Chile Financial Sector Assessment

Public Disclosure Authorized
FOR OFFICIAL USE ONLY
CHILE
FINANCIAL SECTOR ASSESSMENT
February 2022
Prepared By A joint IMF-World Bank led remote visits to Chile

Finance, Competitiveness, during 2021, to conduct an assessment under the
and Innovation Global Financial Sector Assessment Program (FSAP).1 This
Practice and Latin report summarizes the main findings of the
America and the mission, identifies key financial sector
Caribbean Regional Vice vulnerabilities, and provides policy
Presidency recommendations.
1
The team was comprised of Miquel Dijkman (World Bank Mission Chief), Charles Cohen (IMF Mission Chief), Ana
Maria Aviles (World Bank Deputy Mission Chief), Claudio Visconti (IMF Deputy Mission Chief), Gian Boeddu,
Beulah Chelva, Jennifer Chien, Mark Davis, Ivor Istuk, Oliver Masetti, Cindy Paladines, Valeria Salomao Garcia,
Marc Schrijver, Fiona Stewart (World Bank); Stephane Couderc, Antonio Gabriel, Dimitrios Laliotis, Mindaugas
Leika, Junghwan Mok, Ebru Sonbul Iskender, Peter Windsor (IMF); and Eamonn White (external expert). The FSAP
team gratefully acknowledges the close cooperation and openness of the authorities and technical counterparts.
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CONTENTS
GLOSSARY ____________________________________________________________________________________________ iii

PREFACE______________________________________________________________________________________________ iv
EXECUTIVE SUMMARY ____________________________________________________________________________ 1
MACROFINANCIAL BACKGROUND ______________________________________________________________ 6

A. Macrofinancial Setting ___________________________________________________________________________ 6
B. Financial System _________________________________________________________________________________ 8
C. Financial Development _________________________________________________________________________ 10
FINANCIAL STABILITY ANALYSIS _______________________________________________________________ 11

A. Vulnerabilities and Risks ________________________________________________________________________ 11
B. Stress Testing and Interconnectedness _________________________________________________________ 14
FINANCIAL SYSTEM OVERSIGHT ________________________________________________________________ 16

A. Regulation and Supervision ____________________________________________________________________ 16
B. Macroprudential Policy _________________________________________________________________________ 20
C. AML/CFT ________________________________________________________________________________________ 20
CRISIS PREPAREDNESS AND FINANCIAL SAFETY NETS _______________________________________ 20
COMPETITION, FINANCIAL INCLUSION AND FINANCIAL CONSUMER PROTECTION ______ 22

A. Competition ____________________________________________________________________________________ 22
B. Digital Financial Inclusion _______________________________________________________________________ 25
C. Financial Consumer Protection and Household Indebtedness _________________________________ 27
D. Cross-Cutting Topics ___________________________________________________________________________ 31
PENSIONS AND GREEN FINANCE _______________________________________________________________ 33

A. Pensions ________________________________________________________________________________________ 34
B. Green Finance ___________________________________________________________________________________ 38
Tables
Table 1. Chile: FSAP Key Recommendations _______________________________________________________ 4
Table 2: International Debt Indicators _____________________________________________________________ 13
Table 3. Chile: Selected Economic Indicators ______________________________________________________ 57
Table 4. Chile: Structure of the Financial System __________________________________________________ 58
Table 5. Chile: Financial Soundness Indicators ____________________________________________________ 59
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Figures
Figure 1. Chile: Financial Sector ___________________________________________________________________ 42
Figure 2. Chile: Selected Banking Indicators_______________________________________________________ 43
Figure 3. Chile: Nonbank Financial Institutions and Shadow Banking _____________________________ 44
Figure 5. Mutual Funds, Social Unrest, and COVID-19 ____________________________________________ 46
Figure 6. Pension Funds, Social Unrest, and COVID-19 ___________________________________________ 47
Figure 7. Chile: Bank Stress Test Scenarios ________________________________________________________ 48
Figure 8. Chile: Bank Solvency Stress Test Results _________________________________________________ 49
Figure 9. Chile: Stress Test Results — Sensitivity Analysis _________________________________________ 50
Figure 10. Chile: Liquidity Stress Test Results _____________________________________________________ 51
Figure 11. Chile: Climate Change – Physical Risks _________________________________________________ 52
Figure 12. Chile: Climate Change – Transition Risks _______________________________________________ 53
Figure 13. Liquidity Stress Testing of Type 3 Mutual Funds _______________________________________ 54
Figure 14. Pension Fund Switching and Stress Testing of Type E Pension Funds _________________ 55
Figure 15. Switching in Pension Funds Type A and E______________________________________________ 56
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GLOSSARY
AML/CFT Anti-Money Laundering and Combatting the Financing of Terrorism

BCCh Banco Central De Chile (Central Bank of Chile)
BCP Basel Core Principles
CAR Capital Adequacy Ratio
CCB Capital Conservation Buffer
CCyB Counter-Cyclical Capital Buffer
Programa de Compra al Contado con Venta a Plazo (Spot Purchase with
CC-VP Term Sale Facility)
CEF Consejo de Estabilidad Financiero (Financial Stability Council)
CMF Comision para el Mercado Financiero (Financial Market Commission)
CLP Chilean Peso
DNFBP Designated Non-Financial Businesses and Professions
DPS Deposit protection scheme
ELA Emergency Liquidity Assistance
FCIC Financing Facility Conditional on Increased Lending
FOGAPE Small Business Guarantee Fund
FSR Financial stability report
FNE Fiscalía Nacional Económica
GAFILAT Financial Action Task Force of Latin America
LAC Loss-absorbing capacity
LCL Liquidity Credit Line
LLS Loan loss provisioning
LMF Liquidity management framework
LMT Liquidity management tool
MER Mutual Evaluation Report
MoE Ministry of Economy, Development and Tourism
MoF Ministry of Finance
MF Mutual fund
ML Money laundering
NBFI Nonbank Financial Institutions
NBL Nonbank consumer lenders
NPL Non-performing loan
PF Pension fund
RIA Regulatory Impact Assessment
RBC Risk-based capital
RBS Risk-based supervision
SP Superintendence of Pensions
TDLC Tribunal de Defensa de la Libre Competencia
TF Terrorism financing
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PREFACE
An IMF and World Bank team undertook a series of virtual missions to Chile between March and
October 2021 as part of the Chile Financial Sector Assessment Program (FSAP) update. The team
was led by Charles Cohen (IMF Mission Chief) and Miquel Dijkman (World Bank Mission Chief), and
included Claudio Visconti (IMF Deputy Mission Chief), Stephane Couderc, Antonio Gabriel, Dimitrios
Laliotis, Mindaugas Leika, Junghwan Mok, Ebru Sonbul Iskender, Peter Windsor (IMF); Ana Maria
Aviles (World Bank Deputy Mission Chief), Gian Boeddu, Beulah Chelva, Jennifer Chien, Richard Mark
Davis, Ivor Istuk, Oliver Masetti, Cindy Paladines, Valeria Salomao, Marc Schrijver, Fiona Stewart
(World Bank); and Eamonn White (external expert). The mission assessed financial sector risks and
vulnerabilities, the quality of supervisory oversight of banks, the provision of systemic liquidity, crisis
management and bank resolution arrangements, as well as a series of developmental topics,
including competition in the financial sector, financial consumer protection and household
indebtedness, financial inclusion, green finance, and the pension system.
The mission met with Minister of Finance Rodrigo Cerda, Central Bank Governor Mario Marcel and
Director of the Central Bank Financial Policy Division Solange Berstein, Chairman of the Financial
Market Commission Joaquin Cortez and Commissioners Kevin Cowan and Bernardita Piedrabuena,
Superintendent of Pensions Osvaldo Macias, as well as senior management and staff of these
institutions. The mission also met with commercial and investment banks, insurance companies,
major conglomerates, and other private sector representatives.
The team would like to thank the authorities for their excellent cooperation and fruitful discussions,
particularly in the challenging remote circumstances under which the mission was conducted due to
the COVID pandemic.
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EXECUTIVE SUMMARY
The Chile FSAP has taken place at a critical juncture. Since the previous FSAP, Chile’s well-
diversified financial sector has deepened and further advances have been made in terms of financial
inclusion, while interest rates have come down significantly. Nonetheless, the social unrest in 2019
highlighted that despite Chile’s strong development track record, important inequality challenges
remain.
Chilean financial markets were tested by the twin shocks of social unrest in 2019 and the
pandemic, to which the authorities responded with massive and well-coordinated monetary,
fiscal and supervisory policies. Events in in 2019 put a spotlight on funding linkages between
banks, mutual funds and pension funds. Mutual and pension funds had become the main investors
in bank securities, but proved prone to redemption and reallocation shocks, driven partly by their
large retail investor bases. BCCh countered market dislocations by, inter alia, expanding its collateral
framework to include bank bonds, a cut in the policy rate and the start of a special asset purchase
program. In parallel, government-guaranteed SME loans offset a severe drop in demand for market-
rate loans.
In the context of a challenging political economy, the need to address long-standing

