IMF - Chile: Financial Sector Assessment Program—Technical Note on Crisis Management and Bank Resolution
See my report on behalf of the International Monetary Fund on the Chilean Financial Safety net, crisis management and resolution arrangements for the financial sector published in 2022.
The Chilean authorities have made progress in crisis management since the IMF’s 2011 Financial Stability Assessment Program (FSAP), but significant gaps remain. Banking regulations were revised to increase supervisory powers and expand the crisis management toolkit. While progress has been made to enhance the current early intervention framework, including by enabling the authorities to require firms to submit regularization plans, Comité de Supervision Financiera (CMF)’s prudential toolkit to manage banks at risk of failure lacks an ex-ante recovery planning requirement for banks. The report contains 13 recommendations on how to enhance the financial safety net arrangements in Chile. The key recommendations can be summarised as follows:
Establishing a statutory bank resolution authority with a comprehensive range of resolution tools. This is essential to orderly manage bank failures. It should include clearly setting failing banks apart from the general insolvency framework. While a range of institutional arrangements exist for the resolution authority (e.g., as a standalone agency, or as a function within an existing authority), structural separation and operational independence between resolution and prudential supervision functions must be ensured. Cross-authority crisis coordination should be enhanced to support bank recovery and manage orderly bank failure, including by finalizing and publishing the crisis management MoU between Ministry of Finance, CMF, and Central Bank of Chile (BCCh).
Establishing and implementing resolution planning for all banks in scope of the resolution regime. For systemic banks this should include setting a loss-absorbing capacity (LAC) requirement. Chilean Systemic banks are well-positioned to comply with LAC requirements given their issuance of wholesale debt securities, which could be adjusted to meet LAC eligibility requirements when refinanced.
Establishing an industry-funded deposit protection scheme (DPS) to replace existing MoF and BCCh deposit guarantee arrangements. This will limit moral hazard and central bank balance sheet risks associated with the unlimited guarantee of sight deposits by the BCCh and term deposits of natural persons by the MoF. A prefunded DPS would better insulate the industry from contagion effects (related to DPS levies) during a non-systemic bank failure. The DPS should be implemented alongside a new resolution regime, have the ability to ensure a rapid payout of covered depositors under liquidation, and be able to contribute to the costs of resolution
This report is based on conversations with officials and senior staff of the Chilean Ministry of Finance (MoF), Central Bank of Chile (BCCh) Comité de Supervision Financiera (CMF), and with private-sector stakeholders, including banks and the wider industry. It was a pleasure working with them, and I appreciate the constructive dialogue and the many insights they shared, which contributed to this report and my recommendations.