## 1. The Impact of Productivity Change in One Industry on Aggregate Productivity

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### A. Renewable energy power in Chile — key facts and constraints
- Comparative advantage:
  - High solar radiation in the north and strong winds in the south favor solar and wind power generation.
  - From 2010 to 2021, wind and solar power as a share of the total electricity supply increased from 1 to 20 percent.
  - The total generation capacity from solar and wind could be up to about 1,800 GW, more than 70 times the total capacity installed as of 2021.
- Levelized costs and generation-cost comparisons:
  - Solar generators: USD 20-60 per MWH.
  - Onshore wind generators: USD 40-50 per MWH.
  - Coal generators (other countries, IEA 2020 range): USD 65-175 per MWh.
  - Drivers of low costs for solar and wind: high energy capacity factors and declining installation costs.
- Geographic mismatch and transmission constraint:
  - Renewable-rich regions (north and south) are more than 1,000 miles away from the central economic hub, creating transmission bottlenecks, regional price dispersion, and potential unused electricity.
  - Completion of North-South transmission lines in 2017 and 2019 lowered regional price dispersion and encouraged investment in solar and wind.
- Green hydrogen opportunity and cost barrier:
  - Green hydrogen could use local electricity surpluses to produce an energy carrier and help overcome geographic mismatch.
  - Key production costs: electricity, desalinization, and electrolysers.
  - Chile advantages: low-cost renewable electricity and potential declines in electrolyser costs with scale; however, further technology breakthroughs are needed to make production and transport economically viable.

### B. Assumptions for the GDP impact exercise
- Primary scenario assumptions:
  - Solar and wind completely replace coal, consistent with Chile’s target of retiring all coal power plants by 2040.
  - Other electricity sources (hydro, biofuels, gas, and oil) continue to grow at the same pace as total energy supply so their shares in total electricity supply remain unchanged from 2021.
- Alternative scenario caveat:
  - If hydropower generation (MWH) stays at 2021 level, hydropower share would decline by 10 percentage points and be filled by solar and wind; estimated productivity gain rises slightly to 30 percent from the baseline 28 percent.

### C. Estimated productivity changes in electricity generation
- LCOE assumptions used (In U.S. dollars):
  - Coal: 97
  - Oil: 97
  - Natural Gas: 79
  - Biofuels: 54
  - Hydro: 46
  - Wind: 34
  - Solar: 34
  - Weighted Average: 68
- Productivity gain from fuel-switch:
  - Coal accounted for 30 percent of power generation in 2021.
  - Replacing coal with wind and solar (both USD 34 per MWH versus coal USD 97 per MWH) reduces generation costs by 28 percent, calculated as (97-34) * 30 percent / 68 = 28 percent.
  - The 28 percent represents a productivity increase in the electricity generation industry.

### D. Aggregate GDP impact methodology and results
- Theoretical basis:
  - First-order approximation (Hulten 1978): aggregate productivity response equals the industry’s gross output-to-GDP share (Domar weight) times the industry productivity change: d log(A)/d log(Ak) = λk.
  - Second-order approximation (Baqee and Farhi 2020): adds a nonlinear term capturing change in Domar weight with productivity.
  - Sufficient statistics: Domar weight λk and its change dλk/d(log Ak).
- Key statistics and calculation:
  - Electricity generation industry gross output-to-GDP ratio (2011-20): 2.9 percent.
  - Applying first-order approximation: 28 percent productivity increase × 2.9 percent = 0.8 percent increase in aggregate productivity.
  - Capital multiplier (assuming capital share = one third): 1/(1-1/3) = 1.5.
  - Translating aggregate productivity gain to long-term GDP level: 0.8 percentage point × 1.5 = 1.2 percentage point increase in GDP.
- Staff summary estimate:
  - Substituting all coal-based generators with solar and wind could boost the long-term GDP level by at least 1 percentage point (staff’s headline phrasing), with the numerical calculation implying a 1.2 percentage point increase after applying the capital multiplier.
- Notes:
  - The nonlinear second-order effect is likely small for electricity generation because the industry’s gross-output-to-GDP ratio was stable during 2011-20.
  - The estimated long-term GDP gain is likely a lower bound because it is based on existing technology and does not account for potential future technological changes (e.g., cheaper green hydrogen).

### E. Interpretation relative to other studies and policy-relevant implications
- Comparison with other studies:
  - Staff’s estimate is a “net” gain that allows for reallocation of factors across industries and refers to the permanent increase in steady-state GDP level, not temporary transition gains during construction.
- Policy-relevant constraints and potential interventions:
  - Transmission infrastructure is a key constraint; addressing geographic mismatch can materially affect deployment and realized gains.
  - State support for electricity transmission may produce economic benefits that outweigh costs when evaluated in a cost-benefit framework.
  - Promoting technology development in electrolysers and green hydrogen logistics could amplify the productivity and GDP gains from renewable expansion.

*Source: IMF staff chapter "Renewable Energy—An Attempt to Estimate the GDP Impact and Assess the Role of Policies" (selected excerpts).*

### Resilience to fossil fuel price shocks and methodological caveats
- Resilience and nonlinear effects:
  - Renewable expansion increases resilience to fossil fuel price shocks that tend to have nonlinear negative effects on the economy.
  - The nonlinear term can be asymmetric: declines in real electricity costs may have negligible nonlinear positive effects, while sizable cost rises can have nontrivial nonlinear negative impacts.
- Empirical observations (2008 example):
  - Electricity generation's gross output-to-GDP ratio: 4.1 percent in 2008 versus 2.9 percent average in 2011-20.
  - International coal prices rose from USD 52 per tonne in 2006 to USD 138 per tonne in 2008.
  - Higher electricity cost (about 38 percent compared to 2011-20 average) in 2008 is estimated to have lowered GDP in 2008 by 1.3 percent.
- Cost assumptions and LCOE vs VALCOE caveat:
  - Analysis uses LCOE excluding transmission and storage costs.
  - Wind and solar tend to have higher transmission and storage costs than fossil fuels; using LCOE might overstate unit-cost reductions for renewables.
  - VALCOE (value-adjusted LCOE) accounts for storage and interconnections, but availability of VALCOE estimates is limited.

### State support policies and production-network justification
- Context:
  - Chile is a market economy with state support mainly through Corfo; recent examples include USD 1 billion financing support towards green hydrogen and regulatory changes.
- Analytical framework:
  - Applied Liu (2019) methodology to Chile using the 2019 Input-Output table with 111 industries plus an “external trade” industry.
  - Market imperfections proxied by:
    - Approach 1: industry j's operating surplus-to-gross output ratio.
    - Approach 2: sector-level markups from Benguria et al. (2023) for ten manufacturing sectors and cross-industry imputation for others.
- Distortion centrality f(i): a sufficient statistic where f(i)>1 implies marginal benefit of subsidy exceeds marginal cost.

