up-to-date bank resolution framework with a range of powers to meet international standards, reduce moral hazard, and limit fiscal risk. - Two broad categories of reforms: changes by banks and changes in the legislative and regulatory framework. ### Changes by banks (recommended) - Set a LAC requirement by the resolution authority for systemically important banks that cannot be placed into an orderly liquidation in the event of failure. LAC requirements should enable the resolution authority to: - recapitalize failing systemically important banks if they fail, - protect depositors, - minimize the risk to public funds while ensuring financial stability. - Require firms within scope of the resolution regime to make legal, financial and operational changes to their structure to improve resolvability and ensure resolution tools can be applied in an orderly manner. Structural changes should be mandated in peacetime to maintain continuity of essential banking services, protect depositors, and ensure creditors are exposed to losses instead of public funds. ### Changes in the legislative and regulatory framework (recommended) - Enhance cross-authority crisis coordination arrangements, including agreeing and publishing a MoF, CMF, BCCh crisis management memorandum of understanding (“MoU”). The MoU should describe peacetime crisis preparation, the crisis coordination forum, the full range of crisis management tools and when they would be used, and set public expectations about appropriate tools for different crisis types. - Develop a cross-authority systemic impact assessment framework and wider information sharing arrangements to support coordination. - Introduce a prudential supervisory recovery planning requirement on banks well before crises. - For non-systemic firms that may be liquidated, ensure CMF and BCCh have operational policies, processes, and procedures in peacetime to facilitate orderly pay-out or transfer of sight deposits given their importance to the payment system. - Establish a statutory bank resolution framework defining statutory resolution objectives, a full range of resolution tools, statutory safeguards, a clear statutory creditor hierarchy with depositor preference (general or tiered), and an assessment framework to identify when a bank is no longer solvent and should enter resolution. - Designate a new statutory resolution authority (RA) with powers to conduct bank resolution planning and set peacetime requirements (e.g., LAC) to improve resolvability. Ensure adequate structural separation from prudential supervision to maintain operational independence and avoid conflicts of interest. - Ensure a bank in resolution can access temporary collateralized liquidity support if needed. Drop from statutes the powers for the BCCh to capitalize any loans to a bank facing solvency problems. The BCCh should develop an internal emergency liquidity policy and operational facility capabilities for recapitalized banks, setting criteria for access, likely eligible collateral, rate, and term of lending. Banks in resolution seeking BCCh liquidity would need to meet the same BCCh conditions of access as going-concern banks, including demonstrating a credible prospect to maintain or restore adequate solvency in the near term. - Establish a premium-based partial deposit protection scheme (DPS) that is ex-ante funded to: - ensure market confidence and minimize the risk of runs, - support orderly liquidation of non-systemically important banks, - migrate over time to remove the current BCCh/State guarantees of sight and time deposits. - The DPS should have authority to help fund transfers in resolution of insured deposits backed by the assets of non-systemically important banks, with such use of DPS funds capped (not greater than the losses the DPS would have expected to incur if it had implemented a payout and made recoveries from winding up the institution). The DPS should be implemented as the new resolution regime is established and have the resources and capabilities to implement a rapid payout of covered depositors when failed non-systemically important banks are determined by the resolution authority to enter liquidation. - Expand legal protections for officials involved in crisis management (early intervention and resolution) except in cases of criminal activity, gross negligence, or bad faith. This should: - address CMF and BCCh staff liability in regulations, - require gross negligence as the threshold for civil liability of CMF and BCCh employees and any persons appointed by the CMF (such as inspectors or provisional liquidators). ### Implementation priorities (selected entries from Table 1) - Crisis Preparedness - Early Intervention: Establish a statutory ex-ante recovery planning requirement for banks — MoF/CMF — High - Early Intervention: CMF to define internal early warning triggers for prompt intervention in problem banks — CMF — Medium - Early Intervention: Formalize the tools under the existing framework for forced liquidation of failing non-systemically important banks — CMF/BCCh — Medium - Coordination Arrangements: Define and publish an authority Crisis Management Framework — MoF/CMF/BCCh — Medium - Coordination Arrangements: Formalize Inter-Authority Crisis Coordination Arrangements (e.g., MoU) — MoF/CMF/BCCh — Medium - Coordination Arrangements: Establish crisis information sharing and coordination infrastructure — CMF/BCCh — Medium - Coordination Arrangements: Develop a joint CMF/BCCh systemic impact assessment framework — CMF/BCCh — Medium - Resolution - Establish statutory bank resolution regime, including statutory resolution objectives, a full range of resolution tools, statutory resolution safeguards, clear statutory creditor hierarchy and depositor preference — MoF — High - Designate an administrative resolution authority (RA) with powers to conduct bank resolution planning and set requirements on banks to ensure resolvability (e.g., LAC) — MoF — High - Establish a loss absorbing capacity requirement for systemically important banks — MoF/RA — High - Drop from statutes the powers for the BCCh to capitalize any loans to a bank facing solvency problems. Develop an internal emergency liquidity policy and related operational capabilities (criteria for access, collateral framework, rate and term of lending) for banks in resolution — MoF/BCCh — Medium - Depositor Protection Arrangements - Establish an ex-ante funded premium based partial deposit protection scheme — MoF — Medium - Legal Protections for officials involved in crisis management - Ensure legal liability only accrues in the event of gross negligence or willful misconduct on the part of the CMF, BCCh and RA, or its employees, including persons appointed by the CMF such as inspectors or provisional liquidators — MoF — High *High: within 12 months; Medium: within 1 to 2 years.