inequality issues must be reconciled with the need to preserve past developmental gains. This
has in some instances led to tensions, as has been the case for the pension system that has come
under strain. Congress approved three extraordinary rounds of pension fund withdrawals that
mitigated an immediate increase in household Non-Performing Loans (NPLs), but exacerbated
already low replacement rates and jeopardized past gains in capital market development. Pension
accounts have also seen excessive fund switching driven by a (now defunct) social media-based
financial advisor that lowered returns and increased market volatility.
Financial stability
Overall, the banking sector is sufficiently capitalized and liquid, and banking supervision is
robust, but would benefit from further reform. To ensure resilience under stress, banks should
transition to Basel III-compliant capital structures as announced and complete planned capital-
raising plans. Timely collateral valuation would also lower downside risks. Liquidity stress tests show
limited risks as banks enjoy high deposits (due in part to pension withdrawals) and BCCh funding.
The reversal of these conditions will require clear communication and careful liquidity management
by banks. The Basel Core Principles (BCP) assessment found the Financial Market Commission (CMF)
to be capably staffed with expertise in monitoring of individual risks, but reforms in credit risk, asset
classification, risk management, corporate governance, licensing, and corrective actions are needed.
Basel III implementation should strengthen the capital framework.
Key financial stability priorities are to strengthen liquidity frameworks and to strengthen the
financial sector safety net. Current regulations provide only limited ability to ensure that mutual
funds have sufficient liquidity to meet redemptions in stress scenarios. At the systemwide level, the
absence of a secured money market may overburden the central bank’s liquidity-providing
operations. Stronger risk management practices are needed at BCCh, particularly regarding
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collateral requirements and the acceptance of bank bonds. The Emergency Liquidity Assistance (ELA)
framework needs operationalizing. A statutory bank resolution regime to manage bank failures and
conduct resolution planning should be introduced. Deep financial markets have positioned Chile
favorably to introduce loss-absorbing capacity requirements for systemic banks. An industry-funded
deposit protection regime should be established to replace the MoF and BCCh’s deposit guarantee
arrangements.
Competition, financial inclusion, and financial consumer protection
Since the previous FSAP, Chile’s financial sector authorities have undertaken steps to lay the
foundations for a more contestable and inclusive financial sector. There are signs of healthy
price competition in retail banking, against a backdrop of falling interest margins and lending rates.
Chile has also made significant advances in financial inclusion and has achieved near-universal
access to finance by account ownership. The authorities have also undertaken steps to strengthen
financial consumer protection, including through product disclosure and transparency measures.
Further reforms could focus on enhancing competition in the retail payment ecosystem and
strengthening the enabling environment to promote greater digitalization. Cooperation
among the CMF and FNE could be broadened to include suspected anticompetitive practices, and
CMF could consider introducing a regulatory impact assessment to ex ante assess the competition
impact of proposed regulation. Additional efforts are needed to reap the competition benefits of
recent reforms in the card payments market. Newly established interchange fees should be
monitored to ensure that they facilitate market entry of new acquirers. Broader issues regarding
access to infrastructure, pricing, interoperability, and fair competition should be addressed to foster
a vibrant, competitive, and innovative retail payments ecosystem over the longer term. Greater
digitalization of the financial sector would help to address some of Chile’s remaining financial
inclusion challenges by lowering costs and expanding access. Digital product offerings and
consumer uptake have increased in the pandemic, but there is scope to accelerate this process by
providing legal clarity regarding electronic Know-Your-Customer and digital authentication of
customers, and updating legal frameworks for data protection, privacy and cybersecurity. A draft
FinTech bill should be passed as a matter of priority. Although Chile’s FinTech sector has grown
rapidly, the lack of a legal and regulatory framework creates impediments for new entrants and
causes conflicts with incumbent financial institutions.
It is also recommended to withdraw interest rate caps and to strengthen policy coordination
on financial inclusion. Interest rate caps have led to credit rationing in the productive microfinance
sector. These caps could be removed, or at least be revised to reduce their distortionary impact. The
many initiatives aimed at promoting financial inclusion put a high premium on a systematic and
well-coordinated approach that considers market dynamics and incentives, safety, and
infrastructural elements necessary to support longer-term advances in financial inclusion.
Comparatively high levels of lower-income consumer indebtedness give a special urgency to

measures to strengthen financial consumer protection relating to credit. Regulations and
enforcement have been strengthened, but problematic industry practices (such as sales-driven
incentives, unsolicited credit offers and extensive credit protection insurance bundling) remain.
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Priorities include the introduction of regulatory requirements that financial institutions conduct
customer-specific affordability and suitability assessments and a strengthening of supervision
capacity in an environment characterized by new and increased risks from digitalization and product
complexity.
Lastly, Chile’s credit information system should be strengthened to increase provider

coverage and include more positive, alternative, and historical data. The current set up is
problematic for stability, inclusion, competition and consumer protection. Credit information should
be made accessible to all types of credit providers, and should comprise historic positive and
negative information as well as data from utilities and telecommunications. It is recommended that
authorities do not proceed with enacting a law that would delete information on defaults below a
certain threshold, that would further reduce the depth of available credit information.
Pensions and green finance
Additional measures are urgently needed to stabilize the pension system, starting with a halt
of further pension withdrawals. Additional pension withdrawals jeopardize financial market
development, increase inequalities in the long term and heighten short-term liquidity and long-term
stability risks, particularly if retirees and others are also allowed to liquidate life annuities. The
withdrawals have exacerbated concerns about low replacement rates that will need to be addressed
through an enhanced solidarity pillar and additional employer contributions to raise replacement
rates of middle-class workers to the minimum wage. The new employer contributions should be
managed by a public entity with strong governance in a way which complements the AFP system, by
spreading of risk between public and private provision. It is recommended to introduce a ‘target
date’ default cohort-based fund structure wherein portfolios adjust over time, shifting into less risky
assets as the cohort approaches retirement.
Chile has been a frontrunner in the identification, assessment and mitigation of climate risks
and its impact on the financial sector. A logical next step would be to strengthen interagency
coordination and to develop regulation encouraging banks to integrate these risks as part of their
business practices. The recent issuance of regulatory disclosure guidance is an important milestone,
mandating sustainability-related disclosures for banks, insurance companies, issuers of public
offering securities, general fund managers, pension fund administrators and stock exchanges.
Further ahead, financial institutions could be required to integrate climate risk in corporate
governance and risk management practices, including by developing specific guidance on scenario
analysis and stress testing.
Chile could further improve the flow of finance towards greener activities by deploying an
inter-operable green taxonomy to guide investors and product development. Chile already
hosts the region’s second largest green bond market. It could build on this strength by introducing
impact-oriented instruments, broaden the pipeline of future green projects and consider the
introduction of tax credits and incentives to induce greater supply and demand for green capital
market instruments. CMF could further improve the quality and availability of environmental, social
and governance (ESG) data, develop a green taxonomy, expand regulations to cover non-listed
entities, and by establishing oversight of ESG data rating agencies.
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Table 1. Chile: FSAP Key Recommendations
Recommendations Time1
Ensure banks transition to Basel III-compliant capital structures and complete
NT
announced plans for capital raises in a timely manner.
Bank Improve the collateral valuation and reporting framework. NT
Solvency and
Define and communicate clear criteria regarding conditions for the future
Liquidity I
unwinding of extraordinary liquidity support measures (FCIC and LCL).
Introduce liquidity stress tests for prudential and stability monitoring. NT
Ensure sufficient budget resources to attract and retain specialized talent. I
Strengthen credit risk management and asset classification, including
I, NT
provisioning and treatment of restructured loans.
Establish an integrated risk management framework and enhance corporate
Banking NT
governance standards and supervision.
Supervision Strengthen the legal framework for licensing to ensure banks’ shareholders are
NT
fit, proper, and financially strong.
Improve the corrective actions framework. NT
Improve consolidated supervision by enhancing the legal framework, supervision
NT
practices and organizational arrangements.
Establish a statutory bank resolution authority with a comprehensive range of
Crisis I
crisis management and resolution tools.
Management
Establish and implement recovery and resolution planning and set a loss-
and Bank I
absorbing capacity requirement for systemically important banks.
Resolution
Establish a new industry funded deposit protection scheme. NT
Facilitate the development of the interbank repo market. NT
Systemic Enhance the risk management function of the BCCh through higher haircuts and
I
Liquidity a stricter approach to unsecured bank bonds.
Finalize the Emergency Liquidity Assistance (ELA) framework. NT
Macro- Increasing CEF secretariat resources and through annual publication of official
NT
prudential CEF views on macroprudential risks.
Framework Enhance interagency coordination on the use of the macroprudential toolkit. NT
and Tools Establish a consolidated and comprehensive public credit registry. NT
AML/CFT Ensure a swift implementation of the 2021 AML/CFT MER recommendations. NT
Implement a modern risk-based capital framework in insurance with due regard
Insurance NT
to the impact of introducing IFRS 17 and IFRS 9.
Mutual Funds Strengthen the mutual fund liquidity management framework. NT
Avoid further extraordinary pension withdrawals and ensure that the pension
I
system continues to support deep and liquid long-term capital markets.
Phase in employer contributions of 6 percent, and manage these contributions
holistically with new strongly governed dedicated public entity as ‘universal NT
owner’.
Pension
Avoid unfunded commitments within the funded system (cover increases in
Funds
current pensions and increase redistribution completely within the Solidarity NT
Pillar).
Improve pension fund regulation and investment options to promote long-term
investment and minimize excessive switching by implementing Target Date NT
funds.
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Recommendations Time1
Broaden coordination between CMF and FNE to include suspected anti-
NT
competitive practices in the financial sector.
Establish a simple regulatory impact assessment tool (RIA) to ex-ante assess the
Competition NT
competition impact of new regulation.
Develop a comprehensive strategy for the retail payments ecosystem that
NT
addresses access to infrastructure, pricing, interoperability, and fair competition.
Establish standards and infrastructure for eKYC, digital ID, and digital
authentication and remove remaining barriers to e-signature and digital NT
Digital documentation.
Financial Pass Fintech Bill and develop regulatory frameworks for fintechs and Open
NT
Inclusion Finance System.
Enhance data privacy and protection and cybersecurity frameworks. NT
Remove interest rate caps. NT
Require all credit providers to (i) conduct affordability and suitability assessments
before credit approval that meet sufficiently specific standards to be specified in
NT
Household in regulations, and (ii) address risks to consumers from conflicted sales
indebtedness incentives, unsolicited credit offers and bundling of credit protection insurance.
and Develop a licensing framework on an activities-basis to cover all kinds of
NT
consumer providers and adapt to new entrants.
protection Review of the financial consumer protection supervision arrangements to
confirm sufficient dedicated resources, expertise and independence, and NT
effective processes, to be able to address consumer issues long term.
Require that all credit providers provide data to CMF’s consolidated debt registry
NT
and grant all credit institutions non-discriminatory access.
Credit
Expand coverage of credit information system to be more comprehensive and
Information NT
include positive, alternative, and historical data.
Refrain from deleting negative credit information. I
Expand the sovereign green finance program, including by introducing fiscal
incentives to induce greater supply and demand for green capital market NT
instruments.
Green
Strengthen the climate information architecture by developing a green
Finance
taxonomy; implementing recently issued climate-related disclosure standards for
NT
firms and funds; providing oversight over ESG data products and external
reviewers.
Strengthen interagency coordination to enable the authorities in adopting a
I
systemwide perspective on the impact of climate risk on the financial sector.
Climate Risk
Require financial institutions to integrate climate risk in corporate governance
NT
and risk management practices
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MACROFINANCIAL BACKGROUND
A. Macrofinancial Setting
1. Chile enjoys a long track record of strong fundamentals. Since the financial crisis of
1982–83, Chile has seen strong and consistent growth (text chart). Chile has low central government
gross debt of 32 percent of GDP and commands a high investment grade rating despite 2020 and
2021 downgrades following higher deficits (text charts). Large pension funds are a major contributor
to the depth and diversification of the financial system.
GDP Growth and Government Deficit, 1960-2021