### Distortion centrality results (selected industries)
- Transmission of electricity:
  - Column A: 1.50; Column B: 1.33; Column C: 1.95; Column D: 1.80; Output-to-GDP: 0.4%
  - Interpretation: increasing subsidies to electricity transmission could raise total private consumption by 1.5 times the subsidy expenditure in the baseline (Column A).
- Maritime transport:
  - Column A: 1.33; Column B: 1.44; Column C: 1.53; Column D: 1.58; Output-to-GDP: 0.4%
- Manufacture of basic chemicals:
  - Column A: 1.31; Column B: 1.33; Column C: 0.85; Column D: 0.85; Output-to-GDP: 1.6%
- Gas and steam supply:
  - Column A: 1.30; Column B: 1.25; Column C: 1.92; Column D: 1.89; Output-to-GDP: 0.6%
- Electricity generation:
  - Column A: 1.29; Column B: 1.22; Column C: 1.20; Column D: 1.15; Output-to-GDP: 2.9%
- Electricity distribution:
  - Column A: 1.01; Column B: 0.97; Column C: 1.21; Column D: 1.17; Output-to-GDP: 0.6%
- Manufacture of furniture:
  - Column A: 0.70; Column B: 0.68; Column C: 0.34; Column D: 0.32; Output-to-GDP: 0.4%
- Interpretation:
  - Electricity transmission shows the highest subsidy benefit-to-cost ratio among selected industries; its upstream position and role as a supplier to many industries explain the high f(i).
  - Supporting electricity transmission is even more attractive in closed economy specifications (Columns C and D).
  - Other industries with f(i)>1 include maritime transport, manufacture of chemicals (related to green hydrogen), and gas and steam supply.
  - Industries close to final consumption (e.g., manufacture of furniture) tend to have f(i)<1.

### Policy implications and caveats
- Implications:
  - Targeted support for electricity transmission and certain upstream industries related to renewable energy may be economically justified on production-network grounds.
  - Examples of state support: USD 1 billion financing for green hydrogen and legal/regulatory changes.
- Caveats:
  - Analysis considers only economic benefits measured by increase in total output/consumption versus subsidy expenditure; it does not incorporate social and environmental benefits or costs (e.g., health and carbon emissions).
  - Measurement caveats: using operating surplus-to-output as proxy for market imperfections may count capital income as market imperfections.
  - VALCOE availability is limited; LCOE exclusion of transmission and storage costs may overstate unit-cost reductions for renewables.

*Source: BCCh and IMF staff calculations, Liu (2019) framework and IMF chapter content.*

### Resilience and broader effects of renewable power expansion
- Renewable expansion increases resilience to fossil fuel price shocks and can mitigate asymmetric nonlinear negative effects on GDP.
- The estimated long-term GDP gains from renewable substitution are likely a lower bound because they do not capture future technological advances (e.g., cheaper green hydrogen) that could strengthen linkages and productivity further.

*Source: IMF staff chapter "Renewable Energy—An Attempt to Estimate the GDP Impact and Assess the Role of Policies" (selected excerpts).*

---

### Cybersecurity risk in Chile’s financial sector

### Overview and systemic importance
- Cybersecurity risk is a material and escalating threat to Chile’s financial sector; authorities integrating cyber risk into strategic plans and financial-stability reporting (CMF, BCCh).
- Cyberattacks can erode confidence, trigger reluctance to extend liquidity or credit, cause deposit runs and interbank payment failures, and disrupt transactions when substitutability is low.

### Notable cyber incidents and indicators
- Banco de Chile (May 24, 2018): attack affected a significant portion of 9,000 computers and 500 servers; about 9,000 workstations disconnected; suspension of operations at nearly 400 branches for about two weeks; approximately US$10 million transferred abroad to Hong Kong via SWIFT fraud.
- Banco Consorcio (November 6, 2018): loss of just under US$2 million from tampered international transfer procedures; loss covered by insurance.
- Redbanc (January 15, 2019): employee social-engineering incident; day-to-day business operations reportedly not disrupted.
- Banco Estado (September 6, 2020): ransomware attack via malicious file opened by an employee; branches shut for investigation; website, banking portal, mobile apps, and ATMs unaffected due to network segmentation.
- Non-database indicators (Chile, H1 2021): malware detections over 2 million; email threat detections 47 million; malicious URL detections 1 million.

### Digitalization, exposures, and bank preparedness
- Digitalization trends and exposures:
  - Number of Chilean banks' branches decreased by around 35 percent since 2013.
  - Number of online banking accounts increased by more than four times since 2013.
  - Chilean banks’ nominal IT expenses in the 2010s grew threefold.
- Governance and measures:
  - Banks adopted contingency plans, cybersecurity training, international standards (ISO/IEC 27001, NIST framework, PCI-DSS).
  - Some banks appoint Chief Information Security Officers (CISOs).
- Comparative indicators:
  - Chilean banks’ privacy data management score (MSCI) and cybersecurity rating (Bitsight) are slightly better than regional peers but generally lower than OECD peers.

### Operational loss analysis (solvency resilience)
- Historical operational losses (internal and external fraud proxy for cyber losses):
  - Impact on banks’ profitability predominantly between 0-0.5 percent of equity; a few banks had impacts exceeding 2 percent.
  - Maximum impact on capital ratios for each bank was less than 10 bps in most cases.
  - Stress scenario calibrated to historical maximums: impact on capital ratios would range between 20-80 bps in all cases.
  - Some banks would experience losses exceeding 20 percent of their capital to operational risk, but capital to operational risk would fully cover the gross losses.
- Methodological notes:
  - Analysis uses bank-by-bank operational losses from internal and external frauds (2019-2022, 62 samples annual basis) and may overestimate cyber loss impact because specific cyber loss data in Chile are unavailable.
  - Capital to operational risk calculated by dividing risk-weighted assets for operational risk by 12.5; share of risk-weighted assets for operational risk is around 10 percent among Chilean banks.

### Liquidity risk, cyber-run scenarios, and LCR resilience
- Uninsured wholesale deposit outflow scenarios (Duffie and Younger, 2019 assumptions):
  - Adverse cyber scenario: outflow of 50 percent from unsecured wholesale deposits.
  - Severe cyber scenario: outflow of 75 percent from unsecured wholesale deposits.
- Findings:
  - Most banks, including all D-SIBs, could meet a 100 percent LCR regulatory requirement even after large outflows of uninsured wholesale deposits due to cyberattacks.
  - Resilience supported by substantial holdings of HQLAs and the outflow rate assumptions used to calculate LCRs.
  - Risks remain elevated for banks heavily dependent on wholesale unsecured deposits because large institutional depositors may swiftly withdraw deposits as a precaution.
- Retail deposit-run scenario (Bulgarian 2014 calibration):
  - "10 percent" retail deposit outflow combined with severe wholesale cyber run: most Chilean banks could withstand such sizeable outflows based on balance sheet data as of September-2023.
  - Contributing resilience factors: use of HQLAs, LCR buffers, and legacy temporary liquidity measures (FCIC) allowing banks to use credit portfolios as collateral.

### Systemic concentration and third-party risks
- Concentration metrics:
  - The three largest Chilean banks account for around 50 percent and the five largest banks for about 80 percent of total bank assets.
  - 17 banks operate in Chile; six are D-SIBs as of March 2023, accounting for around 90 percent of bank assets.
- Third-party IT supplier risk:
  - Three of eight IT suppliers (limited Capital IQ Pro coverage) provide services to multiple Chilean banks, indicating systemic nature of third-party IT supplier risk.
  - GTD ransomware attack (October 23, 2023) disrupted part of its IaaS platform; media reported about "3,500 firms" were impacted.