* *CHILE — EXECUTIVE SUMMARY, INTERNATIONAL MONETARY FUND* ### INTRODUCTION ### INTRODUCTION ### Institutional reforms since 2011 - The CMF was created in 2017, replacing the former securities and insurance supervisor (SVS) and then merging the banking supervisor into the CMF in 2019, consolidating an integrated supervisor for the Chilean financial market. - The CMF has an objective to ensure the proper functioning, development and stability of the financial market. - The General Banking Law (GBL) reform introduced new coordination arrangements between BCCh and the CMF in peacetime, including on specific sets of regulations and activation of the countercyclical buffer determined by BCCh. - The banking regulatory framework revision increased supervisory powers and expanded the early intervention tool kit for the CMF. - Most of the legislative framework pertaining to the financial safety net remains unchanged, and powers for managing crises involving failing banks are narrow. ### Scope and focus of the FSAP technical note - Mission focus: assess progress on establishment and provide guidance regarding crisis management and the resolution framework for financial institutions, including banks. - The 2011 FSAP identified resolution and crisis management as the areas with the most significant gaps in the Chilean Financial System Regulatory Framework. - The technical note reviews the existing framework and offers advice to support further development of powers and approaches to managing bank failure in Chile. - Specific topics to be addressed include: - Review of financial safety net legal framework consistency with international standards and best practice for crisis management and statutory resolution. - Resolution challenges and risks to public funds in a system dominated by a handful of large institutions. - Discussion of approaches to distributing losses in a bank failure (socialized vs privatized). - Relevance of the Financial Stability Board (“FSB”)’s total loss-absorbing capacity (“TLAC”) requirements or similar domestic regimes and bail-in debt assessment if bail-in power were established. - Discussion of the guarantee of sight and time deposits by the BCCh and State, and a proposal to introduce deposit insurance. - Structure of the note will: - Describe existing institutional arrangements. - Focus on crisis preparedness, coordination arrangements and prudential early intervention arrangements. - Discuss resolution tools and powers, safeguards including resolution planning and resolvability requirements, and liquidity in resolution. - Discuss the role of loss absorbing capacity requirements for systemically important banks. - Discuss depositor protection arrangements. - Discuss legal protections for officials involved in crisis management. ### Financial system structure and key statistics - The Chilean financial system is large and well-developed, reflected in the ratio of domestic credit to the private sector and broad access to financial products. - Total assets of the financial sector have nearly doubled over the last ten years. - The nonbank sector accounts for almost 50 percent of assets. - The banking sector is very concentrated: six banks—one state bank, two large private banks, and three foreign-owned banks—account for over 90 percent of banking sector assets. - The CMF classifies these six banks as systemic under the Basel III D-SIB classification methodology for capital add-on purposes. - Bond funding makes up between 15–20 percent of total liabilities for the largest banks in Chile. - Equity market capitalization is equivalent to 65 percent of Gross Domestic Product. ### Authorities, mandates, and supervisory architecture - BCCh monetary policy: mainly open market operations in the overnight funding rate in the interbank market; aims to align market rate with the Monetary Policy Rate. - BCCh implements conventional and unconventional monetary policy measures and manages system liquidity through standing facilities and access to settlement accounts in its RTGS system. BCCh is lender of last resort. - BCCh statutory mandate includes ensuring the normal functioning of internal and external payments systems and stability of the currency; broadly interpreted, this gives BCCh an interest in financial stability. - BCCh issues regulations for banks and other depository institutions, regulates and oversees the RTGS system, regulates ComBanc and retail payment systems, and has consultative regulatory responsibilities for CCPs and pension funds. - CMF scope: prudential supervision, market conduct, and surveillance of most major financial institutions; regulates and supervises insurance companies, securities issuers, fund managers, broker-dealers, financial market infrastructures (the SSS, the two domestic CCPs, and the CSD), capital markets, banks, larger credit unions, credit card issuers and retail payment systems. - Superintendence of Pensions (SP) supervises the pension system (pension funds and some social security benefits). - A Department within the Ministry of Economy supervises smaller credit unions (with capital below US$ 15 million) and governs credit union governance. ### Coordination fora and information sharing - Financial Sector Supervisory Committee: forum for peacetime supervisory cooperation and exchange between SP and CMF; BCCh has observer status. - Financial Stability Board (Consejo de Estabilidad Financiera or “CEF”): - Chaired by the MoF, consists of the CMF and SP; BCCh is not a formal member but is a permanent advisor. - MoF plays the lead role and holds the technical secretariat. - CEF can request information from its members, including BCCh, but its policy recommendations are nonbinding. - CEF is required to meet at least monthly. - BCCh publishes a semi-annual Financial Stability Report. - Technical staff of institutions share information through technical groups under the CEF framework. ### Crisis preparedness and historical context - Last banking crisis: mid-1980s. Tools used then: - Liquidation of insolvent banks and financial institutions from 1982 to 1986. - Portfolio purchases with repurchase obligation by the BCCh in 1982–1987 and the special legal framework applicable to subordinated debt (Law 19.396, 1995). - Capitalization of the banking system through the “popular capitalism” process starting in 1985. - BCCh asset purchases were limited to banks judged solvent but facing loss of market confidence; interventions left BCCh with negative equity for many years afterwards. - In 2019, final payment on subordinated debt owed to the Central Bank by SAOS brought to an end interventions dating from portfolio purchases in 1982–1987. - Since the 1980s crisis, no bank has fallen into insolvency. - Two recent episodes of financial stress: social unrest in 2019 and the global COVID crisis in 2020—neither resulted in a financial crisis. - BCCh implemented extraordinary liquidity measures during these episodes; monetary policy stance expanded through conventional and unconventional measures, contributing to significant expansion in the central bank balance sheet. ### Authority crisis coordination arrangements: current status and recommendations - CEF statutory purpose: facilitate technical coordination and exchange of information between MoF, BCCh, CMF, and SP on prevention and management of crises (Art 1, Law N° 20.789); CEF secretariat located within MoF. - CMF must inform CEF of events that may have systemic implications without prejudice to CMF’s autonomy. - CEF may make public