Financial Crime World

Chile’s Banking Regulation: A Look at Bonds, Shareholdings, and Resolution

SANTIAGO, Chile - In an effort to ensure the stability of its banking system, Chile has implemented strict regulations on bonds, shareholdings, and resolution procedures for financial institutions.

Capital Requirements

According to Article 66 of the General Banking Act, banks are required to maintain a minimum level of capital. This includes:

  • Tier 1 (CET1) Capital: Cannot be less than 6% of the bank’s risk-weighted assets, net of required provisions.
  • Tier 2 (AT1) Capital: Comprised of subordinated loans and voluntary provisions made by the bank.
  • Basic Capital: An additional 2.5% of their risk-weighted assets, net of required provisions.
  • Countercyclical Buffer: Between 0% and 2.5% of their risk-weighted assets, net of required provisions, at the discretion of the Central Bank.

Acquisition of Shareholdings

The acquisition of shareholdings in Chilean banks is subject to strict regulations:

  • To acquire more than 10% of a bank’s equity, an investor must obtain authorization from the Superintendency of Banks and Financial Institutions (CMF) and comply with Article 28 of the General Banking Act.
  • Foreign investors wanting 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.

Liquidation and Resolution

In the event of financial distress, banks are subject to a specific insolvency regime:

  • The CMF has the authority to:
    • Revoke a bank’s banking license
    • Declare it in compulsory liquidation
    • Appoint one or more liquidators
  • If a bank is in liquidation, its clients’ deposits will be paid with its cash balance, funds deposited in the Central Bank, or funds that correspond to its technical reserve.
  • The CMF also has the authority to transfer part of a bank’s operations to another bank, and Article 138 of the General Banking Act sets out a simplified regime for banks in liquidation that voluntarily transfer assets to another financial institution.

Transnational Insolvency Provisions

Chile has implemented transnational insolvency provisions relating to foreign operations under Law 20,720 (Insolvency Law), aimed at promoting cooperation between local and foreign courts and insolvency authorities.