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Chile's new banking law revamps regulation, hikes capital requirements


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According to Market Intelligence, April 2023

Chile's new banking law revamps regulation, hikes capital requirements

After more than a year of debate, Chilean lawmakers Oct. 3 approved a new bank reform bill that could force banks to raise nearly $3 billion of additional capital in the coming years. It is the biggest change to the country's banking law in decades.

The new law, which should be ready for President Sebastian Piñera's signature in the coming weeks, will revamp the regulatory framework of the country's financial sector in line with international Basel III standards and update the system's risk requirements. It increases the capital requirements of the banking industry and includes new rules that are meant to strengthen the tools available to financial regulators to prevent banks from becoming insolvent.

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Broadly supported by industry participants, regulators and politicians, the new general banking law, which represents the "biggest overhaul of [the] bank law in 30 years," will "reduce the contingent liability of the state in the face of a financial crisis, because banks will be better capitalized," Finance Minister Felipe Larraín said.

Earlier government estimates suggested Chilean banks will need about $2.80 billion of additional capital under the new rules, or some 15% of the industry's profits over a six-year time frame. According to a report by El Mercurio, Chilean banks, which generated net income of $3.64 billion in 2017, are expected to meet the new requirements without severe difficulties. Still, brokers at Inversiones Security reportedly expect the banking system's dividend payout ratio to fall to 65% of profits from the current 75%.

State-run Banco del Estado de Chile reportedly will need to raise the most amount of capital, around $1.62 billion from public funds, according to the finance ministry's budget office. As of June 30, BancoEstado's Tier 1 capital ratio under the Basel I methodology stood at 6.91%.

"Some [banks] are going to have to make more efforts than others," Jonathan Fuchs, banking analyst at Bice Inversiones, was quoted as saying to El Mercurio. He also noted that the new law was not likely to alter banks' share prices significantly as the issue was already "very internalized" in the prices.

Banks with a solid capital base and high profitability in relation to equity will be "the winners" after the regulatory switch and should have the potential to increase market share, analysts have noted.

Namely, Banco de Chile and Banco de Crédito e Inversiones, respectively, are in a strong position to take advantage of the new law, El Mercurio said, while Itaú CorpBanca and Scotiabank Chile, along with the aforementioned BancoEstado, face some challenges during the transition.

The law, which takes effect gradually, also aims to strengthen regulation of the sector by transferring functions from the former regulator SBIF, to the newly established financial markets commission CMF. That will see the end of SBIF, with its operations being absorbed by the new regulator in a maximum period of one year.

The new financial markets commission will define capital buffers which will be split into three categories of operational risk, market risk and credit risk. After the law has been fully approved by President Piñera, regulators and officials will define norms and specific details under the new framework, in a period of 18 months after the integration of the merged regulatory entity has been completed, meaning the broader implementation period will be 30 months.

As part of the law, banks will be able to raise up to 1.5% of the minimum capital using perpetual bonds. Banco Santander Chile has already said it will consider using such instruments, as it would optimize costs.

While praising the overall "balance" of the new law, Segismundo Schulin-Zeuthen, president of the Chilean banking association Abif, said the merger of SBIF and CMF should take place more quickly in order to define the new capital buffers before the 30-months deadline. He also noted that uncertainty around the eventual size of the buffers should be addressed as soon as possible.

The bank union president also said banks could not fully estimate the amount of additional capital needed until all requirements had been set, and that the figure could be higher than the $2.80 billion government estimate.