communications on crisis management where helpful and is required to meet at least monthly. - Limitations: CEF does not have formal powers or decision-making authority beyond commissioning analysis or information. - CMF and BCCh are working to agree an MoU to include information-sharing arrangements and crisis management protocols, particularly regarding CMF decisions on forced liquidation and BCCh emergency liquidity assistance. - Recommendations: - Develop and publish (summary) an authority Crisis Management Framework describing respective statutory roles and objectives for crisis preparation and coordination, including tools (regulatory, early intervention, collateralized liquidity support, asset purchase, future bank resolution regime, forced liquidation). - Framework should set ex-ante expectations (at least internal) for which authority powers and tools would be used as a bank’s proximity to failure increases and specify which tools are appropriate for systemically vs non-systemically important banks. - Framework should describe factors to determine whether a firm can be liquidated without undermining confidence, legal bases for measures, which authority has the legal power, consultation processes, and operational steps to implement measures. - Update the framework over time to reflect structural or regime changes (e.g., establishment of a resolution regime or DPS). - CMF should build on its internal guide (coordination protocols and template communications) to develop an agreed policy framework for orderly bank failure. - CMF and BCCh should establish a joint framework for conducting systemic impact assessments for individual firms at risk of failure to inform choices between forced liquidation and resolution. - Ensure necessary information sharing between CMF and BCCh to evaluate criteria in systemic impact assessments (impact on capital and funding markets, payment systems, depositors, and credit provision). ### Prudential early intervention arrangements - The General Banking Law revisions expanded CMF supervisory powers and the early intervention toolkit, but the technical note emphasizes the need to strengthen crisis preparedness, coordination, and frameworks to operationalize early intervention and resolution decisions. *Source: 1chlea2022005 - INTRODUCTION* ### 26. Under the General Banking Law, the statutory framework for supervisory early ### Under the General Banking Law: statutory framework for supervisory early intervention, resolution and liquidation (Chile) ### Early intervention framework - The statutory framework for supervisory early intervention has three distinct phases for banks experiencing severe financial stress: (i) regularization, (ii) appointment of an “inspector” or alternately a “provisional administrator,” and (ii) compulsory liquidation. - Regularization is initiated when a range of triggers set out in Article 112 of the General Banking Law are met or other indicators of severe financial stress. - On breach of a trigger, the bank must submit a regularization plan to the CMF. The plan sets out actions the firm will take to address causes of stress and restore market confidence. - The CMF maintains forecasts of these indicators, including those related to market prices. - If the regularization plan is insufficient or its implementation fails, the CMF can appoint an “inspector” or a “provisional administrator.” Appointment requires prior consent of the BCCh Board. - The inspector sits on the board of directors and has a veto right. - The provisional administrator is granted the same powers of the Board of Directors and CEO of the bank. - The CMF can initiate compulsory liquidation if the bank is judged to be insolvent at any point; this also requires prior consent of the BCCh Board. - A firm may move directly into liquidation without submitting a regularization plan or the CMF appointing a provisional administrator. ### Article 112 triggers (as set out in the General Banking Law) - (i) capital requirements mandated by law are breached; - (ii) losses observed during the past two or more months permit to predict that the bank will breach the capital requirements; - (iii) there have been repeated events of noncompliance with the law, regulations or other instruments issues by the CMF; - (iv) noncompliance with liquidity requirements; - (v) recurrent need of Banco Central de Chile’s (BCCh) emergency financing; - (vi) it is foreseeable that the bank will not be able to meet its obligations in the next 30 days; - (vii) losses that surpass 10 percent of the paid capital and reserves; - (viii) excess concentration in related party lending or in favorable terms relative to comparable loans; - (ix) objections of external auditors to its financial statements; - (x) noncompliance with the development plan approved with the granting of the license; and - (xi) any other event that could indicate that there is threat to the financial stability of the bank or poor management. ### Limitations of the current early intervention regime - Article 112 triggers are generally late-stage indicators and illustrative of extreme stress; firms in breach are likely to have constrained capacity to improve their financial position. - Decisions and actions of a provisional administrator are subject to legal challenge by shareholders; although a legal challenge does not suspend CMF measures, it could negatively affect authorities’ ability to discharge statutory duties and exercise professional judgment. - Appointment of a provisional administrator can destabilize an open bank (e.g., by triggering a deposit run) absent strong implicit or explicit public support for the bank’s liabilities. - Compulsory liquidation, while available, is generally not a credible tool for managing the orderly failure of systemically important banks because it terminates the bank’s services and can impair financial stability. ### Recommendations to enhance early intervention - Establish an ex-ante recovery planning requirement on banks: - Apply at least to firms classified as a D-SIB and any other firm that may be judged to undermine confidence in the financial system if it failed and entered liquidation. - Make recovery planning a prudential requirement distinct from resolution planning under a statutory resolution regime. - Make it the responsibility of CMF supervisors to ensure robust recovery plans with credible recovery actions. - Allow the CMF to require a bank to implement one of its recovery actions from the firm’s plan if necessary to avoid failure and the firm’s management refuses. - Enhance internal CMF early warning triggers: - Clarify internal early warning triggers to identify firms at increasing risk of failure. - Specify escalating supervisory interventions, deadlines for remedial action, and how intervention would be escalated toward resolution. - Use the firm’s recovery plan triggers framework as input for CMF’s early warning indicators. - Formalize tools under the existing forced liquidation framework to improve management of non-systemically important bank failures: - Establish operational steps that facilitate payout or transfer to another bank of guaranteed depositors under title XV