Financial Crime World

Chilean Regulator Gives Banks the Boot: Liquidation and Resolution Framework

Introduction

In an effort to maintain financial stability and protect depositors, Chile’s banking regulator has outlined its framework for liquidating and resolving insolvent banks.

Insolvency Regime

According to Article 112 of the General Banking Act, banks in financial distress will be subject to a specific insolvency regime, which includes reorganization and bankruptcy liquidation procedures. The Insolvency Law No. 20,720 also applies to banks in voluntary liquidation, promoting cooperation between local and foreign courts and insolvency authorities.

Authority of the Commission for the Financial Market (CMF)

The CMF has the authority to:

  • Revoke a bank’s license
  • Declare it in compulsory liquidation
  • Appoint one or more liquidators if a bank lacks solvency or if the safety of its depositors or creditors requires its liquidation

Liquidation Procedures

In the event of a bank’s insolvency, all clients’ deposits will be paid out with:

  • Cash balances
  • Funds deposited at the Central Bank
  • Technical reserves

If these funds are insufficient, the liquidator is empowered to sell other assets, including those purchased by the Central Bank or granted through loans.

Provisional Manager

The CMF can appoint a provisional manager to take control of the bank’s operations if necessary. This individual will have all powers granted to both the board of directors and general manager of the bank.

Recovery and Resolution Regime

In addition to liquidation procedures, the CMF has implemented a recovery and resolution regime for banks. Under this framework, banks are required to submit a stabilization plan in the event of financial instability or deficient administration. The plan must contain concrete measures to remedy the situation and ensure the regular functioning of the bank.

Powers of the CMF

The CMF can:

  • Reject a bank’s stabilization plan
  • Instruct it to submit one if necessary
  • Appoint a delegate inspector to suspend any resolutions adopted by the bank’s board of directors and representatives
  • Designate a provisional manager to take control of the bank’s operations, which will have all powers granted to both the board of directors and general manager of the bank.