Chile Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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In April 2019, the Central Bank of Chile (CBC) received the last payment from private banks rescued during the 1981-83 banking crisis, one of the deepest in recent history. On the CBC's 95th birthday, the crisis set the basis of the current Chilean financial system.

Pre-crisis, the country's financial liberalisation process was not accompanied by adequate regulation. Bank credit grew from close to 0% in 1975 to almost 70% annually in 1977 and 20% in 1981; all under a fixed exchange rate scheme. External interest rates rose in 1982, external credit was scarce, the oil price increased 150% between 1978-80 and from 1981 to mid-1982 the copper price dropped 30%, all of which deteriorated the terms of trade and international trade. In 1983, banks' balance sheets showed large currency mismatches, inflation exceeded 30%, GDP was down 14% and unemployment stood at 25%.

A bank bailout process began with the liquidation of non-viable institutions, emergency loans, tax credit for company recapitalisations and the CBC repurchasing a deteriorated portfolio. This policy lasted over 30 years. 'Intervened' institutions represented 60% of the system's total credit. Estimated direct fiscal costs were 41% of GDP.

The crisis was followed by a major upgrade in banking regulation that later extended to other financial markets and institutions. This did not conspire against the development and innovation of financial services, which was partly fuelled by pension reform underpinned by a well-founded system and managed by a growing group of institutional investors. Market development, framed by effective regulation, turned the financial sector from a weakness to a strength of the Chilean economy.

Chile now has one of the strongest financial markets of all emerging countries. Institutional investors – mutual and pension funds and insurance companies – have extended the investment horizon to compensate for corporate debt in foreign currency. In addition, they are the largest investors in fixed income, sovereign and corporate bonds and participate in the market of term deposits and variable income, representing investments of around 83% of GDP subject to rigorous supervision standards.

Banks have diversified and deepened their credit supply, while maintaining capital above regulatory requirements. Companies have learned to overcome a fear of floating, virtually eliminating currency mismatches in the corporate sector. Today, the exchange rate acts as a cushion for external shocks, not as an amplifier as in the past, while reducing interest rate volatility. This characteristic has helped anchor inflationary expectations around the policy target. Market development has enabled a safe increase in household and mortgage credit, as have the advances in payment regulation and inclusion with greater efficiency gains. Add to this the 'bancarization' of the population, infrastructures for gross and retail payments and derivatives market.

A new General Banking Law started 2019 by modernising supervision institutionality, bank solvency standards and crisis management. This positions Chile among the most developed emerging countries. Challenges persist, such as bank resolution mechanisms, deposit insurance and fintech regulation. Further developments can draw from the rich experiences and tough lessons learned from the past.