of the GBL. - Take into account the BCCh technical reserve requirement that banks hold central bank securities in accounts at the BCCh against sight deposits in excess of 2.5 times their own funds or equity capital. - Publish in advance any authority expectations of liquidation to facilitate repayment or continuity of access to sight and term deposits covered by BCCh and State guarantee arrangements. - Define bank-specific information required for liquidation (e.g., Single Customer View files) and test non-systemically important banks’ ability to provide it. - Clarify liquidator approaches (payout versus transfer of deposit), BCCh’s potential role in providing temporary liquidity to a liquidator, and repayment mechanics for BCCh liquidity. - Consider external advisory review or conducting a simulation exercise to test arrangements. ### Resolution and liquidation framework: current status and limitations - Chile currently lacks a formal statutory bank resolution regime as defined in the FSB’s Key Attributes for Effective Resolution Regimes (“KA”). - The GBL does not provide CMF or BCCh statutory powers to: - “bail-in” a failed bank’s creditors; - transfer a failing bank to a private sector purchaser; - establish a temporary "bridge bank" pending a sale to a new owner; or - facilitate the merger of a failed or failing bank with a willing buyer. - The CMF’s only formal power to manage firm failure is to require compulsory liquidation of an insolvent bank, with BCCh approval required. - BCCh approval reflects implications for temporary liquidity assistance, costs associated with BCCh sight obligations guarantee, and systemic stability risks of liquidating a large or medium-size bank. - In forced liquidation, provisions allow transfer of credit portfolios, current accounts and other sight deposits to other banks to continue operation and payment. - The limitations in the financial safety net toolkit may force authorities to use State resources to avoid systemic bank failure: - BCCh can extend emergency loans under specific conditions, including a credible prospect to maintain or restore adequate solvency in the near term. - BCCh has some ability to provide solvency support to a failing bank (e.g., by capitalizing its credits) before being determined insolvent and non-viable. - If BCCh recapitalizes a bank by capitalizing loans, it can sell the resulting shares in a period of three years. - Such interventions risk losses to BCCh and the State and may create incentives for shareholders and creditors to refuse recapitalization in anticipation of state support. ### Recommendations to establish a statutory bank resolution regime - The report recommends establishing a new statutory resolution regime including: - Bank resolution tools and framework that comply with the Key Attributes; - Designation of a resolution authority; - Resolution planning powers to ensure bank resolvability; - Liquidity in resolution. - A comprehensive legal reform is recommended to align Chile’s resolution framework with international resolution standards and strengthen the financial safety net. - Key aspects for a future statutory resolution regime: - Defining clear statutory resolution objectives; - Defining the firms within the scope of the regime; - Providing a range of statutory tools for the resolution authority for managing bank failure; - Defining a framework to assess the resolution conditions; - Setting clear creditor safeguards; - Clear statutory creditor hierarchy. - Resolution objectives proposed for the statutory framework should include: - (1) ensuring the continuity of banking services and critical functions in Chile; - (2) protecting and enhancing the financial stability of Chile; - (3) protecting depositors; - (4) protecting public funds by ensuring losses are imposed on the failed banks’ creditors; - (5) avoiding unnecessarily interference with property rights. - Scope: cover any financial institution “that could be systemically important or critical if it fails.” This may include institutions much smaller than those captured by the Basel III D-SIB classification methodology and could extend to holding companies and affiliated operational entities (e.g., group service companies). - The flexibility to use resolution powers on very small non-systemically important firms must be judged against resolution objectives and safeguards; alternative sources of loss-absorbency (e.g., pre-funded DPS funds or other resolution funds) may be required to avoid risks to public funds. ### Context and preparatory steps - Establishing a bank resolution regime had been considered in legislative reforms in 2018/19 but was deferred. - In March 2021, the CMF and the BCCh participated in a bank resolution crisis simulation exercise (CSE) facilitated by the Financial Stability Institute of the BIS with ASBA support. - The CMF is receiving technical assistance to assess its statutory, regulatory, and institutional capabilities against the FSB Key Attributes. - The FSAP report outcomes, recent experience, and technical assistance should form the basis for a renewed legislative program to establish a fit-for-purpose bank resolution regime in Chile. *Source: 1chlea2022005 - 26. (IMF staff report excerpt)* ### 47. On resolution powers and tools, the RA should be provided with a range of resolution ### 1chlea2022005 - 47. On resolution powers and tools, the RA should be provided with a range of resolution ### Resolution powers and tools (scope and required authorities) - The RA should be provided with a range of resolution tools, such as mandatory recapitalization, mergers, transfer of assets and liabilities (purchase and assumption transactions, bridge banks), or mandatory debt restructuring. - Resolution powers must provide administrative and operational control of the entity and ensure that the authorities can assume all shareholder’s rights (essential for undertaking resolution measures). - Authorities should explore any possible constitutional implications of the suspension of shareholder’s rights during resolution. ### Specific statutory resolution tools recommended (paragraph 48) - Legislation should provide administrative powers to: 1) transfer shares and property to a private sector purchaser, 2) transfer shares or property to a bridge bank on a temporary basis to facilitate an onward sale, 3) bail-in creditors without ex-ante consent but subject to ex-post appeal as a means of recapitalizing failing banks. - Resolution powers should be applicable to medium and small-sized banks where liquidation would undermine the resolution authority’s statutory objectives. ### Temporary Public Ownership (TPO) and solvency support (paragraphs 49–50) - As a last resort, the legislation should provide the MoF the power to take a failing systemic firm into temporary public ownership (TPO) only if the resolution authority cannot apply other resolution tools consistent with resolution objectives. - Authorities should set a high bar for TPO by exhausting all other resolution options first and require demonstration that failure to TPO would be a serious threat to financial stability. - Creditors of a failing firm taken into TPO should be