Macroprudential Policies: A View
from Chile
Claudio Raddatz Director, Financial Policy Division
Central Bank of Chile
The views and opinions expressed in this presentation do not necessarily
represent those of the Board of the Central Bank of Chile.
Chile has not been active in the use
of macroprudential tools
• We have been prudent about macroprudential policies
• Pragmatism and a healthy dose of skepticism in the face
of a rising policy framework
• Especially when your financial system has been in good
shape and you do not feel the compelling need to act
• Why did our financial system fared relatively well during
and after the crisis? Does it has any relation to what
today is understood as Macropru?
11-12-2015 Next steps for macroprudential policies 2
What has worked? Why has our
financial system been resilient?
• An internally consistent macro framework.
• Tight regulation and supervision of banks’ behavior and
activities through the cycle aimed at limiting complexity
and interconnections: policy decision to keep it simple.
• Adequate monitoring, evaluation, and communication of
systemic risks by an independent central bank. Signaling
matters.
11-12-2015 Next steps for macroprudential policies 3
Outline
• Banking regulation in Chile: simplicity by design
• Signaling by the central bank as a MP tool
• Why did we abandon CAM?
11-12-2015 Next steps for macroprudential policies 4
Outline
• Banking regulation in Chile: simplicity by design
• Signaling by the central bank as a MP tool
• Why did we abandon CAM?
11-12-2015 Next steps for macroprudential policies 5
Chilean financial system is largely
dominated by banks
Source: Central Bank of Chile, SVS, SBIF and SP
39 41 39 41 45 41 40 42 43 43 42
37 37 38 38 32 35 38 35 36 36 37
10 10 11 13 11 13 13 12 12 12 1212 09 08 06 09 08 06 09 08 07 07
0
20
40
60
80
100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Banks Insurance and Pension Funds
OFIs Central Bank
Public Financial Institutions Non-bank DTIs
Financial Institutions (percent of TFA, end 2014)
11-12-2015 Next steps for macroprudential policies 6
Chilean banking law clearly defines
and limits banks activities Allowed operations for banks in Chile (LGB)
Taking deposits, offering current accounts, making transfers and payments
Issuing senior bonds, mortgage linked bonds, guaranteed and unguaranteed loans
Issuing letters of credit, payment orders and guarantees of deposits
Issuing and trading commercial paper
Trading derivatives according to Central Bank regulations, and engaging in exchange rate
operations
Offering services of securities custody
Issuing and operating credit cards
Acting as investment agent and stock underwriter
Buying, keeping and selling securities and other assets in order to provide banking services;
Establishing on-shore subsidiaries and acquiring ownership stakes in foreign firms
Subsidiaries in Chile are allowed to act as securities agents; broker dealers; Mutual or investment
funds administrators; and insurance broker.
Subsidiaries are not allowed to buy shares unless it is stricly necessary for its functions (parent
banks are not allowed to buy or hold shares)
11-12-2015 Next steps for macroprudential policies 7
Crucially: no stocks, no commodities, limited set of derivatives
…and is relatively restrictive in terms
of risk weights (…and no IRB)
Bank Assets Basilea II LGB
Cash 0% 0%
Exposure to sovereign or central bank debt 0-100%10 o 100%(2)
Trade credits (1) 0-100% 100%
Commercial mortgages 100% 100%
Multilateral development banks 0% 100%
Banks (1) 20-100% 100%
Consumer 75% 100%
Home mortgages 35% o > 60%
90-day default portfolio (net of provisions) (1) 100% 100%
90-day default portfolio (net of provisions), mortgages 50-100% 100%
Risk weights in the standard Basel II model and in
Chile (General Banking Law)
(1) A weight of over 150% could be applied to: sovereign, state-owned or bank debt or corporate securities rated lower than B–; commercial credit rated lower than BB–; and mortgage loans in default with provisions of less than 20% of the debt. (2) Sovereign or Central Bank of Chile debt: 10%; remainder: 100%. Source: Central Bank of Chile, based on BIS and SBIF data.
11-12-2015 Next steps for macroprudential policies 8
As a result, the balance of banks is
relatively simple
Liabilities 2008 july 15
Demand deposits 13 17
Time deposits 47 39
Foreign liabilities 7 4
Foreign bonds 1 5
Debt securities 13 14
Derivatives 6 7
Other liabilities 7 6
Capital and reserves 8 8
Total 100 100
Liabilities of banking system(%)
Assets 2008 sept 15
Cash 4 5
Consumer loans 8 8
Commercial loans 42 41
Home mortgages 16 19
Foreign trade 8 6
Securities 12 9
Derivatives 7 7
Other assets 3 5
Total assets 100 100
Assets of banking system(%)
11-12-2015 Next steps for macroprudential policies 9
…and banks’ capital is good quality
CET1
0
5,000
10,000
15,000
20,000
25,000
ago.09 ago.10 ago.11 ago.12 ago.13 ago.14 ago.15
Mill
are
s
capital and reserves Tier II (1)
Regulatory capital of banking system (MMM $)
(1) Includes subordinated bonds, additional provisions, etc.. Source: Central Bank of Chile.
