June 14, 2017 / 4:55 PM / 6 months ago

Fitch: Chile General Banking Law Reform Will Strengthen System

(The following statement was released by the rating agency) NEW YORK/SANTIAGO, June 14 (Fitch) Proposed changes to the Chilean General Banking Law presented on Monday would bring it in line with Basel III recommendations and be supportive of banking system stability, according to Fitch Ratings. The reforms would raise regulatory capital requirements and strengthen the regulatory and resolution framework. Chile's banking sector is generally well positioned to implement the new capital requirements that are part of the reform - up to 4% of additional capital for specific banks. However, the degree that it will enhance stability will depend on the final scope and timeframe of implementation, as well as whether it incorporates lessons learned in other emerging markets (EM). Many midsized EM banks have struggled to raise capital through domestic Additional Tier 1 (AT1) capital instruments and also have been unable to raise AT1 capital in international markets. Depending on the final definition of AT1, Fitch believes the relatively small sizes and capital bases of midsized Chilean banks will make compliance with the new capital standards challenging. Changes in the definition of risk weighted assets (RWA), new minimum requirements for core capital and regulatory capital, as well as the new treatment of Pillar 2 requirements and hybrid instruments and of deferred tax assets, are key elements that could affect banks credit profiles. The reform introduces Basel III capital standards and the Pillar II risk management and supervision recommendations. The reform adds the Superintendency of Banks role to the recently created Financial Market Commission (FMC), a new entity that will consolidate the functions of all sector regulators (pensions, banks and securities). Fitch believes that this will strengthen the regulator's governance and autonomy. Updates to banking resolution legislation, in line with international trends following the global financial crisis, are also included. Banks will have six years to comply with the new capital standards. The regulator estimates that USD2.8 billion-USD4.0 billion of additional capital will need to be raised from 2019-2024. This does not include the countercyclical buffer or the additional capital charges for domestic systemically important banks (D-SIBs). If the banks maximize the use of new AT1 capital instruments, which are allowed in the reform, and the risk weighted assets treatment become similar to Basel III or if mitigants are allowed, the costs should be nearer to the lower end of the estimate. However, AT1 instruments do not yet exist in the local capital markets, and the ability and willingness of Chilean banks to explore the global market for issuing these securities is uncertain. Banks could modify their dividend/profit-reinvestment policies to meet the capital requirements, depending on the pace and extent of Basel III implementation. Total minimum regulatory capital will be 10.5% of RWA, up from the current 8%. The main changes include increasing the Tier I capital minimum to at least 6% of RWA, composed of a minimum 4.5% of core Tier I plus 1.5% of additional, previously undefined Tier I capital instruments. Tier II capital will drop to 2% from the current 3.5% of RWA and a capital conservation buffer of 2.5%. A countercyclical buffer of up to 2.5% of RWA would also be added, to be determined by the central bank with FMC agreement. The current definition of RWAs will extend to include market and operational risk and capital deductions would include those stated in Basel III definitions. The D-SIB capital charges (1% to 3.5% additional capital) would be determined by the FMC with central bank approval. Contact: Abraham Martinez Director Financial Institutions +56 2 2499 3317 Fitch Ratings Alcantara 200, Of. 202, Las Condes Santiago Theresa Paiz Fredel Senior Director Head of Spanish Speaking South America & Caribbean Financial Institutions +1 1 212 908-0534 33 Whitehall Street New York, NY Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@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. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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