bailed-in and bear considerable losses first. - A TPO tool entails the highest risk to public funds and can result in moral hazard. - Establishing a Loss Absorbing Capacity (“LAC”) requirement for banks is the most important step to protect public funds by ensuring creditors are exposed to loss in a bank resolution, including TPO. - MoF and financial authorities, including the future resolution authority, should have an appropriate legal framework (e.g., enabling powers in legislation, operationalized via a memorandum of understanding) to facilitate swift mobilization of solvency support actions and funding as a last resort. - Solvency support arrangements should be agreed in advance and structured to preserve the independence of BCCH and the future resolution authority. ### Recognition and support of foreign resolution actions (paragraphs 51–52) - The future RA in Chile should have the power to recognize or support a foreign resolution action with respect to a foreign bank operating in Chile (branches or subsidiaries). - Resolution recognition: accepting commencement of a foreign resolution proceeding domestically and empowering the domestic authority to enforce the foreign resolution measure; recognition should produce substantially the same legal effect in Chile as if made under domestic laws. - Supportive resolution measures: taking domestic resolution measures to produce the effect of the foreign resolution measure. - Safeguards for recognition consistent with the Key Attributes: - A foreign resolution action must not be recognized unless an arrangement exists with the foreign authority under which eligibility of Chilean creditors or shareholders to claim compensation is broadly consistent with their eligibility to claim NCWOL compensation under Chilean legislation. - Recognition must not be granted where it would adversely impact Chilean financial stability, would not deliver outcomes consistent with Chilean resolution objectives, or would disadvantage Chilean creditors or shareholders relative to other creditors or shareholders. ### Conditions for entry into resolution (paragraph 53) - Two conditions must be judged met before a firm can be taken into resolution: 1) the firm is failing or likely to fail (first determination by the supervisory authority, the CMF, following consultation with the resolution authority as designated, BCCh and MoF), 2) it is not reasonably likely that action will be taken that will result in the firm recovering (second determination by the resolution authority in consultation with the prudential supervisory authority, BCCh and MoF). - If both conditions are judged to be met by the respective authorities, then the resolution authority can place the firm into the resolution regime to minimize resolution costs or preserve financial stability. ### Statutory safeguards and creditor protections (paragraph 54) - Safeguards should limit RA uses of powers affecting property and contractual rights and include requirements to: 1) ensure no shareholder or creditor is left worse off (“NCWO”) than they would have been had the failed bank been placed into liquidation or insolvency, 2) conduct an independent valuation of the firm’s assets and liabilities prior to use of resolution powers to inform NCWO protections, 3) respect netting, set-off or collateral arrangements. - Shareholders and creditors should have a right of ex-post appeal for compensation to the MoF against actions of the RA if their treatment in resolution leaves them worse off than in liquidation. ### Statutory creditor hierarchy and depositor preference (paragraph 55) - The statutory regime should ensure a sufficiently clear priority or hierarchy of creditor claims in insolvency or winding-up to support orderly resolution. - Currently, creditor hierarchy in Chile is not sufficiently clear on the interaction between the GBL and wider corporate insolvency legislation in assessing treatment of bank creditors in liquidation. - Authorities should adopt a statutory depositor preference that aligns with eligible depositors and protected levels provided by the DPS protection regime once introduced. - A clearly defined statutory creditor claim framework will decrease risk of disorderly market behavior on entry of a failing firm into resolution. ### Designation of the Resolution Authority (paragraphs 56–62) - The RA should be a designated administrative authority; judicial actions should not constrain implementation of, or reverse, measures taken by resolution authorities acting within legal powers and in good faith. Judicial review scope should be limited by law to procedural aspects, not substantive decisions. Monetary compensation by the Government is the remedy for affected parties. - Four broad institutional models for a RA: - establish a new standalone agency (e.g., Federal Deposit Insurance Corporation in the US, Single Resolution Board in the European Banking Union) - establish the resolution authority within the prudential regulator with appropriate operational independence from prudential supervision (e.g., FINMA in Switzerland, BAFIN in Germany) - establish the resolution authority within the central bank (e.g., Bank of England, Hong Kong Monetary Authority, Monetary Authority of Singapore) with appropriate operational independence from prudential supervision and lender of last resort functions - establish the resolution authority within the depositor protection agency (where one already exists) (e.g., PIDM in Malaysia) (not relevant in Chile) - Structural arrangements are necessary to ensure operational independence of the RA and avoid conflicts of interest between prudential supervision and resolution functions. - Operational independence requires at minimum: - separate staff and leadership of the same seniority (structural separation of staff and separate reporting lines), - a decision making/governance framework allowing the RA to take decisions without consent of any supervisory authority. - Operational independence does not prohibit close cooperation or information sharing; statutory information sharing gateways should be included to facilitate cooperation. - In Chile, while no statutory resolution framework exists, it is assumed that the CMF may be the lead authority in resolution under a future regime, but any RA function within the CMF would need structural separation from CMF prudential functions. - Alternatively, BCCh could be designated as RA due to operational independence and statutory objective to ensure normal functioning of payment systems; RA function within BCCh must ensure operational independence to avoid perceptions that BCCh would engage in open market operations beyond monetary policy objectives to avoid firms entering resolution. ### Resolution planning powers and bank resolvability (paragraphs 63–65) - A future resolution regime in Chile should provide the RA with a statutory objective to engage in resolution planning in advance of firm failure for all institutions within scope. - Resolution planning powers should include authority to: - gather information from the bank (legal, financial and operational structure), - set and operationalize a preferred resolution strategy