Speaking with investors in London on Thursday, Valdes said the Finance Ministry plans to introduce wide-ranging legislation that will among other things see the country’s banks adopt Basel III regulations over the next six years, forcing them to hold a higher level of liquid assets and regulatory capital – from 4.5% to 6% Tier 1 capital.
Chile has a strong financial system, with an average leverage ratio more akin to what is seen in countries like Canada or New Zealand than its neighbours in the region. But its banks still largely operate on the Basel I framework, so the quality of capital isn’t as high as what’s seen in markets that have adopted the Basel II or III standard.
Valdes said the move would strengthen the country’s capital markets.
“Chile, in terms of liquidity, isn’t as strong as it could be. We have a relatively illiquid bond market. There are many reasons for this: red tape around getting funding in and out; restrictions on institutional investors; and the stock market is fairly small.”
“We need to add perpetual bonds and preferred stocks. We have simple banking bonds and contingent bonds, but we don’t have perpetuals, which our capital markets could benefit from. And we don’t have the standard tools Basel III have developed,” he added.
Valdes told Bonds & Loans that while a core aspect of the capital market reforms focuses on Basel III implementation, resolution will be equally important in the long run.
“For resolution, we really need a long-term solution for Chile – it’s something we don’t have right now. We need to do more to protect deposits. But, that also means other liabilities have to become less protected than they are today,” he said.
Other reforms to be introduced under the new banking law include the creation of an arms-length commission to oversee superintendency of securities, increasing Central Bank deposit guarantees, deepening integration with global digital payments infrastructure, and bolstering bank and non-bank funding opportunities for SMEs.
A bill that improve insurers and pension funds’ ability to invest in alternative assets and invest abroad is already making its way through Chile’s Congress.