### FMIs, fintech, and substitutability risks
- FMIs and concentration:
  - Six FMIs operate, four private, often as monopolies within segments.
  - High-value interbank payment systems: Sistema LBTR (BCCh RTGS) and ComBanc (privately-owned net clearing).
  - DCV is central securities depository (CSD); CCLV operates as securities settlement system (SSS); CCPs: ComDer and CCLV.
  - Chile has implemented CPSS-IOSCO Principles; private FMIs hold ISO 22301 and ISO/IEC 27001 certifications.
- Fintech sector:
  - Chilean fintech market smaller than regional peers; concentrated in payment and remittance systems and Open platforms &APIs and Cloud computing.
  - As of 2023, there are 300 Chilean fintech companies, up from 179 in 2021.
  - There are 78 foreign fintech firms operating in Chile.
  - About 70 percent of Chilean fintech firms have raised capital from third parties.
  - Banco Estado provides about 14.5 million Cuenta RUT accounts (equivalent to about 95 percent of the adult population).
  - About 85 percent of Chileans had access to accounts at financial institutions and used digital payments compared to around 50 percent in 2011 and 2014.
  - Alternative finance market segment was less than US$1 billion in 2020 compared to bank loans of around US$ 250 billion in the same year.
  - Chilean financial sector has no meaningful exposures to cryptocurrencies and "has no exposure to DeFi activities."

### Regulatory and supervisory framework
- Institutional coverage:
  - CMF mainly regulates cybersecurity risk in the financial sector.
  - No general law or authority that addresses cybersecurity risk; Cybersecurity and Critical Information Infrastructure Framework Bill under Congress proposes a National Cybersecurity Agency and other measures.
- Regulatory milestones (selected):
  - June 2016 to July 2020: phased SBIF/CMF banking cybersecurity requirements, cloud outsourcing minimums, incident reporting platform, Board involvement, and comprehensive cybersecurity frameworks.
  - November 2022 to August 2023: CMF regulations and proposals expanding FMI supervision and operational/cyber risk guidelines.
  - February 2023: Fintech law came into effect.
  - January 2024: CMF issued regulatory requirements for financial services providers’ cybersecurity management and reporting requirements, effective February 2024.
- Supervisory findings and gaps:
  - The CMF’s number of cybersecurity experts was insufficient to effectively conduct cybersecurity risk supervision; ensuring sufficient budget resources to attract and retain specialized talent was a 2021 FSAP recommendation.
  - CMF budget for cybersecurity risk supervision has incremented while total budget has decreased.
  - The regulatory perimeter is expanding to include fintech, potentially exacerbating supervisory resource shortages.

### Recommended policy actions (paragraphs 22–24)
- Steady implementation of ongoing policy initiatives:
  - Implement regulatory proposals for FMIs and fund managers to strengthen preparedness for cybersecurity risk.
  - Implement the Fintech Law to address new cybersecurity exposures created by fintech activities while embracing their benefits.
  - National initiatives such as establishing the National Cybersecurity Agency and the National Registry of Cybersecurity could be beneficial for the financial sector.
- Prioritize recruitment of additional cybersecurity experts:
  - Effectiveness of regulatory framework depends on availability of supervisory resources.
  - The increase in the budget for cybersecurity risk supervision is welcome.
  - New technologies, such as AIs and quantum computing, could exacerbate cybersecurity risks, making continued efforts to ensure sufficient supervisory resources vital.
- Consider new supervisory exercises to enhance crisis management:
  - Create cyber maps of financial networks and third-party dependencies to identify critical nodes, analyze liquidity and solvency impacts, and run top-down stress tests based on cyber scenarios.
  - Introduce supervisory bottom-up cybersecurity stress tests (Bank of England initiated such tests in 2022; ECB planned similar exercises for 2024).
  - Reference: IMF collaboration example—Monetary Authority of Singapore bottom-up cyber stress testing (Goh et al., 2020).

*Prepared by Tatsushi Okuda; content synthesized from the specified IMF chapter.*

---

### The Fintech Law and open finance (key features and implementation)
- Overview:
  - Law effective February 2023.
  - Objectives: promote competition and financial innovation, improve customer protection, data protection, and cybersecurity, and prevent money laundering and financing of terrorism.
- Three key elements:
  - (i) regulating fintech activities,
  - (ii) establishing an open finance system,
  - (iii) regulating crypto assets.
- Regulation of fintech activities (CMF):
  - Five types of fintech activities subject to CMF regulations: (i) crowdfunding, (ii) alternative trading systems, (iii) custody of financial instruments, (iv) credit and investment advisory services, (v) trading of financial instruments and transaction routing.
  - Regulatory scope includes licensing, required risk management, disclosure requirements, data protection measures, and information requirements for supervision.
- Open finance system:
  - Operational and implementation regulation mainly by the CMF; payment initiators also BCCh.
  - Enables customers to share financial information with new service providers while retaining greater control over their financial data.
  - Payment initiators that temporarily hold clients' money will be subject to BCCh regulation.
  - Participants expected to implement the system by the first half of 2027.
- Crypto assets and stablecoins:
  - CMF will regulate crypto assets, exchanges, and related intermediaries.
  - Stablecoins issued in Chile by entities supervised by the CMF are treated as a payment method and fall under BCCh regulation.
  - Chainalysis reports usage and adoption of crypto assets in Chile are limited and lower than regional peers.
- Implementation timeline and actions:
  - CMF issued regulations for fintech companies and related services in January 2024; effective February 2024.
  - Requirement: Relevant regulations to fully implement the law must be issued by the CMF within 18 months or by July 2024; the CMF estimates approximately 70 regulations will be issued through this process.
  - BCCh planned 2024 regulation on payment initiation services; consultations on open finance in October 2023 and Payments regulatory Agenda updates in July 2023.
- Communication and competition considerations:
  - Authorities emphasize public, transparent, and participative implementation via consultation roundtables.
  - Regulatory design should ensure symmetry to foster fair competition and fair cost-sharing among participants.

*Source: CHILE, INTERNATIONAL MONETARY FUND.*

### 1. The Impact of Productivity Change in One Industry on Aggregate Productivity  _   6

### 1. The Impact of Productivity Change in One Industry on Aggregate Productivity

### A. Renewable energy power in Chile — key facts and constraints
- Comparative advantage:
  - High solar radiation in the north and strong winds in the south favor solar and wind power generation.
  - From 2010 to 2021, wind and solar power as a share of the total electricity supply increased from 1 to 20 percent.
  - The total generation capacity from solar and wind could be up to about 1,800 GW, more than 70 times the total capacity installed as of 2021.
- Levelized costs and generation-cost comparisons:
  - Solar generators: USD 20-60 per MWH.
  - Onshore wind generators: USD 40-50 per MWH.
  - Coal generators (other countries, IEA 2020 range): USD 65-175 per MWh.
  - Drivers of low costs for solar and wind: high energy capacity factors and declining installation costs.
- Historical cost decline:
  - Average real electricity generation costs declined substantially in Chile during 2008-21 due to relief from natural gas shortages, lower coal prices, and increasing shares of solar and wind with lower installation costs.
- Geographic mismatch and transmission constraint:
  - Renewable-rich regions (north and south) are more than 1,000 miles away from the central economic hub, creating transmission bottlenecks, regional price dispersion, and potential unused electricity.
  - Completion of North-South transmission lines in 2017 and 2019 lowered regional price dispersion and encouraged investment in solar and wind.
- Green hydrogen opportunity and cost barrier:
  - Green hydrogen (produced using renewable electricity) could help overcome geographic mismatch by using local electricity surpluses to produce an energy carrier.
  - Key production costs: electricity, desalinization, and electrolysers.
  - Chile advantages: low-cost renewable electricity and potential declines in electrolyser costs with scale; however, further technology breakthroughs are needed to make production and transport economically viable.