20 20,000
Flexible
10 exchange rate 15,000
0 10,000
-10 5,000
-20 0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Real GDP growth, annual %

Government deficit, % of GDP
GDP per capita, current US$ (right axis)
Source: WDI and IMF.
2. The Chilean economy was first impacted by the social unrest in 2019Q4, then by the
COVID-19 pandemic. In October 2019, protests against high inequality resulted in negative
economic shock further compounded by pandemic-related lockdowns. Events in the fourth quarter
of 2019 have highlighted that despite Chile’s strong development over the past decades, important
inequality challenges remain. This has prompted strong social and political demands to develop
more inclusive policies. Following the protests, elections that approved the drafting of a new
constitution and chose the members of the Constitutional Convention were held in October 2020
and May 2021, respectively. COVID-19 led to widespread lockdowns and a precipitous fall in
economic activity; a rapid vaccine rollout began in February 2021.
3. The authorities engaged in a massive, well-coordinated response to these shocks.

Financial measures were appropriately implemented in line with IMF best practices for COVID-19
response. These included:
 MoF expanded the government guarantee programs for commercial bank loans (FOGAPE
COVID and FOGAPE Reactiva) and SME loans. This offset a dramatic decline in market loan
demand (Figure 1 in annex and text charts).
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 CMF established special provisioning rules that facilitated banks rescheduling (with limited 3–6-
month payment deferrals) viable mortgages, personal loans, and commercial loans. By
end-October 2020, rescheduled loans represented 38 percent of bank mortgage and
commercial lending combined.
 CMF deferred Basel III implementation to December 2021.
 BCCh established the Financing Facility Conditional on Increased Lending (FCIC)—a bank
lending facility for banks tied to SME credit—and a bank bond purchasing program to offset
temporarily dislocations in wholesale funding market (Figure 1 in annex). As of October 2021,
about US$35.7 billion of the FCIC has been employed.
 BCCh cut the policy rate by 125 bps to its historical low of 0.5 percent, but started increasing
rates since July 2021.
4. Congress approved three extraordinary pension fund withdrawals. Access to the

pension funds during the pandemic in Chile has been one of the most generous globally. In May
2021, retirees and others were allowed to liquidate up to 10 percent of their life annuities, the
legality of which was challenged by insurance companies in Chilean courts and through international
arbitration proceedings. The pension withdrawals are estimated to leave one third of individuals
with empty balances and will affect current and future pension incomes and exacerbate concerns
about low replacement rates.
5. Reported non-performing loans (NPLs) are historically low versus peers. The pension
withdrawals, together with income transfers from the government, have helped to mitigate the
impact of the pandemic on asset quality, as households used the proceeds primarily to pay down
existing debts.2 In addition, loan payment deferrals and measures aimed at encouraging voluntary
loan restructurings helped to curb the impact of the pandemic on reported asset quality indicators,
particularly for mortgage and consumer loans (text charts).
Household and Commercial Loan Delinquency Rate, 2014-21

(in percent)
3.5
3
2.5
2
1.5
1
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Mar-16
Mar-17
Mar-18
Mar-14
Mar-15
Mar-19
Mar-20
Mar-21
Commercial loans Consumer loans Mortgage loans Total
Source: CMF.
6. Aggregate credit growth has stayed in positive territory, but disguises divergent
trends in its subcomponents. Consumer credit was hit by reduced demand (due to pension
withdrawals and government income transfers) and supply (as banks restricted consumer credit
2
BCCh has estimated that 15 percent of the withdrawals went on consumption, 62 percent to pay down debt or were
transferred to other forms of savings, with the remainder unidentified (Informe de Politica Monetaria Marzo 2021).
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lines; text charts). Meanwhile, mortgages demonstrated continued growth. Guarantee schemes and
other support measures helped to stabilize credit supply to SMEs.
Credit Growth by Loan Type, 2014-21 Commercial lending by firm size, 2017-21M11
(yoy growth in percent) (denominated in Unidad de Fomento (UF), March 2020 = 100)
20 120
108.5
110
10
100
0
90 98.0
-10
80
-20 70
Jan-21
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Jan-19
Jul-19
Jan-20
Jul-20
Jul-21
60
Jan-21
Jan-17
Jul-17
Jan-18
Jan-19
Jan-20
Jul-18
Jul-19
Jul-20
Jul-21
Commercial Consumer
Mortgage Total SMEs Non-SME firms
Source: BCCh. Sources: BCCh, CMF, and SII.

Note: Data for SMEs and Non-SME firms are based on firm-
level data obtained through public records. The classification
of SME is based on annual sales volume in 2019.
7. Despite the strong baseline outlook, high economic uncertainty remains. Growth in
2021 amounted to 11.7 percent and COVID-19 vaccination rates are among the highest in the world.
However, pandemic risks remain, the constitutional reform is only just underway, and additional civil
unrest would be highly disruptive to the economy. Furthermore, subdued growth is forecast over
the medium term (2.5 percent in 2022).
B. Financial System
8. Chile’s financial sector is large,

