Basel III And Its Implementation In Chile

BASEL III'S NEW CAPITAL REQUIREMENTS

Chile is one of the few countries that endured the last global financial crisis, and emerged with a solid and stable economy, mainly due to the strength of its banking sector. Conservative Chilean banks and their zealous authorities learned the lessons from the country's financial crisis in 1982; since then, they have carefully avoided systemic risk, over lending and have kept safe levels of liquidity. Additionally, the Chilean banking industry has grown steadily for the last 30 years. Chile did not adopt Basel II, but the GBA already provided for (and still does) a regulatory capital of at least 8% of risk-weighted assets at all times, equivalent to standard capital requirements under Basel III. Regulatory capital under the GBA is almost entirely comprised of equity and undistributed revenue. However, it does not contemplate Tier 2 capital and the new Additional Tier 1 (AT1) feature of Basel III. AT1 is introduced by Basel III as a new high quality capital base intended to strengthen banks' positions when facing risk exposure. As such, the instruments qualifying for AT1 are required to contain certain special features which limit their availability in certain markets. AT1, together with the counter-cyclical buffer, can be considered the most relevant changes from Basel II regarding capital requirements.

BASEL III IN CHILE

The Chilean government is undertaking a major reform of the GBA in order to comply with Basel III's requirements. The motivation for the reform is the internationalisation of the Chilean banking sector, the increasing local presence of foreign banks and the aim to meet international financial standards. One aspect of this reform is the inclusion of AT1. Preliminary estimates by the banking industry indicate that the gap between current levels of capital and those to be achieved under Basel III is around US$4bn. This is a considerable amount which needs to be met by either equity or instruments that meet the criteria to be included in AT1. Bearing this in mind, the industry has begun to analyse the legal framework and the potential amendments required for these instruments to exist in Chile.

AT1 INSTRUMENTS: LEGAL ISSUES

The discretionary character of AT1 instruments and the ability of banks to use these instruments to overcome sudden liquidity crises is essential for Basel III. Some of the main criteria to qualify as an AT1 instrument under Basel III are that: --the instruments are...