### B. Assumptions for the GDP impact exercise
- Primary scenario assumptions:
  - Solar and wind completely replace coal, consistent with Chile’s target of retiring all coal power plants by 2040.
  - Other electricity sources (hydro, biofuels, gas, and oil) continue to grow at the same pace as total energy supply so their shares in total electricity supply remain unchanged from 2021.
- Alternative scenario caveat:
  - If hydropower generation (MWH) stays at 2021 level, hydropower share would decline by 10 percentage points and be filled by solar and wind; estimated productivity gain rises slightly to 30 percent from the baseline 28 percent.

### C. Estimated productivity changes in electricity generation
- LCOE assumptions used (In U.S. dollars):
  - Coal: 97 (Based on IEA (2020) projection for Brazil)
  - Oil: 97 (Imputed to be the same as coal)
  - Natural Gas: 79 (Based on IEA (2020) projection for Brazil)
  - Biofuels: 54 (Based on IEA (2020) projection for Brazil)
  - Hydro: 46 (Based on IEA (2020) projection for Brazil)
  - Wind: 34 (Based on IEA (2020) lowest projection for all countries)
  - Solar: 34 (Based on IEA (2020) lowest projection for all countries)
  - Weighted Average: 68 (Sources: IEA (2020) and IMF staff calculations)
- Productivity gain from fuel-switch:
  - Replacing coal (which accounted for 30 percent of power generation in 2021) with wind and solar (both USD 34 per MWH versus coal USD 97 per MWH) reduces generation costs by 28 percent, calculated as (97-34) * 30 percent / 68 = 28 percent.
  - Staff states this 28 percent represents a productivity increase in the electricity generation industry.

### D. Aggregate GDP impact methodology and results
- Theoretical basis:
  - First-order approximation (Hulten 1978): aggregate productivity response to an industry productivity change equals the industry’s gross output-to-GDP share (Domar weight) times the industry productivity change.
    - d log(A)/d log(Ak) = λk
  - Second-order approximation (Baqee and Farhi 2020): adds a nonlinear term capturing change in Domar weight with productivity:
    - d log(A)/dlog(Ak) = λk + ½ [dλk/d(log Ak)]*dlog(Ak)
  - The sufficient statistics for up to second-order approximation: Domar weight λk and its change dλk/d(log Ak).
- Key statistics and calculation:
  - Electricity generation industry gross output-to-GDP ratio (2011-20): 2.9 percent.
  - Applying first-order approximation: 28 percent productivity increase × 2.9 percent = 0.8 percent increase in aggregate productivity.
  - Capital multiplier to reflect endogenous increase in economy-wide capital stock (assuming capital share = one third): capital multiplier = 1/(1-1/3) = 1.5.
  - Translating aggregate productivity gain to long-term GDP level: 0.8 percentage point × 1.5 = 1.2 percentage point increase in GDP.
- Staff summary estimate:
  - Substituting all coal-based generators with solar and wind could boost the long-term GDP level by at least 1 percentage point (staff’s headline phrasing), with numerical calculation implying a 1.2 percentage point increase after applying the capital multiplier.
- Notes on nonlinear effects and lower-bound characterization:
  - The nonlinear second-order effect is likely small for electricity generation because the industry’s gross-output-to-GDP ratio was stable during 2011-20, implying close-to-unit elasticity of substitution with the rest of the economy.
  - The estimated long-term GDP gain is likely a lower bound because it is based on existing technology and does not account for potential future technological changes that could further increase renewable productivity or strengthen linkages (e.g., cheaper green hydrogen production and transport).

### E. Interpretation relative to other studies and policy-relevant implications
- Comparison with other studies:
  - Staff’s estimate is a “net” gain that allows for reallocation of factors (e.g., labor and capital) across industries, unlike some partial-equilibrium studies that report gross gains (for example, construction-phase employment).
  - The staff estimate refers to the permanent increase in steady-state GDP level, not temporary transition gains during construction or scale-up phases.
- Policy-relevant constraints and potential interventions:
  - Transmission infrastructure is a key constraint — addressing the mismatch between locations of generation and consumption can materially affect deployment and realized gains.
  - State support for industries such as electricity transmission may produce economic benefits that outweigh costs, when evaluated in a cost-benefit framework.
  - Promoting technology development in electrolysers and green hydrogen logistics could amplify the productivity and GDP gains from renewable expansion.

*Source: IMF staff chapter "Renewable Energy—An Attempt to Estimate the GDP Impact and Assess the Role of Policies" (selected excerpts).*

### 14.      Besides the long-term GDP gain, the expansion of renewable power would also

### 14.      Besides the long-term GDP gain, the expansion of renewable power would also

### Resilience to fossil fuel price shocks and nonlinear effects
- Renewable power expansion increases resilience to fossil fuel price shocks that tend to have nonlinear negative effects on the economy.
- The nonlinear effect (last term of equation (2)) can be asymmetric:
  - Nonlinear positive effect of electricity supply may be negligible when real electricity costs decline (example: 2011-20).
  - A sizable rise in electricity generation cost can have a nontrivial nonlinear negative impact on GDP (example: 2008).
- Empirical observations:
  - Electricity generation's gross output-to-GDP ratio was 4.1 percent in 2008, significantly higher than the 2.9 percent average in 2011-20.
  - International coal prices rose from USD 52 per tonne in 2006 to USD 138 per tonne in 2008.
  - Higher costs of importing natural gases from Argentina during 2005-08 contributed to higher average costs of electricity generation.
  - The higher electricity cost (by about 38 percent compared to 2011-20 average) in 2008 is estimated to have lowered the GDP in 2008 by 1.3 percent.
- Mechanism:
  - Because electricity demand is hard to cut in the short run, cost increases raised the value of electricity generation (despite somewhat lower quantities), making electricity a complementary good that is hard to substitute and raising its output-to-GDP ratio while lowering aggregate GDP.

### Cost assumptions and methodological caveats on LCOE vs VALCOE
- Cost assumption in the analysis is based on the levelized cost of electricity generation (LCOE) excluding transmission and storage costs.
- Caveat:
  - Wind and solar power tend to have higher transmission and storage costs than fossil fuels; using LCOE (which excludes these costs) might overstate the assumed reduction in unit costs of electricity.
  - It is plausible that transmission and storage costs will fall with technological progress.
- Alternative metric:
  - The value-adjusted levelized cost of electricity generation (VALCOE) takes into account additional costs such as storage and interconnections, but VALCOE is a new concept and availability of estimates is limited.

