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Wednesday, October 3 de 2018

Chilean Parliamentary approves New Banking Law

After the approval of the bill, led by the Ministry of Finance, the Minister Felipe Larraín highlighted: “The bill’s approval will contribute to further development of Chile’s financial system, while at the same time build on its resilience”.

After several years of discussion, on October 3th the Chilean Congress approved the New Banking Law. Led by the Minister Felipe Larraín, the bill is considerate the most important adjustment to Chile’s banking legislative framework over the past thirty years.

“The bill’s approval will contribute to further development of Chile’s financial system, while at the same time build on its resilience”, said Minister Larraín.

Among the most important changes, the law provides enhanced new governance for the bank regulator, broadening the range of regulatory tools to deal with weak banks, and extending government guarantees for term deposits, among other important issues. The current Securities and Insurance regulator, the Committee for Financial Markets (CMF), will also supervise and regulate the banking sector. This is the final step on a transition to an integrated model for supervision of the financial sector. 

In addition, it sets the adoption of Basel III Capital Requirements for banks, aligning Chilean capital requirements with international standards. Under the new legislation, the CMF will define the standard model for the definition of Risk Weighted Assets (RWA) and banks will be able to use internal models once they have been authorized by the CMF. In addition to the new capital requirements (Table 1), the CMF will be able to impose additional Pillar 2 capital requirements for banks that fail to mitigate risks with the minimum capital requirements.

These changes will take place gradually. The CMF will have up to one year to take on the regulation of banks and then, up to 1.5 years to issue the new capital requirements regulation. Once this regulation has been issued, new capital requirements will be gradually phased-in over a four-year period. 

Government Guarantees for Term Deposits

The law sets an extension of Government Guarantees for Term Deposits. Term deposits will be 100% guaranteed by the government, up to a 200 UF limit for deposits on the same bank and 400 UF for deposits on all the system. To date, deposits are covered only up to 90% up to a limit of 120 UF. The current sight deposits guarantee scheme remains unchanged, meaning that these deposits remain covered up to a 100% with no maximum limit by the Central Bank of Chile.

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