Chile’s central bank raised capital requirements on financial institutions, tightening credit conditions, amid concern over the risk a global shock could present to the local economy.
(Bloomberg) — Chile’s central bank raised capital requirements on financial institutions, tightening credit conditions, amid concern over the risk a global shock could present to the local economy.
A worsening of the international financial outlook would lead to high volatility, lower liquidity and capital flight from emerging markets, policymakers wrote in their financial stability report on Wednesday.
“The board has activated the counter-cyclical capital requirement as a precautionary measure amid the higher global uncertainty,” they wrote. “Although the macroeconomic outlook has evolved in line with expectations, one cannot completely rule out the risk of an occurrence of a severe external shock. Although the probability is low, its negative impact on the economy would be significant.”
The counter-cyclical measure came as a surprise to the market amid expectations the central bank will start to cut its key interest rate from a two-decade high later this year. Policymakers are cooling an economy that had overheated on more than $50 billion in early pension withdrawals, as well as government transfers that reached some 90% of families during the pandemic.
“It is evident that it will tighten credit conditions,” BTG Pactual analysts including Pablo Cruz wrote. “Considering the severe adjustment of private consumption in 1Q23 as well as the decline of core inflation that we expect to take place in coming months, we now believe that the board will begin to cut rates in July to mitigate part of this extra tightening.”
Read more: Chile Holds Key Rate With Inflation Trudging Toward Target
The bank announced late yesterday that it planned to raise capital requirement for banks by 0.5% of their risk-weighed assets. Central bank President Rosanna Costa told lawmakers on Wednesday that the measure would have a limited impact on credit.
Still, Vantrust Capital estimated that the steps will force publicly-traded banks to create a buffer of about $930 million. Itau Chile will have to set aside the least, with $165 million, while Banco de Credito e Inversiones will have to allocate the most, with $300 million, Vantrust said in a report.
It is important to continue backing policies that encourage savings, as well as measures that strengthen banks’ capacity to confront new adverse events, central bankers wrote in the report Wednesday. Credit to individuals is continuing to slow down, they added.
The move was criticized by a local business group.
“When you make these demands and the banks have to increase capital, that will immediately have an impact on the loans to companies and individuals,” said Ricardo Mewes, head of the business chamber CPC, in an interview with Radio Pauta.
–With assistance from Valentina Fuentes.
(Updates with estimate on capital requirements in seventh paragraph, quote from business chamber in 10th.)
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