The first day after the decision of the Central Bank of Chile to raise -for the first time- by 0.5 percent the requirements for banking risk-weighted assets, which would imply -according to industry figures- constituting about 1,500 million dollars in capital by financial institutions, has been marked by criticism and doubts from the market regarding the timing of the measure.
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The Central Bank of Chile raised the requirements on Wednesday, citing the greater international uncertainty and the risk that a global shock could present for the economy local.
A worsening of the global macro-financial scenario could generate bouts of high volatility, reduce liquidity and trigger capital outflows from emerging markets, the officials wrote in their financial stability report, published on Wednesday.
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The Chilean economy, it should be noted, is in an adjustment process after an overconsumption in 2021 and 2022 due to unprecedented liquidity in the market after the withdrawal of 51,000 million dollars from pension savings funds in the midst of the pandemic.
Chile closed last year with inflation of 12.8 percent, the highest in 30 years, and it is expected to end this year at around 4.6 percent after the moderation in consumption and demand.
The Central Bank pointed out that unpaid household debts have increased, especially in cards and lines of credit, in a scenario in which unemployment has increased: it rose from 8.4 percent to 8.8 percent in the first quarter compared to the same period in 2022.
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What is the measure about?
The purpose of the tool, called Countercyclical Capital Requirement (RCC), is to strengthen the resilience of banks in the face of disruptive episodes that can have a significant impact on the economy, contributing to financial stability.
As? Through the accumulation of a “cushion” (buffer) of capital so that it is available against severe stress scenarios. In those cases, the “cushion” is released, and with that additional margin, the negative effects of an abrupt restriction of essential services are mitigated, such as the supply of credit.
The action was agreed on Tuesday afternoon unanimously by the directors, in response to the external situation of the markets, where a greater degree of uncertainty than usual and the deterioration of financial conditions stand out.
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The president of the Chilean Central Bank, Rosanna Costa, referred to this during the presentation of the Financial Stability Report (IEF) for the first semester before the Senate Finance Committee, noting that “the use of the requirement seeks to mitigate the procyclical behavior of banks when adverse shocks occur, thus ensuring that their consequences are not amplified through a decrease in the supply of credit when funding is most needed.
“This is a preventive measure, in the face of a shock that we do not see today, that today we do not identify or say is, but whose probability has increased particularly in the external sector. We have to have the capacities so that the economy can cope with it” Costa added.
What do the business community and banks say?
Businesses and banks criticized the decision of the Central Bank of Chile to increase the capital requirement for banks because, they estimated, it could have adverse effects on credit and economic activity.
Ricardo Mewes, president of the Confederation of Production and Commerce, affirmed that the requirement for banks to increase capital “will probably have an impact on loans to companies and individuals”. The business community estimated that the measure will force the accumulation of some 1,500 million dollars of additional capital.
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Banking has also been critical. José Manuel Mena, president of the Association of Banks and Financial Institutions, said “we do not see the activation of this instrument as something coherent.”
What do the analysts think?
There are market analysts who believe that there was a problem with the moment chosen to activate the measure, which has led to a feeling of surprise. What’s more, many agree that when the string of bank failures occurred in the United States and Europe, it was the monetary authority itself that indicated that local banks had dealt well with these events.
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Supervisory tools would have been more immediate and effective in targeting less capitalized banks and would also be generating less noise in the market.
Regarding the activation of the RCC, Jorge Cayazzo, Risk Advisory partner at Deloitte, told Emol that “beyond the impact that this higher capital requirement will have on credit activity, the most worrying implication, in my opinion, is the apparent inconsistency of this measure with the recent signals that the Central Bank has given regarding the resilience of the financial system and its ability to resist potential shocks”.
Although Cayazzo stated that “it is legitimate that the authorities have a concern about the adequacy of bank safeguards to face negative scenarios, but It is questionable whether the countercyclical buffer was the best tool available to them to address such a concern.”.
“It seems to me that supervisory tools would have been more immediate and effective in targeting less capitalized banks and, furthermore, they would be generating less noise in the market,” added the expert.
Along with this, he pointed out that it is a question of 1,500 million dollars of greater capital requirement, which is “a perfectly achievable figure for the banks, but the potential change in the expectations of the agents can have undesired effects beyond what is happen with the credit market”.
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The chief economist of BCI, Sergio Lehmann, maintained that “the increase in the capital requirement implies less use of resources for new credits. Although the banks present capital indexes that are above the regulatory norm, it sends a signal that they are she must be even more careful in the use of her capital.”
“The external factors that the Central Bank points to are bank tension, and doubts regarding the prolongation of contractive policies in the United States and Europe. However, the arguments are somewhat weak. Greater control is perceived over the situation of the banks in the United States, while the reading on monetary policy in the United States and Europe responds to more resilient economies, with greater momentum. Rather, it is read from this factor that reaching a balance in the developed economies will be more gradual” Lehman added.
For his part, Ewald Stark, senior analyst at Bice Inversiones, meanwhile, explained that, in simple terms, The measure will result in “lower credit growth, especially in riskier segments. This tool is countercyclical in nature. And it seeks for banks to increase their ability to withstand shocks in the event of financial stress. So that, given a shock scenario, credit will continue to flow to the economy through the release of this ‘cushion’.”
From Stark’s perspective, yes, “today banks in general remain well capitalized, and all banks can easily meet this new requirement with the capital they already have today, or by capitalizing their profits and assigning them to this account of It affects banks with lower credit growth, which can generate lower results.”
While Francisco Simian, chief economist at Altafid, believes that “The RCC will help contain the generation of credit. The objective is to avoid the generation of imbalances that could later hit the solvency of one or more banks”.
And referring to the Financial Stability Report for the first half released today, Simian indicated that “for emerging economies, the risks of abrupt corrections in asset prices and capital outflows have increased. These risks are greater if interest rates in economies developed prices remain high for longer than expected”.
“In Chile, in addition, the narrower financial position of households is added, leaving agents more exposed to risks due to changes in interest rates. Partly because of this, it is necessary to strengthen the capacity of the financial system to face potential adverse effects. Activating the RCC goes precisely in this direction,” he concluded.
INTERNATIONAL WRITING
*With information from Bloomberg, Agencies and El Mercurio (Chile) / GDA
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