October 27, 2022 - The Financial Market Commission (CMF) has published for consultation a regulation to implement additional liquidity requirements as a result of the supervisory process. It is built upon principles related to liquidity risk management and the Internal Capital Adequacy Assessment Process arising from the latest Basel Committee Accords. This is in addition to the Internal Liquidity Adequacy Assessment Process (ILAAP) proposed by the European Banking Authority and the guidelines published on the matter by the European Central Bank.
The regulation under consultation complies with the provisions of Number 4 Bis of Chapter III.B.2.1 of the Compendium of Financial Standards of the Central Bank of Chile. Said provisions cover the development of the ILAAP and allow the incorporation of the best international practices into the Chilean banking system. It also broadens the Commission's powers to set additional liquidity requirements on specific entities should their conditions arising from the current economic situation demand it.
Before Chapter III.B.2.1 was amended, and though current rules and regulations included the concept of solvency assessment and management, the CMF lacked authority to impose higher liquid asset requirements to banking entities which either had low liquidity levels or insufficient management according to supervisory assessments. Accordingly, the regulation under consultation introduces Chapter 21-14 to the Updated Compilation of Rules for Banks, which distinguishes two processes:
- The ILAAP, in which in banks themselves determine liquidity adequacy levels needed to cover the dimensions of liquidity risk over a timeframe of at least one year.
- The Commission's assessment of banks' liquidity adequacy to support their liquidity risk profile as determined in the annual supervisory review process.
Validity
The regulation will become effective as of April 2023, when banks must submit their first Liquidity Self-Assessment Report (LSAR) in a simplified format. All matters covered by the regulation will be evaluated starting with the supervisory cycle beginning in January 2025. Before that date, the LSAR will be based exclusively on funding plans carried out by banks for different economic scenarios provided by the Commission, as well as their own internal estimates.
For example, the first report shall consider challenges related to the expiration of the Conditional Credit Facilities to Increase Loans in 2024, which were granted by the Central Bank of Chile as a result of the 2020 sanitary crisis. The analysis must include market changes and their impacts on wholesale funding. Said assessment is to be submitted alongside a summary of the main conclusions and a liquidity adequacy statement.
Interested parties can check the Draft Rules and Norms section of the CMF website until November 25, 2022 to check the details of the regulatory proposal and submit their feedback. In addition, the Commission makes available a Regulatory Report with its key elements.