diversified and dominated by conglomerates.
At end-2020, financial assets comprised
300 percent of GDP—more than double their size
a decade ago (Figure 1 in annex, and text chart).
Despite the absence of a legal definition of
financial conglomerates3, CMF has identified 22
business groups that are active in at least two of
the areas of banking, insurance, and pension funds
(PFs). These groups include all major banks in Chile
and have total assets of around 160 percent of
3
CMF is preparing a Draft Bill on Conglomerates to be presented to MoF.
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GDP. PFs held assets equal to 74 percent of GDP at the end of December 2020. Mutual funds (MFs)
grew from 17 to 26 percent of GDP from 2010 to 2020.
9. The size of the non-bank financial sector reflects the far-reaching pension reform of
the early eighties. Chile was a pioneer in replacing a traditional Pay-As-You-Go public pension
program by a funded pension program managed by private companies (Administradoras de Fondos
de Pensiones (AFPs)). Since the introduction of the scheme, the annuities market has developed
exponentially, transforming institutional investors, pensions, capital markets and long-term finance
more broadly.
10. Banks dominate credit provision. The sector has 18 banks and has become more
concentrated following two mergers, with the top four banks holding 66 percent of assets.
Profitability (ROE) prior to the crisis was driven by relatively low capital levels versus regional peers;
return on assets (ROA) was below 0.5 percent (Figure 2 in annex and text charts).
11. Funding linkages have increased in importance over the last decade. Wholesale funding
through bond issuance has grown to play an important role (Figure 1 in annex). Smaller banks have
up to 40 percent of liabilities in bonds while the biggest banks have a large sight deposit base (text
chart). Collective investment vehicles are important sources of wholesale bank funding and, to a
lesser extent, corporate credit. Mutual and pension funds allocate 64 percent of their long-term
credit portfolio to bank bonds. In contrast, life insurance companies allocate 72 percent of the same
portfolio to corporates, suggesting a greater propensity to invest in the less-liquid but higher
yielding corporate space (text chart).
12. Despite the large non-bank sector, shadow banking does not appear to be a major
stability concern. In the last ten years, fixed-income mutual funds have driven the growth in non-
bank financial intermediation by buying bank debt, while riskier non-bank lending that depends on
short-term funding has remained relatively constant (Figure 3 in annex). Although Chile has the
largest dependency of bank funding on non-bank financial institutions (NBFIs) amongst the 29 FSB-
monitored countries, average bank exposure to NBFIs is small (text charts).
13. A diverse set of non-bank lenders (NBLs) provides credit to lower-income households.
The extension of credit is not restricted in Chile, and among the group of non-bank lenders (NBLs)
are credit unions, factoring and leasing companies, credit card issuers linked to large retail stores
(casas comerciales) as well as cajas de compensacion (i.e., private, non-profit entities created by law
that administer social security benefits but also grant so-called ‘social credit’). While NBLs are small
in terms of total assets4 -and the recent mergers of the three largest casas comerciales with banks
reduced the size of the segment – they have a significant number of clients and perform an
important socio-economic role. NBLs are also an important source of market dynamics and
competition, especially in the lower-end retail segment and for borrowers that have challenges
4
Overall amounts and a limited bank exposure to NBL-issued consumer loans (which represent about 2 percent of
bank assets) suggest that systemic risk is limited.
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accessing bank financing. The pension withdrawals caused consumer lending from NBLs to slow
significantly.
Bank Funding and Exposures to NBFIs
Use of funding from NBFIs Exposures to NBFIs

(in percentage of 2020 bank assets) (in percentage of 2020 bank assets)
40 12
10
30
8
20 6
4
10
2
0 0
ZA
BR
KR
BE
DE
KY
AU
AR
TR
LU
SA
HK
SG
RU
MX
FR
CH
CN
CA
CL
ID
IN
UK
IE
NL
US
ES
IT
ZA
BR
BE
KR
DE
AU
AR
TR
KY
LU
HK
SA
SG
RU
MX
FR
CH
CN
CA
IN
ID
CL
UK
IT
US
IE
ES
NL
Pension funds Insurance corporations Pension funds Insurance corporations
Other OFIs SFVs Other OFIs SFVs
Finance companies Broker-dealers Finance companies Broker-dealers
MMFs Other investment funds MMFs Other investment funds
Source: FSB.
Note: MMFs = money market funds; SFV = structured finance vehicles; OFIs = other financial intermediaries.
C. Financial Development
14. The Government of Chile (GoC) has been actively promoting financial inclusion
through a range of institutions, programs, and policies and has achieved substantial progress.
The state has channeled many of its financial inclusion policies through Banco del Estado, a state-
owned commercial bank with a developmental mission. The national government also funds credit
guarantee schemes (such as FOGAIN and FOGAPE, which are administered by Corfo and Banco del
Estado, respectively) to provide credit guarantees to financial institutions for loans to
microenterprises and small firms. Banco del Estado has been a major contributor to high financial
inclusion metrics due to products and services such as Cuenta RUT (a simplified demand account
that can be opened with just an ID card and has achieved significant uptake), BEME (a subsidiary
focused on small enterprise lending), and Caja Vecina (a network of agent outlets in rural areas) that
has since been replicated by private banks.
15. Chilean credit markets are characterized by price regulation in the form of interest rate
caps. Interest rate caps have been an enduring feature in Chile. They apply to practically all loans
with a term of more than 90 days and vary across loan size. Interest rate caps have been gradually
lowered since end-2013 for smaller loans. CMF analyses suggest that the introduction of a binding
interest rate cap reduced average rates (with significant bunching at the maximum permitted rate)
but also reduced the availability of credit, particularly for riskier borrowers.
16. Chile has achieved high levels of financial inclusion, but there remain pockets of
underserved segments and opportunities to further expand in digital financial services (DFS).
10
CHILE
Account ownership has increased significantly over the past decade, due to Cuenta RUT and the
recent introduction of prepaid cards (figure 4). Account ownership and account and card usage are
on par with or above levels observed for upper middle income (UMI) countries and above averages
for the Latin America and Caribbean region, but below levels observed for OECD countries.
Consistent gaps in financial inclusion metrics exist for those out of the labor force or with a primary
education or lower, as well as for migrants. Use of digital channels has steadily increased and use of
digital payments is also on par with or above UMI. However, there remain opportunities to further
expand in digital payments, particularly for underserved segments and online payments,5 as well as
to expand in DFS more broadly.
17. Levels of consumer indebtedness are comparatively high, particularly for lower-
income households. Just before the pandemic, 15.5 percent of borrowers in the lowest income
decile were devoting more than half of their income to monthly repayments,6 leaving low-income
consumers with little remaining income to cover living costs. The continuing lack of a consolidated
credit registry makes it challenging for financial institutions to assess a borrower’s total debts.7
FINANCIAL STABILITY ANALYSIS

A. Vulnerabilities and Risks
Liquidity Risk
18. Wholesale bank funding is subject to some structural risks that materialized during the
social unrest episodes of 2019Q4. The mutual and pension funds that comprise the main investors
in bank securities
are prone to
redemption and
reallocation
shocks, driven
partly by their
retail investor
bases. Pension
fund reallocation
increased
dramatically
since 2011 due
5
For example, the 2017 Household Financial Survey from BCCh indicates that use of non-cash means of payment
increases with income. In addition, the World Bank’s Global Findex 2017 indicates that Chile is currently lower than
the UMI average in specific metrics such as % of adults paying online for internet purchases (65.8% vs 79.0%) and %
of adults paying utility bills in cash only (71.9% vs 57.4%).
6
Figures were roughly similar for the second lowest-income decile, while 18.8 percent of all Chilean households with
debts had a debt service to income ratio of more than 50 percent.
7
Only banks and CMF- regulated credit unions may access the individual debt data they report to the CMF database,
which is exclusively for their use.
CHILE
to advising from social-media-based advisors.8 During the social unrest episodes of 2019, long-term
fixed income investment by pension and mutual funds suffered unprecedented reallocations and
redemptions that put significant pressure on bank and corporate bonds as well as the Chilean Peso
(CLP) (text chart; Figure 5 and 6 in annex). BCCh’s interventions quelled volatility in funding and FX
markets, but as a result increased its exposure to the banking sector by accepting unsecured bank
bonds as collateral. Risks are heightened by the lack of a functioning secured inter-bank lending
market to backstop wholesale funding.9
19. Further pension fund withdrawals or annuity liquidations would pose a systemic
liquidity risk. While previous withdrawals were well managed by the authorities,10 further
withdrawals risk market disruptions, especially given the uncertain environment and lack of an
obvious buyer base for long-term assets.11 This is particularly a risk with life annuities, where
insurance company liquidity buffers could be severely tested by further liquidations, potentially
leading to asset fire-sales and capital shortfalls.12
Solvency Risks
20. The banking system, which has lower capital than its regional peers, could be
challenged by credit losses after a widespread shock. Although asset quality has been
consistently high and loans are aggressively written off, provision coverage for non-performing
mortgages (8.8 percent) and consumer loans (48.3 percent) are low compared to international
standards13 (Figure 2 in annex). The chance of losses may be heightened by stale collateral
valuations; bank stress tests (see below) show that under the adverse negative housing shock
scenario loan losses would be significantly larger than are currently provisioned for. Together these
factors raise the chance of vulnerabilities under stress.
21. Easy financial conditions and financial deepening have increased household leverage.
Although risks at the systemwide level appear limited, household indebtedness levels in Chile are
comparatively high and pockets of vulnerability have built up among low-income households. For
example, as shown in table below, immediately prior to the pandemic the median financial burden
to household income ratio for Chile was high – above the 75th percentile of a sample of countries
with similar levels of development to Chile. Chile was also observed to have the highest percentage
of households with a financial burden ratio of at least 25 percent amongst countries considered. The
8
A law passed in April 2021 that requires financial regulation of these consultants seems to have shuttered the most
influential of these firms.
9
World Bank Global Findex 2017
10
BCCh established a USD$10 billion spot purchase with term sale facility (CC-VP) to soften the market impact of
pension liquidations.
11
According to BCCh, the three initial withdrawals had a significant impact on local capital markets, including
increases in interest rates, devaluation pressure and higher volatility of the CLP (BCCh Press Release, October 12,
2021, “Presidente del Banco Central expuso ante Comisión de Constitución…”).
12
See October 2021 CMF analysis: www.cmfchile.cl/portal/estadisticas/617/articles-49575_doc_pdf.pdf
13
As an illustration, provision coverage was 26.4 percent of non-performing mortgages and 61.9 percent of non-
performing consumer loans across the EU27/EEA according to the EBA 2020 EU-wide transparency exercise
12
CHILE
housing market appears stable, and rising housing prices drove increases in mortgage debt
(currently around 25 percent of GDP) for new loans. Increasing vacancy rates in the commercial real
estate space could lead to medium term risks.
Table 2: International Debt Indicators