11-12-2015 Next steps for macroprudential policies 10
Our regulatory framework also includes
some macroprudential features
• Limits to related lending and interconnections
• Higher capital requirements for larger banks
• Limits to maximum LTVs in securitizable mortgages
– We will soon introduce provision rules that penalize loans in the
banking book with high LTVs
• Requirement to explicitly consider exposures of
borrowers to IR and FX risk and the state of the business
cycle in the determination of provisions.
11-12-2015 Next steps for macroprudential policies 11
Indeed during the crisis provisions
increased before NPLs .5
11
.52
2.5
1990m1 1995m1 2000m1 2005m1 2010m1 2015m1date
NPL coupon (% loans) Provision expenses (% loans)
11-12-2015 Next steps for macroprudential policies 12
Outline
• Banking regulation in Chile: simplicity by design
• Signaling by the central bank as a MP tool
• Why did we abandon CAM?
11-12-2015 Next steps for macroprudential policies 13
The Central Bank has maintained for several
years a close monitoring of financial stability
issues
11-12-2015 Next steps for macroprudential policies
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2
4
6
8
10
12
14
16
18
20
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Number of years producing a FSR
14
State, vulnerabilities, and risks, shared
with participants and supervisors
• FSR is shared with supervisors before its public release
• Results of individual-bank stress tests are discussed with
bank supervisors
• FSR is widely disseminated among market participants
and presented to congress twice a year.
• We have occasionally issued specific warnings about
developments in some markets that have had bite even
before actual measures are taken…
11-12-2015 Next steps for macroprudential policies 15
Lending conditions in mortgages
tightened after CB warning
(*) The vertical dashed line indicates the central bank warnings about possible risks associated with the dynamics of the housing market. Source: Central Bank of Chile, based on data of SII.
Loan to Value (*) (percent)
40
50
60
70
80
90
100
11 II III IV 12 II III IV 13 II III IV 14 II
P10, P90 P75 Median
11-12-2015 Next steps for macroprudential policies 16
Outline
• Banking regulation in Chile: simplicity by design
• Signaling by the central bank as a MP tool
• Why did we abandon CAM?
11-12-2015 Next steps for macroprudential policies 17
What do we know about the
effectiveness of CAM measures?
• Chile had a system of URR on certain forms of credit during 91-99.
• URR had little to no impact on the overall level of capital inflows.
• URR may have had some impact on the composition of inflows,
reducing ST and increasing LT
– Increase in non-taxed ST flows.
• It required a permanent tinkering with its conditions as loopholes
were discovered
– Changes in the base and holding period
• It had little to no impact on exchange rate or MP room
• Sand in the wheels? Maybe, but our experience suggests that
wheels keep moving fast unless you throw them a rock..
11-12-2015 Next steps for macroprudential policies 18
Macroprudential Policies: A View
from Chile
Claudio Raddatz Director, Financial Policy Division
Central Bank of Chile
The views and opinions expressed in this presentation do not necessarily
represent those of the Board of the Central Bank of Chile.
And our SB is mainly concentrated in
mutual funds Other Financial Institutions (OFIs)
(percent)
Source: Central Bank of Chile, SVS, SBIF and SuSeSo
11-12-2015 Next steps for macroprudential policies 20
0
20
40
60
80
100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MMFs MLTF
Finance Companies Social Credit Entities
Broker dealers Structured Finance Vehicles
Full FX liberalization has reduced firm’s
FX exposures
11-12-2015 Next steps for macroprudential policies
400
450
500
550
600
650
700
750
-20
-10
0
10
20
30
40
01 04 07 08 09 10 11 12 13 14 15II
Mismatch >= 10% of assets Mismatch <= -10% assets XR(CLP/USD)
Tails of FX mismatch distribution (% of corporate assets)
Short dollar
21
Development of local base of
institutional investors has helped us
11-12-2015 Next steps for macroprudential policies
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
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Mexic
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Denm
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Peru
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Taiw
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Russia
Japan
P[75-25] Median
Low correlation of local and global LT rates
(rolling estimated pass-through, local vs US 10y bond)
22
Development of local base of
institutional investors has helped us
11-12-2015 Next steps for macroprudential policies
Pension funds have dampened movements in capital inflows from non-residents
(US$MM, PFAs 3m moving cumulative flows)
-12,000
-8,000
-4,000
0
4,000
8,000
12,000
ago-08 Oct-09 Dic-10 Feb-12 Abr-13 Jun-14 Ago-15
Domestic Foreign
23
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