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
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
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.