(percentage, times)
All countries (1) Chile and countries with similar
development indicators (2)
Chile #Obs. P25 P50 P75 #Obs. P25 P50 P75
Households with debt 66.4 31 36.8 47.0 64.6 10 36.7 36.9 41.2
DTI (3) 3.0 30 5.1 9.5 14.3 9 3.0 5.0 6.4
Percentage of households 2.6 28 3.9 8.8 14.2 9 2.6 3.8 4.4
DTI>36 (4)
FOR (5) 14.0 22 11.5 13.4 16.3 9 11.1 12.4 16.2
(20.7)
Percentage of households 11.4 21 4.7 6.5 11.3 9 4.8 5.5 8.9
FOR>25% (4) (27.7)
(1) Includes: Australia, Austria, Belgium, Canada, Chile, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Japan, Latvia, Luxemburg, Malta, Norway, New Zeeland, Netherlands, Poland, Portugal, Slovakia, Slovenia, Sout h
Korea, Spain, U.S., U.K., Uruguay. Data (2012-2015); Chile (2017).
(2) Includes Chile and countries in sample with GDP per capita below 30,000 USD.
(3) Median of the debt to gross monthly income ratio (times) of households with debt
(4) Estimated over all households in each country
(5) Median of the financial obligations (excl. credit cards and credit lines) over gross monthly income ratio (percentage) of
households with debt. Data in parenthesis for Chile includes credit cards and credit lines.
Source: BCCh (2019) based on Household Financial Survey (Chile), Household Financial Consumption Survey (Europe), Survey of
Consumer Finances (US) and Wealth Distribution Database (OECD).
22. Corporate leverage risks appear limited. Although total non-financial corporate debt is
comparatively high at around 120 percent of GDP, financial debt to equity is relatively low at around
0.7, and a large share of corporate FX debt is hedged and related to FDI/obligations to parent
companies. Large corporates have recently engaged in precautionary borrowing but could face
challenges under a protracted recovery.
Climate Risk14
23. Chile is sensitive to climate risks including drought, flooding, wildfire, heat waves, and
coastal swells. The GoC committed through its National Determined Contribution (NDC) to reduce
its carbon emissions per GDP unit by 30-45 percent below their 2007 levels by 2030 and to reach
carbon neutrality and be resilient to climate change by 2050. The GoC has pushed ahead with a
Framework Law on Climate Change, that has been approved in the Senate and is now being
reviewed by the Constitutional Court. Enactment of the Bill will make the NDC legally binding15. The
Law also contains a section on the country’s climate finance strategy. It is expected that economic
14
Climate risk regulation and supervision is discussed in the following section that discusses financial sector
oversight. Opportunities for developing green finance are discussed in the final section on long-term finance.
15
The Bill will provide a framework for climate adaptation and mitigation plans that are yet to be developed. This in
includes the Long-term Climate Strategy (currently in public consultation), regional climate change action plans,
sectoral adaptation plans and sectorial mitigation plans).
CHILE
sectors that will be impacted by physical risk include agriculture, fishing, forestry, mining, tourism;
transition risk will particularly affect energy intensive sectors, including transport and manufacturing.
24. The financial sector is expected to be impacted by climate risk, though more study is
necessary to better understand the full range of transmission channels and potential impacts.
In general, physical risk, affecting the financial sector through extreme weather events and gradual
shifts in climate patterns, are determined by 1) sensitivity of sectors to climate hazards or long-term
changes; and 2) geographical location. Transition risk, driven by climate related mitigation policies
technology changes and consumer preferences, is determined by 1) the policy sensitivity of the
exposure, and 2) the tenor of the exposure.
B. Stress Testing and Interconnectedness
25. The FSAP conducted quantitative stress tests and contagion analyses. Quantitative
approaches include: (i) bank solvency and liquidity stress tests; (ii) an exploratory analysis on the
impact of climate transition and physical risks; (iii) mutual and pension funds liquidity stress tests;
and (iv) interconnectedness and contagion risk analysis.
Bank Solvency and Liquidity Stress Tests

26. Solvency stress tests were used to assess banks’ resilience to severe macrofinancial
conditions. Banks appear healthy under the baseline scenario. 16 The aggregate common equity
Tier-1 (CET1) capital ratio is on an upward trajectory due to banks’ revenue-generating capacity and
the mild impact on net interest income and credit impairment. The system’s aggregate capital ratio
(CAR) would increase by 0.8 percentage points to 15 percent by 2023 (Figure 8 in annex, panels 1, 2).
27. The results under the adverse scenario suggest that there are pockets of weaknesses
across individual banks. Several banks eat into their CCB buffers, two fall below the hurdle rates for
CET1/T1, and a third falls below the T1 threshold (text charts). Currently planned capital raises, which
could significantly boost ending capital ratios if implemented, were not taken into account since
they were not final at the time the exercise was conducted.17 Hence some of these shortfalls can be
partially attributed to either the low starting capital levels of some banks or to the phased
derecognition of certain eligible capital instruments during Basel III implementation, which the stress
tests take into account.18
28. Capital shortfalls could be materially larger in a more severe shock. Sensitivity analyses
explored the potential impact of the full unwinding of BCCh’s liquidity support measures and credit
line facilities. The three-year cumulative effect on the capital ratio would be in the 0.3–1.3
16
A baseline scenario follows the April 2021 WEO forecast, while an adverse scenario implies a negative GDP shock
close to 3 standard-deviations of the real GDP growth rate relative to the next two-year baseline (14 percent
cumulative in level terms). This deviation reflects a baseline outlook that envisages a strong recovery, with 2021 GDP
forecast significantly above average long-term growth. Scenario projections for key macroeconomic variables are
shown in Figure 7 in annex.
17
A recapitalization of Banco Estado was subsequently finalized in October 2021
18
Notably, the phase-out of Tier 2 (T2) capital that is currently recognized as Additional Tier 1 Capital (AT1).
14
CHILE
percentage point range (Figure 9 in annex). These results suggest the importance of ensuring
realistic capital planning by banks as support measures are appropriately unwound.
29. The banking system appears resilient to sizeable funding withdrawals despite inter-
bank dispersion. While the system on the whole seems well positioned to mitigate liquidity shocks,
results vary across individual bank funding profiles and demonstrate the positive material impact of
extraordinary liquidity support measures (Figure 10 in annex). Given the temporary nature of these
measures, enhanced prudential monitoring is recommended to identify potential points of stress.
Climate Risks
30. A limited stress test was conducted to explore the potential impact of climate risks.
Despite significant data gaps, both physical and transition risks were examined through an
exploratory analysis to raise awareness on the materiality of such risks to banks. Data limitations
may have impacted the outcomes.
31. The work assessed banks’ exposures to extreme hydrometeorological events and
identified floods and droughts as the most relevant physical risk events for Chile. Due to data
limitations and the absence of a catastrophe risk model for Chile, historical loss events (Figure 11 in
annex, Panel 1) were used to proxy the magnitude of physical capital destruction and the
subsequent impact on real growth rates (Figure 11 in annex, Panels 2, 3). Although the results
indicated a relatively small negative impact on banking system capitalization (CAR), this benign
result should be interpreted with caution given the country’s exposure to natural disasters (e.g.,
earthquakes) and given the uncertainties surrounding loss event modelling, including modelling the
transmission of physical shocks to banks’ balance sheets. Simplified assumptions did not consider
non-linear amplification effects or potential spillovers (e.g., productivity shocks).
32. Transition risks were assessed by the FSAP team in cooperation with BCCh staff, with
the analysis focused on risks driven by a material increase in carbon pricing and its ultimate
impact on corporate PDs. The results provide some evidence that transition risks could be material
for some banks, but not sizeable enough to compromise bank’s solvency or financial stability (Figure
12 in annex). The magnitude of the PD increase suggests that a policy change on carbon pricing can
have a measurable impact on the credit quality of the corporate portfolios, and that transition risks
could be an important contributor to future stress test results. The increase in the segment
exposure-weighted corporate portfolio PDs ranges from 0.3 to 0.5 percent under a 3-year scenario,
with the transportation, electricity and gas, forestry and mining industries being the largest
contributors.
Mutual and Pension Funds Liquidity Stress Tests

33. Fixed income mutual funds stress tests suggest the need for enhancing liquidity
management practices. Results show most funds hold liquidity buffers larger than 15 percent of
AUM, but a significant share hold less. 15 percent corresponds to the first percentile (severe stress)
of the typical distribution of weekly redemptions (Figure 13 in annex, Appendix IV). Recognizing the
tradeoff between higher liquidity buffers and lower returns, the authorities should consider a more
robust liquidity management framework for mutual funds to improve resilience and limit potential
systemic risks, taking into consideration possible arbitraging and other unintended effects.
CHILE
34. Stress testing type “E”19 pension funds confirms sound liquidity management while
highlighting the detrimental impact of excessive fund switching. Results show liquidity buffers
are larger than 30 percent for all AFPs (Figure 14 in annex, Appendix IV). This suggests AFPs are
cautiously managing liquidity given the excessive switching environment, at the cost of lower
profitability. More restrictive switching rules and/or appropriate market mechanisms would help
eliminate this negative dynamic (Figure 15 in annex).
FINANCIAL SYSTEM OVERSIGHT

