Fitch: Chile's Largest Banks Ready for Basel III Liquidity Rules

Friday, November 24, 2017


Chile's largest banks are well positioned to meet new Basel III-related rules for liquidity and stable funding, given their strong deposit franchises and ability to adapt their balance sheets, Fitch Ratings says. However, banks with a smaller retail base and greater dependence on wholesale funding may find it harder to meet the requirements, and their earnings could suffer as a result.

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The new rules are credit positive for the Chilean banking system as a whole as they are designed to increase liquidity and use of stable funding sources, which should improve resilience during cyclical downturns.

Chile is phasing in new minimum liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) requirements, largely based on the international Basel III framework and due to take full effect at the start of 2019. We estimate that the average LCR for Chilean banks is already above the new 100% minimum requirement and the average NSFR nearly 80%. This reflects banks' stricter liquidity discipline since the global financial crisis, and largely stable domestic-based funding underpinned by ample retail deposits. Liquidity discipline was boosted by more stringent guidelines mirroring international standards on liquidity management, and liquidity stress tests, introduced by Chile's central bank following a review of liquidity regulation in 2015.

Our analysis of the country's four largest banks (Santander Chile, Banco de Chile, Banco BCI and Banco Estado), representing 77% of total bank sector assets) shows that they are on track to meet the LCR and NSFR requirements. New liquidity requirements for smaller banks have not yet been disclosed, but we expect some smaller banks may struggle to adapt their balance sheets to meet higher requirements, given their dependence on wholesale funding and their limited financial flexibility. Their earnings could be significantly affected by the need to hold a higher proportion of lower-yielding securities to meet the liquidity requirements.

Chilean banks are funded primarily by the domestic market (mainly retail deposits; 65% of total funding), complemented with debt issuance in local and international markets to support long-term funding needs. The international debt is well diversified by maturity profile and source. Chile's domestic capital market is fairly deep and growing. Banks' use of domestic wholesale funding is limited but reasonably stable as much of it comes from the country's large pension fund system.

Although Chile's loan-to-deposit ratio is higher than the Latin American regional average (125% compared with 105%), mortgage loans are matched with long-term funding, and the ratio excluding these assets is about 90%, which is below the regional average. Bank sector liquidity has been stable and ample since 2009 with the liquid assets/short-term funding ratio averaging 33%.