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Chile’s Banking Regulation: A Focus on Preferential Shares and Capital Requirements

Overview

The Chilean banking system is subject to strict regulations aimed at ensuring the stability and security of financial institutions. One key aspect of these regulations is the requirement for banks to maintain a certain level of capital, which includes preferential shares.

Preferential Shares (Tier 1 Capital)

  • According to Article 66 of Chile’s General Banking Act, preferential shares must account for at least 6% of a bank’s risk-weighted assets, net of required provisions.
  • Preferential shares are also known as Tier 1 capital and can be converted into ordinary shares under specific conditions.

Tier 2 Capital

  • Banks are also required to maintain Tier 2 capital, which includes subordinated loans and voluntary provisions made by the bank.
  • This type of capital can account for up to 50% of the issuing bank’s basic capital, less 20% for each year that elapses from six years before maturity.

Systemically Important Financial Institutions (SIFIs)

  • The Comisión para el Mercado Financiero (CMF), Chile’s central bank, has the authority to declare one or more banks as systemically important financial institutions (SIFIs).
  • SIFIs are subject to additional capital requirements and other regulatory measures aimed at reducing their risk profile.

Acquisition of Shareholdings and Control

  • The acquisition of shareholdings and control of banks in Chile is subject to specific regulations.
  • According to Article 28 of the General Banking Act, acquirers must comply with certain ownership and behavioral requirements to obtain authorization from the CMF.

Foreign Investment

  • Foreign investors wishing to acquire a significant shareholding in a bank must also comply with Article 32 of the General Banking Act, which sets out the requirements for foreign institutions or entities planning to set up a bank in Chile or a subsidiary of a foreign bank.

Liquidation and Resolution

  • Chile’s banking regulation provides for a specific insolvency regime that applies to banks in financial distress.
  • Banks are subject to reorganization and bankruptcy liquidation procedures set out in the Insolvency Law (Law 20,720).

Powers of the Regulator

  • The CMF has a range of powers aimed at ensuring the stability and security of the financial system, including:
    • Revoking banking licenses
    • Declaring banks in compulsory liquidation
    • Appointing liquidators or provisional managers
    • Transferring part of a bank’s operations to another bank under a simplified regime

Conclusion

Chile’s banking regulation provides a robust framework for ensuring the stability and security of the financial system. The requirement for banks to maintain a certain level of capital, including preferential shares, is a key aspect of this regulation, along with the powers of the regulator to intervene in cases of insolvency.