A. Regulation and Supervision
35. The Financial Market Commission (CMF) is the primary financial supervisor and
regulator. Established in 2018, CMF integrates bank, large credit union, some NBLs, insurance, and
securities market supervisors. Pension funds are supervised by the Pension Superintendency (SP).
Banking Supervision
36. The Basel Core Principles (BCP) assessment found CMF to be capably staffed with
expertise in monitoring of individual risks, although further improvements are required. In
2018, the authorities revised the banking law and overhauled the financial supervisory structure. The
reform aimed to improve supervision through better coordination on financial markets and
supervision of the regulatory perimeter and conglomerates.
37. Budget constraints might hinder the effectiveness of supervisory processes in the
future. CMF’s budget depends on the MoF approval. Sufficient funding is essential to allow CMF to
attract and retain staff in highly specialized fields. Several recently approved or pending laws that
extend the regulatory perimeter (i.e., Ley de agentes, Proyecto de ley Fintech, Proyecto de ley de
deuda consolidada, among others) add to the urgency.
38. CMF’s legal mandate does not prioritize prudential supervision relative to its other
mandates. The CMF’s mandate is to safeguard the proper functioning, development and stability of
the financial market. There is no hierarchy specified among these objectives. Consequently, the
CMF’s market development mandate could result in potential conflicts with prudential supervision.
39. Implementation of Basel III starting from December 2021 will largely address
shortcomings of the capital framework. The Basel I framework is not compatible with the size and
complexity of the banking industry. For now, capital is required for credit risk only. Pillar 2 capital
requirements were introduced in September 2020 but are not fully in force.
40. Key reform areas include:
19
Type E funds are the most conservative of the five pension fund versions, with relatively less liquid asset holdings
16
CHILE
 Establishing an integrated risk management framework. There is no regulatory requirement

that banks establish an integrated risk management function that oversees all risks that a bank is
exposed to, although some banks have taken steps in this direction.
 Strengthening of corporate governance standards and supervision, including in respect to
aspects of governing banks’ board members and senior management (fit and proper criteria,
collective suitability of the board).
 Strengthening the legal framework for licensing, including granting powers beyond Article
28 of the General Banking Act to ensure banks’ shareholders and senior management are fit and
proper and that shareholders have capacity to provide additional financial support.
 Increasing the scope of the corrective actions framework. Current triggers mostly rely on
breaches of regulatory requirements or materialized indications of deterioration. Although the
CMF law provides broad powers to adopt preventative and corrective measures, there is scope
for expanding the corrective action toolkit, including by imposing more stringent prudential
limits and requirements, restricting payments to shareholders before prudential ratios are
breached, and facilitating takeovers/mergers with healthier institutions.
 Strengthening consolidated supervision. Improvements in the legal framework, further
strengthening of the financial analysis and monitoring of financial conglomerates, the
appointment of lead examiners and ratings for conglomerates would all be beneficial.
 Improving credit risk management and asset classification. Although CMF closely monitors
banks’ rescheduling activity, there is scope to strengthen the regulatory guidance on the
definition, identification, and treatment of loans subject to restructuring/refinancing that
currently allow a quick classification of restructured loans as performing, creating a risk that
banks delay the recognition of inevitable credit losses through aggressive restructurings.20
 Strengthening collateral valuation and provisioning requirements. Regulations lack explicit
supervision guidelines on collateral revaluation to help adequately provision for problem
exposures, including estimation of foreclosure and liquidation costs. Collateral valuations should
be updated on a regular basis. There is recognition by the authorities that bank consumer loans
are under-provisioned, which should be addressed with the adoption of CMF’s standardized
provisioning methodology.
Mutual Fund Supervision

41. Liquidity regulation is constrained by the current legal framework. Regulators are
limited to a general prohibition on more than 50 percent of a MF portfolio being in “illiquid
assets”.21 Given large fixed-income (type 3) mutual funds with assets (bank and corporate bonds)
whose liquidity can deteriorate rapidly under stress, a more sophisticated approach is
recommended. Fixed income market volatility and ensuing supervisory actions during Q42019
support the need for greater attention to this area.
20
The law governing Chile’s insolvency was revamped in 2014 (Ley 20.720). The “Superintendencia de Insolvencia y
Reemprendimiento” collects significant amounts of data regarding insolvency.
21
Additional regulations limit leverage, prohibit certain investment types, and enforce portfolio concentration limits.
CHILE
42. A liquidity management framework for mutual funds (LMF) is needed to reduce
systemic risks. The LMF should utilize a risk-based regulatory approach and conduct periodic
stress-testing. While applicable to all MFs, it should be customized according to fund assets and
redemption rules. Standard liquidity management tools that allow fixed income fund managers to
respond to stress events should also be considered, including redemption fees, gating, and
redemption in kind.22
Pension Fund Regulation and Supervision

43. Regulatory measures are needed to further inhibit switching and improve participant
outcomes. The multifondos approach was best-in-class twenty years ago but is now outdated and
has enabled recent switching by implicitly allowing a focus on extreme options (Funds A and E).
Implementing target-date default funds, which in other markets have achieved a higher resistance
to excess switching even during periods of higher market stress, could help facilitate this.
44. The SP has initiated the transition towards a risk-based supervision approach. SP has
provided robust oversight of the pension system. Though the move to a risk-based supervision
approach has already begun, further advances would require legal changes and a streamlining of
burdensome investment regime requirements as part of the target date fund implementation.
Insurance Sector Supervision

45. More work is needed to strengthen the regulatory framework for RBS of insurance
companies. However, some aspects of RBS require the approval of changes in the broader legal
framework. The authorities should implement a modern risk-based capital (RBC) framework. It
should replace the current leverage limit and simple minimum solvency requirement. The RBC
requirement should include capital requirements based on market and credit risks rather than
current legal restrictions on asset allocation. A RBC requirement will complement the economic
basis of valuation enabled by IFRS 17 and IFRS 9 and encourage better risk management, in
particular better matching of assets and liabilities.
Cross-cutting Themes - Climate Risk Regulation and Supervision

46. Chile’s financial sector authorities are strongly committed to identifying, assessing and
mitigating climate risks and its impact on financial sector. The MoF, BCCh, CMF and SP have
publicly committed to mainstreaming climate change through the Green Agreement and a Public
Statement. The BCCh has appointed a Board Member for climate-related topics, established an
internal coordination body, developed a roadmap, and is planning to address the impact of climate
change on the financial stability in the Financial Stability Report. The CMF has established board
commitment, formulated a strategy, and set-up a climate change task force. It plans to integrate
climate risk in its supervisory approach for banks, insurance companies, and investment funds. It has
recently issued updated regulation on climate disclosure. The SP has begun requiring pension funds
to consider Environmental, Social and Governance (ESG) factors and climate change risks to be
22
The Ley Unica de Fondos (LUF) enables the CMF to require fund managers to set aside capital according to risk
management practices. CMF has not yet published this norm.
18
CHILE
included in a pension fund’s investment and risk management process and is planning to review the
first integrated annual report of pension funds in 2022.
47. The financial sector authorities are studying the potential impacts of climate risk on
the financial sector. CMF is assessing the impact of six acute physical events in select regions on
the expected capital requirements of banks and is planning to develop a climate stress test to
determine the impact of expected physical risk on banks’ loan portfolio. In parallel, the BCCh is
studying the impact of IPCC scenarios on economic performance of certain sectors in select regions.
Together with the IMF, BCCh is analyzing the impact of an adverse physical risk shock anchored at 2
percent of GDP. On transition risk, the CMF planned to determine the impact of transitional risk (as
firms work toward reaching the Paris agreement goals) on the investment portfolio of insurers; and
to develop a climate stress test to determine the impact of transitions risk on the loan portfolio of
banks. BCCh together with IMF determined the impact of a carbon tax of USD 100 per ton carbon
emission on the banking sector based on firm level data of scope 1 carbon emissions.
48. There is scope for strengthening coordination, to avoid gaps and overlaps and enable
the authorities in adopting a systemwide perspective on the impact of climate risk. Although
the different studies help to understand the different aspects of climate risk, there are potential gaps
and overlaps23. Enhanced coordination among the key players, i.e. the MoF, BCCh, CMF, and SP
could help to adopt a more systematic approach by mapping the available studies, models, data,
and determining potential gaps, including those gaps identified by climate scientists. This is
important to get a better understanding of climate risks not only for the individual sectors (banking,
insurance, and investment), but also for the financial system as a whole and its cross linkages.
49. Financial institutions could be required, as a next step, to integrate climate risk in
corporate governance, strategy, business model, and risk management practices. Although
most financial institutions believe that climate change is a source of financial risk, there has been
limited progress towards integrating these risks as part of business practices. More work is needed
by the financial institutions in understanding and managing these risks. The recent issuance of
regulatory disclosure guidance NCG 461 on climate risk is an important milestone, mandating
sustainability-related disclosures by banks, insurance companies, issuers of public offering securities,
general fund managers, and stock exchanges. In addition, regulatory requirements could be
introduced mandating financial institutions to integrate climate risk in corporate governance,
strategy, business model and risk management, including developing specific guidance on scenario
analysis/stress testing, as this will strongly contribute to understanding, managing, and pricing
climate risk.24
23
There are, for instance no granular data to determine physical risk per commune or determine transition risk as a
result of scope 3 emissions, while CMF and BCCh are both studying the potential impact of physical risk and
transition risk on the banking sector. As of yet, no work is planned on the investment sector. The Green Finance
Roundtable, led by the MoF, is the main body for coordination between the authorities and the financial sector.
24
For pension funds, a requirement to integrate ESG factors and climate change risks into the management of
investment risk and the Investment Policy for Pension Funds already exists.
CHILE
B. Macroprudential Policy
50. Macroprudential policy coordination is run through the Financial Stability Council
(Consejo de Estabilidad Financiera, CEF). The committee has historically facilitated strong inter-
agency coordination and crisis response. The BCCh’s financial stability report (FSR) plays a central
role in macroprudential risk analysis. The FSR is one of the highest quality financial stability reports
in Latin America25 and has facilitated the identification and containment of financial stability risks in
Chile.26 While the CMF and other CEF members are given some input into the FSR, they currently
lack a public venue for the communication of their own views on financial stability issues. Although
the Chilean financial sector authorities have a comparatively broad range of macroprudential tools
at their disposal, regulators could use the toolkit more actively, and the CEF could assume a more
proactive role. To further enhance macroprudential regulation, consideration should be given to: (i)
expanding the capacity of the CEF secretariat, (ii) conducting annual reviews of systemic risks in a
dedicated CEF meeting; and (iii) publishing CEF member views on financial stability risks and
regulatory responses.
C. AML/CFT
51. Chile has taken important steps to strengthen its AML/CFT regime in line with the
international standards. The July 2021 mutual evaluation report (MER) notes that Chile has made
significant effort in identification and assessment of money laundering and terrorism financing risks
through its 2017 National Risk Assessment and other sectoral studies. Strong AML/CFT policies and
strategies are in place to address risks, with a high level of implementation of priorities identified in
its 2018–2020 Action Plan.
52. Efforts should continue to enhance effectiveness of the AML/CFT regime. The MER
notes remaining gaps in the legal framework and effectiveness that require attention. Authorities
should ensure the application of effective, proportionate, and dissuasive sanctions for AML/CFT
breaches to the preventive measures. They should also strengthen the implementation of the
preventive framework regime and AML/CFT risk-based supervision. On entity transparency,
significant improvements are needed to ensure timely availability of beneficial ownership
information.
CRISIS PREPAREDNESS AND FINANCIAL SAFETY NETS

