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Abstract
Even though a growing number of emerging countries are implementing the Basel III recommendations on bank capital, this is not yet the case in Chile, a financially sound economy that has not undergone a banking crisis since the 1980s. This paper analyzes the relevance, advantages and challenges that the Chilean financial system would face if the new international standard were implemented. One conclusion is that there are two substantial reasons to implement Basel III: (a) the need to avoid major regulatory discrepancies between domestic and foreign banks, considering that the parent companies of European banks operating in Chile are already implementing Basel III, and (b) the need for tools, such as the Basel III countercyclical capital buffer, to prevent credit booms.
A second conclusion, based on simulation exercises, is that if Basel III were implemented, Chilean banks at an aggregate level would comply with the Basel III recommendations regarding total capital ratios, but would have a moderate capital deficit to comply with the Tier I Capital Ratio (which includes only higher quality capital). This leads to the recommendation for a more detailed analysis at the level of individual banks. A third conclusion is the need for gradual implementation of the new standard, in the current context of a less favorable international environment affecting Chile and other emerging countries in the short and medium term.
Finally, further analysis is recommended to determine which Basel III recommendations should be adapted (rather than adopted) to the Chilean context. One example is that it would not be appropriate to use the reference indicator suggested by Basel III (deviations of the credit/GDP ratio from its trend) in order to activate (or deactivate) the countercyclical capital buffer since it could lead to an increased pro-cyclicality of capital requirements — precisely the opposite of what Basel III intends.
Resumen
Aunque un número creciente de países emergentes está implementando las recomendaciones de capital bancario de Basilea III, este no es aún el caso en Chile, un país caracterizado por su fortaleza financiera y que no ha enfrentado una crisis bancaria desde los 80s. Este trabajo analiza la relevancia, ventajas y desafíos que enfrentaría el sistema financiero chileno si se implementara el nuevo estándar internacional. Una conclusión es que hay dos razones de peso para la implementación de Basilea III: (a) la necesidad de evitar fuertes discrepancias regulatorias entre la banca doméstica y la extranjera pues las casas matrices de bancos Europeos operando en Chile ya están implementando Basilea III y (b) la necesidad de contar con herramientas que eviten la formación de booms crediticios, tales como el capital contracíclico de Basilea III, pues estos booms en Chile en las últimas décadas han resultado en fuertes contracciones crediticias.
Una segunda conclusión, basada en ejercicios de simulación, es que si se implementara Basilea III, la banca chilena, a nivel agregado, cumpliría con las recomendaciones de Basilea III con respecto a los ratios de capital total, pero presentarían un déficit moderado de capital para cumplir con el ratio de capital de Nivel I (que incluye solo al capital de mayor calidad). Esto lleva a recomendar un análisis más detallado a nivel de bancos individuales. Una tercera conclusión es la necesidad de gradualidad al implementar el nuevo estándar, dado que la coyuntura económica internacional no se proyecta favorable para Chile y otros países emergentes en el corto y mediano plazo.
Finalmente, se recomienda un mayor análisis para determinar cuáles de las recomendaciones de Basilea III deben adaptarse (en vez de adoptarse) al contexto chileno. Un ejemplo es que no sería adecuado utilizar el indicador de referencia sugerido por Basilea III (las desviaciones del ratio de crédito/ PIB con respecto a su tendencia) para activar (o desactivar) el colchón de capital contracíclico pues podría incentivar a que el crédito sea aún más pro-cíclico con respecto a la actividad económica; justamente lo opuesto a la intención de Basilea III.
Abstract
Even though a growing number of emerging countries are implementing the Basel III recommendations on bank capital, it is not yet true of Chile, a financially strong country that has not undergone a bank crisis since the 1980s. This paper analyzes the relevance, advantages and challenges that the Chilean financial system would face if it implemented the new international standard. One conclusion is that there are two substantial reasons to implement Basel III: (a) the need to avoid major regulatory discrepancies between national and foreign banks, considering that the parent companies of European Banks operating in Chile are already implementing Basel III, and (b) the need for tools to prevent credit booms, such as the Basel III countercyclical capital buffer, because in recent decades, these booms in Chile have led to major credit contractions. A second conclusion, based on simulation exercises, is that if Basel III were implemented, Chilean banks at an aggregate level would comply with the Basel III recommendations regarding total capital ratios, but would have a moderate capital deficit to comply with the Tier I capital ratio (which includes only higher quality capital). This leads to the recommendation of a more detailed analysis at the level of individual banks. A third conclusion is the need for gradual implementation of the new standard, because the current international economic context does not bode favorably for Chile and other emerging countries in the short and medium term. Finally, further analysis is recommended in order to determine which Basel III recommendations should be adapted (rather than adopted) to the Chilean context. One example is that it would not be appropriate to use the reference indicator suggested by Basel III (deviations of the credit/GDP ratio with regard to its trend) in order to activate (or deactivate) the countercyclical capital buffer because it could lead to credit being still more pro-cyclical with regard to economic activity – precisely the opposite of what Basel III intends.
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