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Report: Execs claim Chile's new provision rules could cost banking sector $500M

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Report: Execs claim Chile's new provision rules could cost banking sector $500M

Chile's recently proposed regulations on provisions could dampen the availability of credit and force the banking sector reserve an extra $500 million, local banking executives reportedly say, nearly twice the amount estimated by the country's banking superintendent, the SBIF.

In January, the SBIF put forward new methods for calculating provisions for credit risks within institutions' commercial portfolios. Specifically, the norm proposed four different methods for calculating provisions depending on the asset class of the loan — namely, commercial leasing, factoring, student credit and generic commercial.

The regulator estimated that the banking sector would have to provision an additional $275 million under the new methodologies, which were under consultation until March 16 and won't go into effect until 2019.

However, according to Chilean daily Pulso, executives have taken issue with two of the methods in particular, those for student and generic commercial loans, arguing that they will result in far higher provision requirements. The student credit method, executives say, requires that banks provision state-guaranteed loans, known locally as CAE at 50%, even though the guarantees of the Chilean Treasury cover 90% of such loans. The SBIF provision estimate, however, only accounts for a maximum loss of 10%.

The requirements under the commercial loan method, they say, will also lead to higher provisioning costs and discourage lending to the small and medium-sized enterprises that primarily resort to such credit, according to the newspaper, which did not cite specific sources.

According to Pulso, the banking industry is broadly supportive of changes to provision regulations, but believe that they should lean on international standards in their alterations.