### The potential role of state support policies
- Context:
  - Chile is a market economy with generally low levels of government intervention, but state support exists mainly through the development agency Corfo.
  - Recent renewable-related examples include USD 1 billion financing support towards the development of green hydrogen and nonpecuniary legal or regulatory changes.
- Challenges in cost-benefit analysis of state support:
  - No unique standard for types of “benefit” and “cost” to be considered (output, employment, carbon emission can lead to different conclusions).
  - Industries are interconnected; subsidizing one industry has consequential impacts on others, complicating net benefit assessment.
- Framework applied:
  - Liu (2019) framework compares economic costs and benefits of subsidizing industries in a production network, focusing on “economic” benefits (abstracting from health and emissions).
  - Government finances subsidies via a lump-sum tax; tradeoff: higher subsidies can increase aggregate private consumption but reduce government consumption.
  - Market imperfections are modeled as tax-equivalent wedges that raise costs of procuring intermediate inputs; negative effects can transmit and accumulate along value chains.
  - Industries upstream in long value chains or with extensive linkages to high-imperfection industries tend to have higher-than-efficient prices and lower-than-efficient production scales — justifying potential subsidies to correct inefficient allocation.
- Operational steps in this analysis:
  - Applied Liu (2019) methodology to Chile using the 2019 Input-Output (IO) table compiled by the BCCh with 111 industries plus an “external trade” industry to capture imports/exports.
  - Market imperfections measured in two ways:
    - Approach 1: market imperfection parameters x(i,j) proxied by industry j's operating surplus-to-gross output ratio (for all 111 industries plus external trade).
    - Approach 2: use the "markup" measure from Benguria et al. (2023) for ten manufacturing sectors; for other industries impute values with the cross-industry average market imperfections.

### Liu (2019) methodology (key elements)
- Production network: final consumption good requires N intermediate goods; intermediate goods production uses labor and other intermediates.
- Market imperfections: deadweight loss x(i,F) P(F) M(i,F) where x(i,F)>0 is a wedge between producer and purchaser price; GDP defined as total output netting deadweight loss.
- Tax and industrial policy: government collects lump-sum tax T to finance government consumption G and industrial subsidies; subsidy rate s(i,F) reduces effective cost to producer i.
- Cost-benefit comparison: marginal benefit d(C)/d s(i,F) (increase in total output/consumption) vs marginal cost d(G)/d s(i,F) (reduction in government consumption); ratio >1 implies net economy-wide benefit.
- Distortion centrality f(i): ratio of industry i’s “influence” u(i) to Domar weight γ(i); f(i)>1 is sufficient statistic indicating marginal benefit of subsidy exceeds marginal cost.

### Results: distortion centrality estimates and implications
- Distortion centrality f(i) estimated using BCCh IO data; different specifications employed:
  - Column A: baseline open economy specification with external trade industry; market imperfection proxied by operating surplus-to-gross output ratio.
  - Column B: open economy using Benguria et al. (2023) sector-level markups.
  - Columns C and D: closed economy setup (excluding external trade) treating exports as final consumption; closed economy estimates often yield larger f(i) for some industries.
- Key findings (selected industries; reported estimates of f(i) and output-to-GDP (Domar weight) where shown):
  - Transmission of electricity:
    - Column A: 1.50
    - Column B: 1.33
    - Column C: 1.95
    - Column D: 1.80
    - Output-to-GDP (Domar weight): 0.4%
    - Interpretation: increasing subsidies to electricity transmission could raise total private consumption by 1.5 times the subsidy expenditure in the baseline (Column A).
  - Maritime transport:
    - Column A: 1.33
    - Column B: 1.44
    - Column C: 1.53
    - Column D: 1.58
    - Output-to-GDP: 0.4%
  - Manufacture of basic chemicals:
    - Column A: 1.31
    - Column B: 1.33
    - Column C: 0.85
    - Column D: 0.85
    - Output-to-GDP: 1.6%
  - Gas and steam supply:
    - Column A: 1.30
    - Column B: 1.25
    - Column C: 1.92
    - Column D: 1.89
    - Output-to-GDP: 0.6%
  - Manufacture of other chemical products:
    - Column A: 1.30
    - Column B: 1.27
    - Column C: 0.96
    - Column D: 0.95
    - Output-to-GDP: 0.5%
  - Electricity generation:
    - Column A: 1.29
    - Column B: 1.22
    - Column C: 1.20
    - Column D: 1.15
    - Output-to-GDP: 2.9%
  - Electricity distribution:
    - Column A: 1.01
    - Column B: 0.97
    - Column C: 1.21
    - Column D: 1.17
    - Output-to-GDP: 0.6%
  - Manufacture of furniture:
    - Column A: 0.70
    - Column B: 0.68
    - Column C: 0.34
    - Column D: 0.32
    - Output-to-GDP: 0.4%
- Interpretation of results:
  - Electricity transmission shows the highest subsidy benefit-to-cost ratio among selected industries; its upstream position and role as a supplier to many industries explain the high f(i).
  - Supporting electricity transmission is even more attractive in closed economy specifications (Columns C and D).
  - Other industries with f(i)>1 include maritime transport, manufacture of chemicals (related to green hydrogen), and gas and steam supply.
  - Industries close to final consumption (e.g., manufacture of furniture) tend to have f(i)<1, indicating subsidy costs exceed marginal benefits under this framework.

### Policy implications and caveats
- Policy implications:
  - Targeted support for electricity transmission and certain upstream industries related to renewable energy may be economically justified on production-network grounds, as estimated benefits can exceed subsidy costs (f(i)>1).
  - State support examples already in place include USD 1 billion financing for green hydrogen and legal/regulatory changes.
- Caveats and limitations:
  - The analysis considers only economic benefits and costs measured by increase in total output (or consumption) versus subsidy expenditure; it does not incorporate important social and environmental benefits or costs (e.g., health and carbon emissions).
  - The framework justifies government intervention where inefficiency arises from misallocation of productive factors across industries; other rationales (e.g., externalities from technological diffusion) are not modeled.
  - Measurement caveats:
    - Using operating surplus-to-output as a proxy for market imperfections may count capital income as market imperfections; this may be less problematic if high capital intensity correlates with high market imperfections.
    - VALCOE availability is limited; LCOE exclusion of transmission and storage costs may overstate unit-cost reductions for renewables.

*Source: BCCh and IMF staff calculations, Liu (2019) framework and IMF chapter content.*

### 2.      The increasing cybersecurity risk is posing a threat to Chile’s financial sector, as it is in

### 2.      The increasing cybersecurity risk is posing a threat to Chile’s financial sector, as it is in

### Overview
- Cybersecurity risk is recognized as a material and escalating threat to Chile’s financial sector, reflecting global regulatory concern (FSB, 2017a; FRB, 2021; ESRB, 2020; FSOC, 2022; ECB, 2022; BIS, 2022a).
- The CMF included cybersecurity risk in its 2022 strategic plan; the BCCh has addressed cyber risk in Financial Stability Reports since 2016, including a thematic box in the 2018 FSR.
- Cyberattacks can erode confidence and trigger reluctance to extend liquidity or credit, potentially causing deposit runs and interbank payment failures and disrupting transactions when substitutability is low.

