Fitch: Chilean Basel May Be Too Late to Allay Capital Pressures

SANTIAGO, Chile & NEW YORK--(BUSINESS WIRE)-- Proposed changes that would bring the Chilean Banking Act into compliance with Basel III would be positive for the country's banks as they would raise the level of regulatory capital, Fitch Ratings says. However, the rules may not be implemented quickly enough to help Chile's banking system manage the economic slowdown and rise in corporate taxes, which will likely drive up loan loss provisions over the next two years.

Approximately seven of the 10 largest banks will need to raise some new capital or increase internal capital generation to meet the standards. The banking sector is generally well prepared to implement the new capital and liquidity requirements and the changes could bolster the sector's resilience. However, the degree of that stability will depend on the final scope and timeframe of the reform and whether it incorporates lessons learned in other developing markets. Some of these have struggled to create domestic Additional Tier 1 (AT1) capital markets and their mid-size banks have been unable to raise AT1 capital in the international markets.

The costs to Chilean banks over the proposed six-year transition to these regulations are estimated by the local bank regulator at from USD2.8 billion to USD4.0 billion. This range does not include the countercyclical buffer or the capital charge for domestic systemically important banks (D-SIBs). If the banks maximize their AT1 instruments, the costs would be nearer the lower end of the estimate. However, those instruments do not yet exist in the local capital markets and the global appetite for them is uncertain.

The main change required to adopt Basel III capital rules would be to create a new Tier 1 capital minimum of at least 6% of risk-weighted assets (RWA), composed of a minimum 4.5% of core Tier 1 plus 1.5% of additional Tier 1 capital instruments. Tier II capital will be reduced from the current 3.5% of RWA to 2.0% and a conservation buffer of 2.5% would be created.

The current definition of risk-weighted assets would extend to market and operational risk. Capital deductions would include those stated in Basel III definitions. And, the D-SIB capital charges (1% to 3.5% additional capital) would be reviewed by the regulator and the central bank. The latter would be able to require a countercyclical capital buffer of up to 2.5% of total RWA.

The independent working group charged with reforming the Chilean General Banking Act made its proposal to the Ministry of Finance near the end of 2015. The Banking Act was last structurally reformed in 1997 when Basel I was introduced.

The working group made three key proposals: introducing Basel III capital standards and reinforcing Basel Pillar 2; strengthening the regulator's flexibility, corporate governance and financial autonomy; and updating the banking resolution legislation. The group also proposed to improve financial conglomerate regulation and extend the regulatory perimeter to include shadow banking entities. The reform bill will go to Congress during the first half of 2016, but the legislative agenda makes when it might be passed uncertain.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160218006024/en/

Fitch Ratings
Abraham Martinez
Director
Latin American Financial Institutions
+56 2 2499 3317
Fitch Ratings
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Source: Fitch Ratings

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