for the bank, - assess the bank’s resolvability under that preferred resolution strategy to identify barriers to orderly implementation, - address bank-specific barriers to resolution (e.g., rule-making power or firm-specific power of direction). - Resolution planning powers should include a power for the RA to make rules requiring banks to make necessary legal, financial and operational structure changes to remove impediments to resolvability, including a LAC requirement. - Even if CMF prudential powers can be used in some instances to advance resolution planning objectives, a separate statutory basis for RA resolution planning and implementation responsibilities is essential to manage conflicts between resilience and resolvability objectives. *Source: 1chlea2022005 (IMF)* ### 66. The RA will conduct resolution planning for individual banks within the scope of the ### 1chlea2022005 - 66. The RA will conduct resolution planning for individual banks within the scope of the ### Resolution planning - The RA will conduct resolution planning for individual banks within the scope of the regime well in advance of any actual failure. - The CMF has already started to engage with some firms on resolution planning topics recently. - Annex IV provides additional detail on the respective roles and responsibilities of the supervisory authority as distinct from those of the resolution authority. ### Liquidity in resolution — key findings and requirements - Banks in resolution are expected to meet liquidity needs from their own private resources in the first instance. - Where a bank’s liquid resources are insufficient, or it cannot access private funding markets in the initial phase of resolution, the resolution authority needs to be able to provide temporary liquidity assistance to ensure an orderly resolution. - Such liquidity-in-resolution support should be secured against a wide range of collateral. ### BCCh Emergency Liquidity Assistance (ELA) — current framework and recommended reforms - The BCCh can extend emergency liquidity assistance (ELA) to banks, although it has not done so since the mid-1980s. - The MoF is closely sighted on any decision by BCCh to grant ELA, but the MoF cannot stop a decision by the BCCh to provide ELA to a bank in stress. The MoF does not indemnify the BCCh for any losses that may arise from ELA. - If BCCh extends ELA, it can dictate terms and conditions for granting ELA, including collateral eligibility. - BCCh's internal policies and procedures for deployment of ELA require further development to be consistent with international best practice, including: - Clarifying the regulatory framework for ELA and internal BCCh ELA operations. - Developing solvency and viability assessment frameworks, risk control measures documentation and accountability. - BCCh rules should make clear that ELA should be reserved, as a last resort, to solvent banks facing temporary liquidity issues. - BCCh ELA should be accompanied by a government guarantee when liquidity support is provided to a bank with uncertain solvency or under some resolution scenarios (e.g., where the firm’s post-resolution restructure plan designed to restore its business model viability may be more in question). - The standing legislative powers for the BCCh to capitalize any loans to a bank facing solvency problems should be dropped from the statutes. - BCCh should clarify how lending under its existing ELA facility can be tailored or adapted so banks recapitalized via resolution can access temporary collateralized liquidity support if required, building on and expanding existing bilateral lender-of-last-resort facility capabilities. - BCCh should consider interactions between resolution liquidity support and its wider normal lending facilities and strengthen collateral and risk management frameworks. - BCCh should develop an internal emergency liquidity policy and related operational facility capabilities for banks recapitalised through resolution tools, including: - Criteria for access, - Joint assessments of firm solvency and viability with the CMF, - Collateral framework, - Rate and term of lending. ### Loss-Absorbing Capacity (LAC) requirements — rationale and design - Given the highly concentrated Chilean banking system, the report recommends a LAC requirement for any bank that could be systemically important or critical if they fail as the most efficient means of ensuring sufficient loss-absorbing capacity to stabilize these banks in a resolution. - A LAC requirement is judged more consistent with RA statutory resolution objectives to protect public funds and may be more efficient than an ex-ante industry resolution fund. - LAC requirements reduce the direct link between financial sector risk and sovereign risks, reduce moral hazard, and improve alignment of incentives to manage banking risk. - A minimum LAC requirement for systemically important banks means maintaining equity and eligible debt liabilities (e.g., capital and senior unsecured bonds) that can credibly bear losses before and in resolution, for example, through being written down and/or converted to equity. - The proposed minimum LAC requirement will include a minimum one-third debt requirement (as opposed to common equity tier 1 (CET1)). It is proposed that any entity subject to a LAC requirement must meet at least one-third of it with LAC debt. - Not all liabilities are suitable for LAC: liabilities connected to critical economic functions (e.g., deposit-taking) or liabilities not reliably available at the point of resolution (e.g., debt with maturity less than one year) are not appropriate. ### Chilean banks’ position and implementation considerations - The largest Chilean banks are already well-positioned to comply with a future LAC requirement due to active issuance of wholesale debt securities, which can be made LAC eligible when refinanced. - Bond funding for the largest banks ranges between 15 to over 20 percent of total liabilities in some cases. - There is high reliance by Chilean banks on domestic investors, including pension funds, as investors in bond issuance; without appropriate LAC disclosure and pension fund risk management, imposing losses on LAC could raise concerns about impact on pensioners. - Authorities must develop a policy and implementation roadmap consistent with wider monetary and financial stability objectives and integrate LAC within the wider prudential regulatory and supervisory capital regime. - LAC policy must define debt eligibility criteria, including minimum maturity profiles to ensure sufficient LAC instruments on banks’ balance sheets. - To manage contagion risk from imposing losses on LAC instruments, establish a LAC deductions requirement for cross-holdings of LAC instruments by other banks (similar to Basel III deductions for cross-holdings of capital instruments), effectively removing economic incentives for banks to hold each other’s LAC instruments. - LAC policy needs clear market disclosure requirements similar to Basel Pillar 3 disclosures to enable investors (including domestic pension funds) to manage credit exposures and set limits on holdings of LAC debt. - Transitioning liability structures