### Cyberattacks on the Chilean Financial Sector (observations and incidents)
- Past cyberattacks concentrated on banks, including attacks affecting Domestic Systemically Important Banks (D-SIBs).
- Notable incidents:
  - Banco de Chile (May 24, 2018): cyberattack infiltrated a significant portion of its 9,000 computers and 500 servers; 9,000 workstations disconnected, suspension of operations at nearly 400 branches for about two weeks; approximately US$10 million transferred abroad to Hong Kong via SWIFT fraud.
  - Banco Consorcio (November 6, 2018): loss of just under US$2 million from tampered international transfer procedures; loss covered by insurance; no adverse effects on client data or operational systems.
  - Redbanc (January 15, 2019): employee social-engineering incident led to attackers accessing Redbanc’s network; day-to-day business operations reportedly not disrupted.
  - Banco Estado (September 6, 2020): ransomware attack via malicious file opened by an employee; branches shut for investigation; website, banking portal, mobile apps, and ATMs unaffected due to network segmentation.
- Media-covered incidents are captured in the CISSM Cyber Attacks Database, but many blocked or non-public incidents are not included. Example non-database indicators in Chile (first half of 2021): malware detections over 2 million, email threat detections 47 million, malicious URL detections 1 million.

### Cybersecurity Risk for Banks: digitalization and exposures
- Rapid digitalization has increased exposures:
  - Number of Chilean banks' branches decreased by around 35 percent since 2013.
  - Number of online banking accounts increased by more than four times since 2013.
  - Chilean banks’ nominal IT expenses in the 2010s grew threefold (similar to U.S. banks), with actual real growth possibly differing due to inflation differences.
- Banks increased IT and communication expenses and outsourcing services for data processing, raising cybersecurity exposure even as efficiency gains occur.
- Banks have adopted governance and measures including contingency plans, cybersecurity training, international standards (ISO/IEC 27001, NIST framework, PCI-DSS), and some banks appoint Chief Information Security Officers (CISOs).

### Cybersecurity Levels: comparative indicators
- Common indicators show Chile’s banking cybersecurity levels:
  - Chilean banks’ privacy data management score (MSCI) and cybersecurity rating (Bitsight) are slightly better than regional peers (Brazil, Mexico, Colombia, Argentina, Peru) but generally lower than OECD peers.
  - Privacy data management scores are as of 2022; cybersecurity ratings are as of November 2023.
  - Caveats: privacy data management comparisons may suffer sample selection bias; cybersecurity rating sample size is larger than privacy score sample size.

### Resiliency to Solvency Risk (operational loss analysis)
- Historical operational losses (internal and external fraud used as proxy for cyber losses) show:
  - Impact on banks’ profitability predominantly between 0-0.5 percent of equity; a few banks had impacts exceeding 2 percent.
  - Maximum impact on capital ratios for each bank was less than 10 bps in most cases, though some banks could face higher impacts.
  - Under a stress scenario calibrated to historical maximums, the impact on capital ratios would range between 20-80 bps in all cases.
  - When comparing maximum historical annual losses to capital required for operational risk:
    - Some banks would experience losses exceeding 20 percent of their capital to operational risk.
    - In all cases, capital to operational risk would fully cover the gross losses.
  - Calculations rely on bank-by-bank operational losses from internal and external frauds (2019-2022, 62 samples annual basis) and may overestimate cyber loss impact because specific cyber loss data in Chile are unavailable.
- Key methodological notes and definitions preserved as in the source:
  - Seven categories of operational losses defined (internal fraud; external fraud; labor practices and business safety; customers, products and business practices; damage to physical assets; business interruption and systems failures; execution, delivery and process management).
  - “External fraud” includes theft of information, hacking damage, third-party theft and forgery, and self-induced customer fraud.
  - Capital to operational risk calculated by dividing risk-weighted assets for operational risk by 12.5. Share of risk-weighted assets for operational risk is around 10 percent among Chilean banks.
  - Historical gross operational loss to equity uses annual distribution in 2019-2022 across all banks (62 samples, annual basis).

### Resiliency to Liquidity Risk (LCR scenario analysis and cyber runs)
- Cyberattacks can trigger “cyber runs,” contagious bank runs driven by loss of confidence; liquidity coverage ratios (LCRs) may not fully capture cyber-run risks according to literature.
- Two scenario assumptions for uninsured wholesale deposit outflows (following Duffie and Younger, 2019):
  - Adverse cyber scenario: outflow of 50 percent from unsecured wholesale deposits.
  - Severe cyber scenario: outflow of 75 percent from unsecured wholesale deposits.
- Findings:
  - Most banks, including all D-SIBs, could meet a 100 percent LCR regulatory requirement even after large outflows of uninsured wholesale deposits due to cyberattacks.
  - Chilean banks’ resilience is supported by substantial holdings of high-quality liquid assets (HQLAs) and the outflow rate assumptions used to calculate LCRs.
  - Risks remain elevated for banks heavily dependent on wholesale unsecured deposits because unaffected large institutional depositors may swiftly withdraw deposits as a precaution.

### Analytical and policy-relevant observations
- Cyber risk affects both direct (repair, compensation, fines, legal fees) and indirect channels (confidence, contagion, payment disruption).
- Chilean authorities (CMF, BCCh) have heightened focus and integrated cyber risk into strategic and supervisory frameworks.
- Bank-level measures (IT investment, governance, contingency plans, international standards adoption) have improved preparedness relative to regional peers.
- Data gaps: specific operational loss data from cyberattacks in Chile are limited; available analyses use proxies (internal and external fraud) and media-reported incident databases.

*Prepared by Tatsushi Okuda; content synthesized from the specified IMF chapter.*

### 10.      Chilean banks also appear robust to liquidity outflows from retail deposits. A few

### 10. Chilean banks also appear robust to liquidity outflows from retail deposits. A few

### Liquidity resilience and deposit-run scenarios
- Scenario calibrated on a Bulgarian bank run in 2014: "10 percent" retail deposit outflow.
- Scenario combined with a "severe cyber run scenario" for unsecured wholesale deposits suggests most Chilean banks could withstand such a sizeable outflow (based on balance sheet data as of September-2023).
- Contributing factors to resilience:
  - Use of high-quality liquid assets (HQLAs) and existing LCR buffers.
  - Legacy of the temporary liquidity measures (Facility of Credit Conditional on Lending, FCIC) introduced by the BCCh during the pandemic, allowing banks to use their credit portfolios as collateral and potentially avoid selling HQLAs.
  - Basel III liquidity requirement incentives to continue holding HQLAs to meet a "100 percent LCR" regulatory requirement, even after the unwinding of the FCIC.
- Modelling assumptions and notes:
  - Outflows from unsecured wholesale deposits are assumed to decrease HQLAs by forcing banks to sell them and to reduce unweighted exposures to the deposits, with the former decreasing LCRs and the latter increasing LCRs; outflow rates for the deposits are assumed to remain unchanged.
  - LCRs decrease to some extent if same outflow rates from secured wholesale funding are additionally assumed, but overall results remain unchanged because outflow rate assumptions for that item are low.
  - Cyberattacks often occur during financial stress and thus banks should continue to satisfy the "100 percent LCR" requirement after cyberattacks.

### Systemic vulnerability of the banking sector
- Concentration metrics:
  - "The three largest Chilean banks account for around 50 percent and the five largest banks for about 80 percent of total bank assets."
  - "17 banks are operating in Chile, in which six are D-SIBs (Banco de Chile, Banco de Crédito e Inversiones, Banco del Estado de Chile, Banco Santander-Chile, Banco Itaú Chile, and Scotiabank Chile) as of March 2023, accounting for around 90 percent of bank assets."
- Implication: High concentration poses risk of near-single points of failure due to limited substitutability of financial activities.

