Banks’ Patrimony: A Vital Component of Financial Stability
In Chile, the patrimony of banks plays a crucial role in maintaining financial stability. One key aspect of this patrimony is preferential shares, which can be converted into ordinary shares under certain conditions. These shares are considered part of a bank’s effective patrimony and are subject to specific regulations.
Capital Requirements
Banks must maintain a minimum level of capital, including:
- CET1 (Common Equity Tier 1)
- AT1 (Additional Tier 1)
The aggregate of these two types of capital cannot be less than 6% of the bank’s risk-weighted assets, net of required provisions. Additionally, banks can issue subordinated loans, known as Tier 2 (T2), which are subject to specific conditions.
Systemic Risk and Additional Capital Requirements
The Central Bank of Chile (CMF) has the authority to declare a bank systemically important and impose additional capital requirements. In certain cases, the CMF may also impose additional capital requirements on banks that show risks not properly covered by existing regulations.
Shareholdings and Acquisition of Control
The acquisition of shareholdings and control of banks is subject to specific regulations. CMF authorisation is required for any person or entity seeking to acquire more than 10% of a bank’s equity. Foreign investors must also comply with the requirements set out in Article 32 of the General Banking Act.
Liquidation and Resolution
In the event of financial distress, banks are subject to a specific insolvency regime. The CMF has the power to:
- Appoint a liquidator
- Revoke a bank’s banking licence if it determines that the bank does not have sufficient solvency or its liquidation is necessary to ensure the safety of depositors or creditors
Recovery and Resolution Regime
Banks are required to prepare recovery plans, which must be approved by their board of directors. The CMF can also instruct a bank to submit a stabilization plan if it becomes aware of a situation that threatens the bank’s financial stability.
Powers of the Regulator
The CMF has significant powers in the event of a bank’s liquidation, including:
- Revocation of its banking licence
- Compulsory liquidation
- Appointment of one or more liquidators
- Transfer of part of a bank’s operations to another financial institution
Transfers of Business
In a liquidation scenario, the liquidator appointed by the CMF is empowered to transfer part of the bank’s operations to another bank. This simplifies the process for banks in liquidation that voluntarily transfer assets to another financial institution.
Conclusion
Overall, the patrimony of banks plays a vital role in maintaining financial stability in Chile. The regulations and powers outlined above are designed to ensure that banks operate safely and efficiently, while also protecting depositors and creditors.