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Bonds and Shares: The Lifeblood of Chile’s Banking System

In Chile, bonds and shares play a crucial role in the country’s banking system. Also known as preferential shares, these instruments are an essential component of a bank’s capital structure, providing a safety net for depositors and investors alike.

Capital Requirements

According to Article 66 of the General Banking Act, banks are required to maintain a minimum aggregate of:

  • Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital of at least 6% of their risk-weighted assets, net of required provisions.
  • Additional basic capital of 2.5% of their risk-weighted assets, net of required provisions.
  • An additional countercyclical buffer between 0% and 2.5%.

Subordinated Loans (Tier 2)

Banks can also issue subordinated loans, known as Tier 2 (T2), which are comprised of voluntary provisions made by the bank. T2 capital is limited 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 Central Bank (CMF) can also declare one or more banks as systemically important financial institutions (SIFIs), imposing additional capital requirements on them.

Shareholdings and Acquisition of Control

Restrictions and Requirements

The acquisition of shareholdings in Chilean banks is subject to certain restrictions and requirements. CMF authorisation is required to acquire more than 10% of a bank’s equity, and the acquirer must comply with Article 28 of the General Banking Act.

Foreign Investors

Foreign investors seeking to acquire a significant shareholding in a Chilean bank must also comply with the requirements set out in Article 32 of the General Banking Act. There are no specific restrictions on foreign shareholdings, and the General Banking Act does not differentiate between acquirers based on their nature or origin.

Liquidation and Resolution

Insolvency Regime

In the event of financial distress or insolvency, Chilean banks are subject to a specific insolvency regime governed by Article 112 and following of Title XIV of the General Banking Act. Banks must immediately notify the CMF of any fact that may imply financial instability or deficient administration and file a stabilisation plan.

Compulsory Liquidation

If the stabilisation plan is rejected or not filed, the CMF can designate a delegate inspector to suspend resolutions adopted by the bank’s board of directors and appoint a provisional manager with full powers over the bank. In the event of compulsory liquidation, the CMF will revoke the bank’s licence, declare it in liquidation, and appoint one or more liquidators.

Liquidator Powers

The liquidator is empowered to:

  • Transfer part of the bank’s operations to another financial institution
  • Sell off other assets to pay outstanding debts

Powers of the Regulator

The CMF has significant powers over Chilean banks, including the authority to:

  • Revoke licences
  • Declare banks in compulsory liquidation
  • Appoint liquidators
  • Designate a delegate inspector
  • Suspend resolutions adopted by the bank’s board of directors

Forced Liquidation Scenario

In the event of a forced liquidation scenario, foreign creditors are subject to the same rules as domestic ones.

Conclusion

In conclusion, bonds and shares play a vital role in Chile’s banking system, providing a safety net for depositors and investors alike. The acquisition of shareholdings is subject to certain restrictions and requirements, while the liquidation and resolution of insolvent banks is governed by specific regulations designed to maintain financial stability.