### Third-party IT supplier and cyber concentration risks
- Third-party IT supplier risk is relevant: attacks on IT providers can infiltrate bank systems regardless of banks' own cybersecurity measures.
- Empirical notes:
  - Chilean cybersecurity rating of IT service sectors is modestly higher than regional peers (and banks), implying cyberattacks on third-party suppliers may be relatively more contained.
  - Based on Capital IQ Pro supply-chain data (coverage limited), three of the eight IT suppliers serving the Chilean banking sector provide services to multiple Chilean banks, indicating systemic nature of third-party IT supplier risk in Chile.
  - On October 23, 2023, a Chilean telecommunications company, GTD, suffered a ransomware attack that affected part of its Infrastructure as a service (IaaS) platform, disrupting online services; media reported about "3,500 firms" were impacted by this incident.

### Cybersecurity risk for Financial Market Infrastructures (FMIs)
- FMIs considered critical entities with low substitutability and high market concentration, increasing vulnerability to cyber shocks.
- Chilean FMI landscape and concentration:
  - "Six FMIs, four of them private entities, operate as monopolies within their respective segments."
  - High-value interbank payment systems: Sistema LBTR (BCCh-operated RTGS) complemented by ComBanc (privately-owned net clearing system).
  - DCV serves as central securities depository (CSD); CCLV operates as a securities settlement system (SSS) for debt securities and money market instruments.
  - Two central counterparties (CCPs): ComDer (OTC derivatives) and CCLV (equities and exchange-traded derivatives) hold monopolistic positions.
  - BBCh operates SIID-TR as trade repository (TR) for reporting foreign exchange derivatives transactions.
  - Compared with regional peers, PSs and CSD are relatively larger while CCPs are smaller.
- Operational resilience and standards:
  - Chile has implemented CPSS-IOSCO Principles for Financial Market Infrastructures (BIS, 2012).
  - CPSS-IOSCO FSAP assessment (World Bank, 2016) concluded FMIs adopted best practices for operational and cyber risk management.
  - All private FMIs have certificates of ISO 22301 (Business Continuity Management) and ISO/IEC 27001 (information security management).
  - BCCh, as operator of Sistema LBTR, has implemented policies to enhance cyber resilience and signed a Memorandum of Understanding (MoU) with other FMIs to improve coordination.
- Substitutability risk consequence:
  - If payment systems must be redirected without netting and payment efficiencies due to cyberattack, additional liquidity would be required, risking disruptions to market volumes and sudden price fluctuations.

### Fintech industry cyber risks
- Market characteristics:
  - Chilean fintech market appears smaller than regional peers but has exposures in segments handling large volumes of customer data.
  - Technologies concentrated on "Open platforms &APIs" and "Cloud computing."
  - Majority of fintech firms in Chile are payment and remittance systems; share of payment and remittance segment in Chile is higher than regional peers.
  - "20 percent of operation fintech firms are foreign, most of which are Colombian, Mexican, and Argentinian."
- Crypto and DeFi exposure:
  - Cyberattacks on cryptocurrencies have been rapidly increasing globally, with notable uptick in attacks on Decentralized Finance (DeFi).
  - Chilean financial sector does not have meaningful exposures to cryptocurrencies and "has no exposure to DeFi activities."
  - Transaction volume of cryptocurrencies in Chile is smaller than regional peers.
  - Note: issuers of these currencies are global entities outside the regulatory perimeter of Chilean authorities.

### Regulations and supervisory framework on cybersecurity
- Institutional coverage:
  - The CMF mainly regulates cybersecurity risk in the Chilean financial sector.
  - Chile has no general law or authority that addresses cybersecurity risk and there is no specialized data protection authority while relevant laws are discussed in Congress.
- Recent regulatory actions and assessments:
  - The CMF has recently issued many regulations on cybersecurity risk in the financial sector; the regulatory framework for cybersecurity risk would be comprehensive.
  - A stand-alone Report on the Observance of Standards and Codes for the implementation of the Basel Core Principles for Effective Banking Supervision in Chile (IMF and World Bank, March-May 2021) concluded the Chilean regulatory framework for banks’ operational risk management including cybersecurity risk is comprehensive.
  - The Financial Stability Council (CEF) monitors and follows cyber incidents with possible systemic impact and has an operational continuity working group.
  - CMF has established a reporting and information-sharing framework and risk management requirements for banks and insurers; plans are in place to enforce them for FMIs, fintech, and fund managers, ensuring comprehensive coverage of cybersecurity risk in the financial sectors.

*Source: IMF staff report content as provided.*

### 21.      Ensuring sufficient human resources for the effective cybersecurity risk supervision is

### 21.      Ensuring sufficient human resources for the effective cybersecurity risk supervision is

### Human resources and budget constraints
- Finding: The number of cybersecurity experts in the CMF was not sufficient to effectively conduct cybersecurity risk supervision.
- Finding: Ensuring sufficient budget resources for the CMF to attract and retain specialized talent was one of the 2021 FSAP recommendations.
- Finding: The regulatory perimeter of the CMF is expected to expand to include the fintech sector, which could exacerbate the shortage of cybersecurity expertise and hinder effective supervision.
- Finding: The CMF's budget for cybersecurity risk supervision has incremented while total budget has decreased.

### National legal and institutional developments
- The Cybersecurity and Critical Information Infrastructure Framework Bill under Congress aims to:
  - create a National Cybersecurity Agency;
  - establish procedures for protecting essential services;
  - include definitions such as cyberattack and cybersecurity;
  - set minimum requirements for incident prevention, containment, resolution, and response;
  - propose creation of entities such as the National Cybersecurity Agency and the National Registry of Cybersecurity Incidents.
- The bill on personal data protection is under discussion in Congress and:
  - aligns with international standards, such as the EU’s GDPR;
  - proposes establishment of a national authority for personal data protection;
  - notes that the National Consumer Service (SERNAC) currently manages personal data protection in consumer affairs until a dedicated authority is established.
- Institutional coordination: The CEF was created in 2011, is chaired by the finance minister, and includes the CMF president, the Pension Superintendent, and the BCCh Governor as a permanent invitee and advisor.

### Supervisory perimeter and prior assistance
- Note: payment providers engaging in fintech activities are already subject to cybersecurity regulations issued by the CMF.
- The CMF presented detail of the regulations on FMIs in 2018 and 2023.
- Note: Chile received Technical Assistance on cybersecurity policies by the IMF in 2017 (Abarca, 2023).