Crisis Management and Bank Resolution
53. The authorities have made progress in crisis management since the 2011 FSAP, but
significant gaps remain. Banking regulations were revised to increase supervisory powers and
expand the crisis management toolkit. While progress has been made to enhance the current early
25
Financial Stability Reports in Latin America and the Caribbean, 2017, WP/17/73, Cheng Hoon Lim et al.
26
Notably, a banking regulatory tightening was introduced from January 2016 to better align higher credit risks with
additional loan loss provisioning (LLP) for mortgage loans. This followed a series of BCCh warnings published in FSRs
about the buildup of residential real estate risks and associated lending standard practices.
20
CHILE
intervention framework, including by enabling the authorities to require firms to submit

regularization plans, CMF’s prudential toolkit to manage banks at risk of failure lacks an ex-ante
recovery planning requirement for banks.
54. Establishing a statutory bank resolution authority with a wide range of resolution
tools, that sets failing banks clearly apart from the general insolvency framework, is a priority.
This is essential to orderly manage bank failures. There are a range of institutional arrangements for
the resolution authority (e.g., standalone agency, or as a function within an existing authority), but
structural separation and operational independence between the resolution authority and prudential
supervision functions must be ensured. Cross-authority crisis coordination should be enhanced to
support bank recovery and manage orderly bank failure, including by finalizing and publishing the
crisis management MoU between the MoF, CMF, and BCCh.
55. Similarly, resolution planning needs to be introduced for all banks in scope of the
resolution regime. For systemic banks this planning should include setting a loss-absorbing
capacity (LAC) requirement as envisaged in the General Banking Law which is yet to be
implemented. Systemic banks in Chile are well-positioned to comply with LAC requirements given
their issuance of wholesale debt securities, which could be adjusted to meet LAC requirements when
refinanced.
56. An industry funded deposit protection scheme (DPS) to replace existing MoF and
BCCh deposit guarantee arrangements needs to be established. In absence of a prefunded
deposit protection scheme, the BCCh fully guarantees banks’ sight deposits, while MoF guarantees
term deposits of natural persons.27 A prefunded DPS would limit the moral hazard and central bank
balance sheet risks associated with the existing arrangement. The DPS should be implemented as
the new resolution regime is established and have the ability to ensure a rapid pay out of covered
depositors under a liquidation scenario.
Systemic Liquidity
57. The absence of an active secured money market puts an additional burden on the
central bank’s liquidity-providing operations. Despite well-developed capital markets, an
institutional repo market does not exist in Chile, as banks prefer exchanging liquidity on an
unsecured basis, with the central bank serving as backstop. Setting appropriate risk/reward and
regulatory incentives to develop this market should be a policy priority.
58. The BCCh needs to implement stronger risk management practices, particularly
regarding collateral requirements. The BCCh took significant risks in its crisis response, particularly
with the use of bank bonds as collateral with minimal haircuts. The authorities should: (i) strengthen
risk control measures through a more prudent haircut schedule, based on the risk equivalence
principle; (ii) exclude unsecured bank bonds from the collateral framework except in crisis times; and
(iii) reinforce the risk management perspective in policy proposals.
27
BCCh currently has a negative equity position of 0.9 percent of GDP. This, in part, reflects the 1980’s banking crisis
when BCCh bought bank assets and provided lender of last resort funding.
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59. The operationalization of the Emergency Liquidity Assistance (ELA) framework will
require close cooperation between the central bank and the banking supervisor. While the
BCCh Act provides an appropriate legal basis for an effective ELA framework, the legal architecture
should be completed by a specific ELA Regulation, procedures for the central bank and the banking
supervisor, a master agreement, and an MoU between the BCCh and the CMF.
COMPETITION, FINANCIAL INCLUSION AND

FINANCIAL CONSUMER PROTECTION
60. Events in the fourth quarter of 2019 have given urgency to the need to build a
financial sector that puts more emphasis on the needs of its end users. This entails a financial
sector that fosters competition (that benefits customers by promoting innovation and efficiencies,
which lead to lower prices, greater choice, better quality services and improved products); provides
individuals and businesses with access to useful and affordable financial products and services that
meet their needs; and that ensures that customers are protected from deceptive industry practices
and are provided with the information needed for informed decision-making.
A. Competition
61. Market concentration in the banking sector has increased on the back of mergers. The
increase in concentration came on the back of several high-profile mergers and market exits that
reduced the number of banks operating in Chile by one-quarter since 2015, although Chile’s
banking sector is overall less concentrated than its Latin American peers (see text charts). Mergers
were also the main driver of market dynamic as only few banks managed to significantly increase
their market share through organic growth.
Concentration in the banking sector
Asset concentration Asset HHI (international comparison)
3500
100% 1400 3000
2500
1300 2000
80% 1500
1200 1000
60% 500
1100 0
Brazil
Chile
Morocco
Thailand
Peru
Colombia
South Africa
Mexico
40% 1000
2013
2011
2012
2014
2015
2016
2017
2018
2019
2020
Top-3 market share Top-6 market share

LAC peers International peers
HHI, rhs
Source: CMF and FitchConnect
62. Nonetheless, interest margins and lending rates have decreased considerably and it
has become common practice that clients have relationships with multiple banks. While credit
kept growing until the onset of the pandemic, net interest margins and average lending interest
rates have declined significantly over the past years, particularly for mortgages and commercial
22
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loans, and net interest margins are below levels seen in most peer countries (see graph).28 The
decline in lending rates cannot be fully explained by variations in risk, inflation or funding costs and
thus suggests that competitive dynamics played a role.29 Moreover, profitability indicators of Chilean
banks are relatively low while large banks are not significantly more profitable than their smaller
competitors, suggesting that large banks are incapable to use their market power to generate
surplus profits. Most customers have accounts or loans with more than one provider, pointing
towards consumer power to choose and switch across different banks. To encourage customer
mobility and strengthen price competition among lenders, a law has recently passed that enhances
loan portability and reduces administrative and cost impediments to switching.
Net interest margins have declined over time,… … and are below LAC peers
Net interest margin (% of total assets) Net interest margin (% of total assets, 2020)
4.0%
8.0%
3.0% 6.0%
4.0%
2.0%
2.0%
1.0% 0.0%
Chile Brazil Mexico Peru Romania Thailand
0.0%
2014 2015 2016 2017 2018 2019 2020 LAC peers International
peers
Lending rates (%)