to build up LAC eligible instruments may require multi-year transition periods with tailored flight paths to compliance deadlines based on banks’ funding profiles. - Authorities and banks should be mindful of contagion risk related to concentration of LAC debt holdings in sensitive investor classes; banks may need to develop international investor bases for LAC debt, and pension regulators/funds need appropriate risk management to minimize concentration risk. - LAC disclosure requirements (similar to Basel III Pillar 3) will inform investor risk management strategies. ### Depositor protection arrangements — current features and recommended reforms - Under articles 144 to 153 of the General Banking Law, the Chilean State guarantees term deposits of natural persons. This guarantee: - Benefits individuals only, - Covers 90 percent of the obligations that the financial system has contracted with an individual, - Has a ceiling of up to UF 200 (about US$8,000) per Bank per calendar year and UF 400 for the system, - Acceptance of this guarantee implies renouncing remaining insolvency receivables. - The system is not pre-funded. - The BCCh has an unlimited legal guarantee of sight deposits and other obligations received or contracted by a banking enterprise (See articles 65 and 132 of the GBL, article 36 N° 2 of the BCCh Law). - Sight deposits and obligations are those whose payment may be legally demanded unconditionally and immediately; in limited circumstances where the depositor is another banking enterprise, sight deposits/loans/obligations are deemed as time obligations. - Current State and BCCh deposit guarantee arrangements apply to all banks—domestic and foreign—and have no direct levy cost to entities benefiting from the guarantee. - Guarantees are expected to be paid out by the liquidator during “forced liquidation”; funding for the state guarantee is allocated in the budget every year as contingent. - For the BCCh legal guarantee, banks are required to hold a technical reserve in the central bank or Treasury securities and in current accounts or deposits at the BCCh against sight deposits in excess of 2.5 times their own funds or equity capital (or in excess of 1.5 times regarding systemic banks, if such requirement has been applied, article 66 quarter GBL). - If institution funds under liquidation are insufficient, the central bank has a “super preference” for sight deposits paid under its guarantee in the liquidation (See articles 65, 66 quarter, letter c); 132 GBL). The central bank would finance the payout either by asset purchase or a loan to the liquidator; such a central bank loan would have the highest credit priority during liquidation. ### Recommendations on depositor protection and funding of deposit insurance - Reconsider institutional arrangements for the financial safety net and deposit protection in line with best international practices. - The BCCh sight deposit guarantee, which serves both payment system protection and depositor protection, should be replaced by: - Adoption of an effective resolution framework to ensure continuity of sight deposits as a critical payment system function, and - Creation of a deposit insurance scheme with an ex-ante industry funding model. - Establish a new industry-funded deposit protection scheme (DPS) as the new resolution regime comes into force, with resources and capabilities to implement a rapid payout of covered depositors when failed non-systemically important banks are determined by the RA to enter liquidation. - Transitioning to an industry-funded DPS will limit moral hazard and central bank balance sheet risks associated with current unlimited guarantees. - A future DPS could be: - (1) prefunded via an industry levy or premium, or - (2) ex-post funded via a levy on industry to recoup any losses incurred on temporary liquidity provided by the central bank or the MoF if such lending was indemnified. - Prefunded premium-based DPS advantages: - Better insulates the industry from contagion effects of payouts and subsequent industry levies, - Better ensures market confidence in a crisis by ensuring sufficient resources for orderly payout, - Reduces expectation of State support and can be tailored to risks in the deposit system and insurance level (IADI core principle 9). - Implementation of DPS reforms and retirement of State/BCCh guarantees presents an opportunity to review the MoF levy on commercial banks (which currently flows to general revenue) and BCCh sight deposit technical reserve requirements. - The CMF derives resources from a levy on commercial banks, divided equally between CMF budget and the MoF; establishment of DPS could allow part or all of the MoF portion to: - Increase funding to supervisor’s financial stability work, - Fund new operations of the resolution authority, - Contribute to an industry levy to prefund a DPS, ensuring long-term financial autonomy. - Any changes to levy arrangements impacting prudential supervisor resourcing should be consistent with Basel Core Principle 2, which requires supervisor financing structured so as not to undermine autonomy or operational independence. - A resolution regime for systemically important banks that sets a LAC requirement to protect public funds may further weaken the rationale for the existing MoF levy on banks used for general revenue purposes. *Source: CHILE, INTERNATIONAL MONETARY FUND* ### 90. The establishment of a credible resolution regime and premium-based DPS in Chile ### The establishment of a credible resolution regime and premium-based DPS in Chile ### Rationale and transitional considerations - Establishing a credible resolution regime and a premium-based deposit protection scheme (DPS) may weaken the rationale for the BCCh technical reserve requirement on banks once existing guarantee arrangements are retired. - While establishing a resolution regime or pre-funded premium-based DPS imposes costs on the industry, these measures provide an opportunity to reduce other sector costs in the form of the MoF levy and BCCh technical reserve requirement once implemented and operational. - Phasing out existing State/BCCh guarantee arrangements will require a credible transitional plan to avoid destabilizing bank funding during the transition. ### Use of DPS funds and operational limits - The new industry-funded DPS should have the authority to help fund the orderly use of resolution tools, including via the transfer in resolution of protected deposits backed by the assets of non-systemically important banks instead of funding the payout of protected deposits in liquidation. - Use of DPS funds in resolution should be subject to appropriate limits or caps. - Any DPS funds used to support a resolution transfer should not be greater than the losses the DPS would have expected to incur if it had implemented a payout and made recoveries from the winding up of the institution. ### Institutional arrangements for the DPS - There is no single model for DPS institutional arrangements; the design should be a matter of public policy choice taking into account the distribution of existing financial safety functions among Chilean authorities. - Options include: - Operating the DPS as an autonomous agency. - Operating the DPS under the control of another institution (e.g., the prudential regulator) given the DPS imposes premiums on banks. - Given the continuum between resolution and liquidation, the role of the resolution authority in determining which banks should enter liquidation and a payout under the DPS, and the potential for DPS funds to support transfers of protected depositors in resolution, there is a case to consider for the resolution authority to be responsible for the DPS. ### Single Customer View (SCV) and payout preparedness - To facilitate a rapid DPS payout to protected depositors in the event of a future liquidation, non-systemically important banks must: - Identify each unique deposit accountholder. - Report any covered or uncovered deposit balances depending on future DPS coverage levels. - Develop and implement a Single Customer View (SCV) electronic reporting capability. - An SCV file is a single, consistent view of a depositor’s aggregate eligible deposits with a firm containing the information needed to facilitate a payout. - A SCV file requirement makes the Board and senior management responsible for ensuring appropriate policies, procedures, operations, internal controls, and depositor information integrity. - Banks should be required to demonstrate that relevant systems and processes for producing an accurate SCV file are operationally robust. - Firms are typically expected to be able to provide an up-to-date SCV file within 24 hours of being requested by the authorities. - A SCV file can include: Unique customer identifier, name, address, bank account details, recent transaction history, currency split, aggregate balance and compensation due. ### Crisis management staff legal protection - Employees of national regulatory authorities (supervisory, resolution and central bank) should be able to discharge statutory duties and exercise professional judgment without threat of lawsuits by banks, creditors, or other private actions. - Legal liability in financial crisis management may occur when: - (i) the supervisory authority fails to take any action notwithstanding knowledge of serious problems in the bank, - (ii) measures were inadequate in response to the problems, - (iii) a shareholder challenges the appointment of a provisional administrator, or - (iv) a resolution action interferes with private property rights in the public interest. - Liability should accrue only in the event of gross negligence or willful misconduct by the supervisory agency, central bank, resolution agency, or their employees. - Under current arrangements in Chile: - CMF staff legal protections for officials cover only defense and trial costs. - The same protections are afforded to the provisional administrator, the delegated inspector, and the liquidator established in Articles 117 and 130 of the General Banking Act. - The defense is available to these staff even after they no longer hold their position in the CMF. - For the MoF, any lawsuits against the minister, the State Defense Council's (CDE) President and the Treasury are the responsibility of the Treasury for trial costs. - Recommendations: - Provide statutory clarity that a case would have no chance of success unless based on criminal activity, gross negligence, or bad faith. - Ensure employees facing personal action have access to resources for defending proceedings, including an indemnity for costs. - Amend the GBL to include a provision of indemnity—from personal and institutional liability—for all acts taken by the employee in good faith and in the discharge of duties under the relevant laws. - Require gross negligence as the threshold to civil liability of the CMF and BCCh authorities or employees and persons appointed by the CMF, such as inspectors or provisional liquidators. - Extend these legal protections to acts or omissions taken in support of foreign resolution measures. ### Key financial system statistics (selected from Annex I and II) - Financial system totals (end-2011 vs end-2020, billion USD and percent of total assets): - Total institutions: 163 - Total assets: 476.5 (2011) and 845.5 (2020) - Financial Sector as % of GDP: 204% (2011) and 300% (2020) - Banks: - Number of banks: 18 - Total assets: 242.2 (2011) and 454.3 (2020) - Banks as percent of total financial assets: 51% (2011) and 54% (2020) - Domestic banks: 8; assets 111.7 (2011) and 192.5 (2020) — 46% (2011) and 42% (2020) - Foreign banks: 9; assets 90.5 (2011) and 187.1 (2020) — 37% (2011) and 41% (2020) - Subsidiaries: 5; assets 89.5 (2011) and 185.3 (2020) — 37% (2011) and 41% (2020) - Branches: 4; assets 1.0 (2011) and 1.8 (2020) — 0% (both) - State-owned banks: 1; assets 40.0 (2011) and 74.7 (2020) — 17% (2011) and 16% (2020) - Insurance companies: 69; assets 44.8 (2011) and 76.7 (2020) — 9% (both) - Life insurance companies: 35; assets 3.2 (2011) and 8.5 (2020) — 7% (2011) and 11% (2020) - Non-life insurance companies: 34; assets 41.6 (2011) and 68.2 (2020) — 93% (2011) and 89% (2020) - Pension fund administrators (1): 8; assets 158.1 (2011) and 209.5 (2020) — 33% (2011) and 25% (2020) - Other fund administrators: 68; assets 31.4 (2011) and 105.0 (2020) — 7% (2011) and 12% (2020) - Mutual funds: 19; assets 24.6 (2011) and 72.2 (2020) — 78% (2011) and 69% (2020) - Investment Funds: 49; assets 6.8 (2011) and 32.8 (2020) — 22% (2011) and 31% (2020) - GDP (nominal): 234.0 (2011) and 281.9 (2020) ### Top 10 banks – Dec 2020 (Total assets USD billion; share of total banking; % growth 2011–20) - Banco de Crédito e Inversiones: 80.4 — 17.7% — 253% - Banco Santander-Chile: 78.4 — 17.3% — 126% - Banco del Estado de Chile: 74.7 — 16.4% — 154% - Banco de Chile: 64.8 — 14.3% — 112% - Scotiabank Chile: 51.7 — 11.4% — 537% - Itaú Corpbanca: 50.2 — 11.0% — 702% - Banco Bice: 12.9 — 2.8% — 157% - Banco Security: 11.4 — 2.5% — 107% - Banco Consorcio: 8.3 — 1.8% — 660% - Banco Falabella: 8.2 — 1.8% — 364% - Top 5 total: 350.0 — 77% — 179% - Top 10 total: 440.9 — 97% — 204% - National totals: 454.3 — 100% — 156% ### Status of 2011 FSAP resolution recommendations (selected) - Recommendation 1: Strengthen legal framework for bank resolution — Priority H, Timeframe M — Not implemented. There is no statutory resolution process in Chile. Liquidation remains the only tool available when a firm becomes insolvent. - Recommendation 2: Consider introduction of a premium-based limited deposit insurance system — Priority M, Timeframe M — Not implemented. There is a State guarantee for bank time deposits held by natural persons up to a limit of about US$ 8,000 and a BCCh guarantee of 100% of bank sight deposits. - Recommendation 3: Examine options to establish a framework for dealing with a systemic crisis and with the potential failure of a financial conglomerate — Priority M, Timeframe M — Not implemented. CMF is exploring options to establish a recovery planning requirement on banks and how existing powers can be used to support a solvent wind-down of a failing bank. *Source: The establishment of a credible resolution regime and premium-based DPS in Chile (IMF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1chlea2022005.pdf_