### Recent Regulations on Cybersecurity Risk in the Financial Sector (Box 2) — key regulatory milestones
- Banks:
  - June 2016: SBIF (later CMF) established requirements associated with information security and cybersecurity for assessment of banking service providers under the SBIF’s operational risk management framework.
  - December 2017: SBIF introduced minimum requirements for financial institutions engaging in cloud technology outsourcing.
  - January 2018: SBIF mandated cybersecurity regulations for banks, requiring assessment of critical cybersecurity infrastructure, integration of cybersecurity into operational risk management, and maintenance of a cybersecurity incident database.
  - August 2018: SBIF enacted rule changes including a 30-minute incident reporting platform, user notification, and board involvement in cybersecurity.
  - December 2019: CMF modified regulations on outsourcing services, particularly for overseas outsourcing impacting critical or strategic activities; boards of directors became responsible for evaluating and selecting suppliers, including contingency sites.
  - July 2020: CMF implemented cybersecurity regulations (effective December 2020) applying to various financial entities and mandating Board of Directors’ approval of cybersecurity strategies; entities must define stages in an information security and cybersecurity risk management process including risk identification, analysis, treatment, and incident response.
- FMIs:
  - November 2022: CMF issued regulations empowering it to supervise low-value clearinghouse administrators and set operational requirements, including information submission and guidelines for managing operational and cybersecurity risks, business continuity, and technology assets.
  - August 2023: CMF proposed regulations for consultation on corporate governance, integrated risk management, and operational risk management for FMIs, addressing Board of Directors' role, policies, procedures, risk management, and operational losses and incident reporting.
- Fintech:
  - February 2023: The fintech law came into effect, broadening the CMF’s regulatory scope to cover various fintech activities to mitigate risks in cybersecurity and data protection.
  - January 2024: CMF issued regulatory requirements for financial services providers’ cybersecurity management and reporting requirements, effective February 2024.
- Insurers:
  - May 2021: CMF issued operational risk management and cybersecurity standards for insurers and reinsurers, requiring periodic self-assessments and duties for reporting cyber incidents.
- Fund managers:
  - August 2023: CMF proposed regulations for consultation on corporate governance, integrated risk management, and operational risk management applying to general fund managers, addressing Board of Directors’ role, policies, procedures, risk management, and operational losses and incident reporting.

### Fintech sector context and relevant figures (selected)
- As of 2023, there are 300 Chilean fintech companies, up from 179 in 2021.
- There are 78 foreign fintech firms operating in Chile.
- About 70 percent of Chilean fintech firms have raised capital from third parties.
- Banco Estado provides about 14.5 million Cuenta RUT accounts (equivalent to about 95 percent of the adult population).
- About 85 percent of Chileans had access to accounts at financial institutions and used digital payments compared to around 50 percent in 2011 and 2014.
- The alternative finance market segment was less than US$1 billion in 2020 compared to bank loans of around US$ 250 billion in the same year.

### Recommendations (paragraphs 22–24)
- Steady implementation of ongoing policy initiatives is warranted:
  - Implement regulatory proposals for FMIs and fund managers to strengthen preparedness for cybersecurity risk.
  - Implement the Fintech Law to address new cybersecurity exposures created by fintech activities while embracing their benefits.
  - National initiatives such as establishing the National Cybersecurity Agency and the National Registry of Cybersecurity could be beneficial for the financial sector due to spillovers from third-party providers and the importance of information sharing across industries.
- Prioritize recruitment of additional cybersecurity experts:
  - The effectiveness of a sound and comprehensive regulatory framework depends on the availability of supervisory resources.
  - The increase in the budget for cybersecurity risk supervision is welcome.
  - New technologies, such as AIs and quantum computing, could exacerbate cybersecurity risks for the financial sector, making continued efforts to ensure sufficient supervisory resources vital.
- Consider adopting new supervisory exercises to enhance an industry-wide crisis management framework:
  - Create cyber maps of financial networks and third-party dependencies to identify critical nodes, analyze potential impacts on liquidity and solvency, and run top-down stress tests based on cyber scenarios to assess potential impact on financial stability risks.
  - Introduce supervisory bottom-up cybersecurity stress tests (noting Bank of England initiated such tests in 2022 and the ECB planned similar exercises for 2024).
  - Note: In collaboration with the IMF, the Monetary Authority of Singapore conducted bottom-up cyber stress testing on banks’ capital ratios and liquidity ratios (LCRs) (Goh et al., 2020).

*Source: 1chlea2024002 - 21.*

### 7.      The Fintech Law aims at fostering the fintech sector and could further enhance

### 7.      The Fintech Law aims at fostering the fintech sector and could further enhance financial inclusion

### Overview
- The law became effective in February 2023.
- Objectives: promote competition and financial innovation, improve customer protection, data protection, and cybersecurity, and prevent money laundering and financing of terrorism.
- Three key elements:
  - (i) regulating fintech activities,
  - (ii) establishing an open finance system,
  - (iii) regulating crypto assets.

### Regulation of fintech activities (CMF)
- Regulator: Comisión para el Mercado Financiero (CMF).
- Five types of fintech activities subject to CMF regulations:
  - (i) platforms for collective financing of loans or investment (crowdfunding),
  - (ii) alternative trading systems,
  - (iii) custody service of financial instruments,
  - (iv) credit and investment advisory services,
  - (v) trading of financial instruments, and transaction routing.
- Regulatory scope includes:
  - licensing,
  - required risk management,
  - disclosure requirements,
  - data protection measures,
  - information requirements for supervision.
- Expected effects:
  - enhance transparency and resiliency within the sector,
  - potential to attract more investment into fintech firms that heavily rely on funding from third parties.

### Open finance system (CMF; payment initiators also BCCh)
- Operational and implementation regulation mainly by the CMF.
- Enables customers to share financial information (with banks, payment card issuers, etc.) with new service providers, including fintech firms (information-based service providers and payment initiators), while retaining greater control over their financial data.
- CMF regulatory areas to cover:
  - risk management,
  - cybersecurity,
  - technical standards,
  - cost distributions,
  - payment initiations,
  - consents.
- CMF role in technical specifications and manuals; Open Finance System Forum will provide proposals on technical specifications and manuals.
- Payment initiators that temporarily hold clients' money will be subject to BCCh regulation.
- Potential benefit: address information asymmetry and streamline development of new financial products and services.

### Crypto assets and stablecoins (CMF and BCCh)
- CMF will regulate crypto assets, exchanges, and related intermediaries.
- Stablecoins (crypto assets pegged to specific currencies, such as the U.S. dollar) are treated as a payment method and fall under BCCh regulation, as long as they are issued in Chile by entities supervised by the CMF.
- Note: Chainalysis reports that the usage and adoption level of crypto assets in Chile are estimated to be limited and lower than those of regional peers.

### Implementation timeline and regulatory actions
- CMF issued regulations for fintech companies and related services in January 2024 (based on consultation feedback); these regulations impose requirements such as registration, authorization, information disclosures, risk management, and prudential measures.
- These CMF regulations will be effective in February 2024.
- In October 2023, the CMF started consultation roundtables to establish operational and legal design, technical standards, and regulatory guidelines for the open finance system.
- In July 2023, pursuant to its Payments regulatory Agenda, the BCCh published a proposal to update prudential regulations on payment cards to incorporate new business models.
- Requirement: Relevant regulations to fully implement the law must be issued by the CMF within 18 months or by July 2024.
- The CMF estimates that approximately 70 regulations will be issued through this process.
- Participants of the open finance system are expected to implement the system by the first half of 2027.
- In 2024, the BCCh plans to issue regulation on payment initiation services, in line with CMF-defined rules for the open finance system.

### Communication, competition, and cost-sharing considerations
- Authorities emphasize public, transparent, and participative implementation, using consultation roundtables.
- Potential conflicts of interest among financial sector entities may arise during implementation.
- Regulatory design should:
  - ensure symmetry to foster fair competition,
  - bolster the resilience of the financial system amid fintech developments.
- Establishing and maintaining an open financial system could entail additional costs; fair cost-sharing among participants is essential.

*Source: CHILE, INTERNATIONAL MONETARY FUND.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1chlea2024002.pdf_