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Chile's CMF publishes blueprint to identify systemically important banks

Chile's financial market commission CMF has published for public consultation a methodology on defining systemically important banks, as it gears up for the implementation of new Basel III capital standards in the country.

The government agency will determine systemically important banks based on four factors size, interconnection, substitutability and complexity — that reflect the local impact of the institutions' financial deterioration or eventual insolvency.

Identifying systemically important banks and determining additional requirements should happen annually, according to the methodology.

Using information as of December 2018, the CMF has preliminarily identified six banks as systemically important, requiring additional basic capital of about $2.5 billion. According to Diario Financiero, the banks consist of Banco Santander Chile, Banco de Chile, Banco del Estado de Chile, Scotiabank Chile, Banco de Credito e Inversiones SA and Itaú CorpBanca.

The consultation for the methodology will run until Sept. 26. The new regulations, meanwhile, will take effect in December 2020.

Banks identified to be systemically important are required to inject additional capital starting in December 2021, at an additional rate of 25% annually. The process is expected to end by December 2024.

The CMF said the regulation will translate into annual economic benefit of about 0.5% of GDP, which will be derived from greater financial stability, far offsetting the costs tied to the additional capital requirements.