40.0
30.0 2015 2017 2019 Jul-21
20.0
10.0
0.0
Credit cards* Instalment Overdraft Average Instalment Overdraft Average
credit consumer credit commercial
credit credit
Consumer credit Mortgages** Commercial credit CPI
Notes: * Tarjeta crédito rotativo; ** Mortgage interest rates for credits in UF.
63. Financial conglomerates and interlinkages between financial service providers and
firms in the real economy warrant attention. While Chile has no formal definition of financial
conglomerates, the CMF identifies 22 business groups that are active in at least two of the areas of
banking, insurance, or pension fund management. Financial service providers are also often linked to
entities in the real sector (e.g. retail stores or supermarkets), enabling financial institutions within the
same group to use the physical infrastructure network of the real sector entity (i.e., retail stores) to
on-board clients and distribute products. It also allows them to exclusively access data, subject to
the restrictions in the Data Protection Act, for tailoring and pricing of products. The general
prohibition of tied sales, a requirement for banks to tender mortgage related insurance products
28
The increase in policy rates starting in H2 2021 amid rising inflation has partially reversed the drop in lending rates.
29
Neither can the decline be fully explained by the interest rates caps, which have remained unchanged for the full
duration of the observation period.
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(rather than offering insurance products of affiliated insurance companies) as well as a recent law
clarifying which types of insurance products can be linked to a loan, provide important competition
safeguards (see also discussion on financial consumer protection). Nonetheless, the conglomerate
structure and interlinkages between financial and real sector entities poses inherent competition
challenges and continued vigilance is needed to detect anti-competitive practices.30
64. Competition advocacy and enforcement in the financial sector could be further
strengthened by deepened inter-agency cooperation. Antitrust and competition laws grant the
competition authority (Fiscalía Nacional Económica, FNE) the mandate and powers to investigate
and prosecute anti-competitive practices in the financial sector in a specialized competition court
(Tribunal de libre Competencia, TDLC). FNE has used its powers pro-actively and carried out 18
investigative processes in the financial sector over the past decade, several of which have triggered
concrete legal and regulatory changes. The number of such enforcement and advocacy initiatives in
Chile is higher than in most LAC peer countries. CMF does not have a direct competition mandate,
but it authorizes mergers based on prudential criteria, and its mandate for financial sector
development and market conduct has touch points with competition. A coordination process
between CMF and FNE is in place, but it is limited in scope to mergers and there is no process
established by which CMF refers a suspicion of anti-competitive practices to FNE. Establishing such a
process would best utilize the respective technical expertise and capacities of the two agencies and
strengthen competition advocacy. Without prejudice to its core mandate as a prudential regulator,
the CMF could also adopt a simple mechanism of screening for and assessing the potential
competition impact of new regulations through a regulatory impact assessment (RIA), which can
help to ex-ante identify unintentional competition effects.
65. Recent reforms in the card payments market have increased competition, but
challenges have arisen in implementation. The card payment market in Chile has been subject to
several major competition investigations over the past years that focused on Transbank (a private
entity owned by the main banks in Chile that had been the dominant acquirer in the country).31 The
competition procedures triggered a legal transition from a three-party to a four-party card scheme,
which is the standard in most peer countries. While positive trends are emerging such as new
acquirers and expanded merchant acceptance points, but additional reforms are needed to better
reap the competition benefits from the legal transition. Broader issues have arisen in the retail
payment ecosystem regarding interchange as well as interbank transfer fees, rejection of prepaid
30
Examples of potential anti-competitive practices include, a recent lawsuit accusing that a bank abused its dominant
position in a tender to grant mortgage linked life insurance, as well as the reluctance of a dominant retail chain, which
is linked to a credit card issuing financial institution, to accept prepaid cards, or the practice of retailers to offer
discounts exclusively for users of a credit card issued by related financial institution.
31
The monopoly role of Transbank, as well as complaints of merchants of discriminatory merchant discount rates,
triggered multiple investigations by the FNE and procedures in front of the TDLC over the past decade. In 2017, the
TDLC issued the Proposal for Regulatory Modification N° 19/2017 to regulate the processes involved in card
transactions (issuing, acquiring, and processing activities), as well as promoting competition in the acquirer market.
Following the TDLC proposal, the Central Bank published regulations (Compendium of Financial Regulations Chapters
III.J.1 and Chapters III.J.2) that promoted and regulated the transition to a four-party card scheme. The transition to
the four-party system was finalized in March 2020.
24
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cards, interoperability of new technology such as QR codes, and conflicts regarding access to retail
payments infrastructure. Between March 2020 and September 2021, Transbank’s prices were frozen -
pending a TDLC review of the proposed price structure – at commercially non-viable levels that
caused losses for Transbank and made it challenging for new acquirers to generate positive profits.32
A Committee with members designated by FNE, CMF, Central Bank and Ministry of Finance had
been tasked with setting maximum interchange fees, which were published in February and entered
into force in April 2022.
66. Developing a comprehensive strategy for further enhancing the retail payments
ecosystem in Chile may be beneficial. More broadly, there is opportunity to address emerging
issues in a holistic manner that fully considers the market dynamics necessary to further develop a
vibrant, competitive, and innovative retail payments ecosystem. Issues regarding access to
infrastructure, pricing, interoperability, and fair competition should be considered strategically and
with a long-term view towards enhancing financial inclusion and DFS. An in-depth assessment based
on the Payment Aspects of Financial Inclusion (PAFI) framework could help contribute to such a
holistic strategy. Establishing a broad task force or similar entity that brings together relevant
stakeholders at a technical level from both the public and private sectors to develop a strategic
framework for further enhancements to the retail payments ecosystem could also be useful, or at a
minimum ensuring that there is coordination and synergies between ongoing initiatives to develop
the retail payments ecosystem with financial inclusion initiatives.
B. Digital Financial Inclusion
67. Chile has made significant progress in financial inclusion. As noted, by now the vast
majority of adult Chileans have a transaction account. Nonetheless, the availability of savings, credit,
and account products that are appropriately tailored to meet the needs of underserved consumers
could be further improved. Despite broad access to consumption credit, there is limited access to
productive microenterprise finance. Chile scores higher than UMIs in the percentage of adults that
borrowed from a financial institution or used a credit card, but below-average in percentage of
adults that borrowed for their business (see box ‘The state of financial inclusion in Chile’). Gaps also
remain in the usage of formal savings products, indicating a lack of availability of appropriate
savings products, in particular microsavings products appropriate for saving in small increments on
a frequent basis.
68. Greater digitalization of the financial sector can help to address some of Chile’s
remaining financial inclusion challenges by lowering costs and expanding access. Financial
service providers (FSPs) have already started to offer digitally-oriented products and consumers
have increased usage of digital channels during the pandemic. Some FSPs are introducing DFS to
encourage savings behavior or to build up history with new clients, partly to address the lack of
consolidated credit information in the market.
32
TDLC its final ruling regarding this issue and September 21, 2021, (Resolution N° 67/2021) putting an end to the
temporary freezing of the new proposed Transbank fees structure for its 4-model card payment structure.
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69. Several elements of a well-functioning DFS ecosystem are currently missing in Chile.
Barriers and uncertainties, such as the lack of legal clarity regarding appropriate processes for eKYC
and digital authentication of customers, prevent full digital onboarding. Regulatory guidance could
be provided on appropriate eKYC processes and means of digital identification that are risk-based
and balance facilitating access with addressing AML/CFT and other security risks. This could be
combined with expanded infrastructure to support digital ID and digital authentication and the
removal of remaining barriers limiting usage of e-signature and digital documentation. At a broader
level, the Fintech Bill should be passed to allow for greater innovation and competition in the
financial sector (see also cross-cutting issues).
70. The development of FinTech and DFS also puts the spotlight on data protection,
privacy and cybersecurity to protect consumers and to avoid uncertainty and inconsistency in
the market. The FinTech Bill specifies the type of information that can be transferred through
application programming interfaces and strengthens data protection frameworks for open banking.
Nonetheless, the development of FinTech and DFS highlights a broader need to address new forms
of data processing, alternative data, and algorithmic scoring; incorporate new approaches to data
privacy including greater focus on legitimate use; update data protection standards; and clearly
designate an authority to enforce a new data protection law.33 Similarly, cybersecurity rules should
be strengthened in line with new technologies and business models.
71. There are indications that interest rate caps have constrained access to finance for
Chilean microenterprises. Lending to micro and small enterprises (MSEs) by nature requires higher
operational costs, and higher interest rates, due to the informality of such enterprises and higher
costs required for servicing such clients. Such clients often fall victim to credit rationing due to
interest rate caps. Indeed, it appears that the majority of FSPs (banks as well as credit cooperatives)
have withdrawn from MSE lending.34 Chilean FSPs consistently indicated that serving this segment
was commercially unfeasible due to lack of credit information, higher risks, and interest rate caps.
This has been replaced primarily by consumption lending.
72. It is recommended that interest rate caps be replaced with affordability and suitability
requirements. Interest rate caps are a blunt instrument that often do not have a net benefit. Caps in
Chile have clearly curtailed the availability of productive microfinance, while potentially driving some
33
A draft data protection bill which aligns more closely with the GDRP approach is under discussion in Congress and
is currently in the second constitutional stage.
34
Traditional banks have generally withdrawn from productive microcredit over the past decade, instead focusing on
consumption credit (for higher-income consumers). Even savings and credit cooperatives, which traditionally served
microenterprises, have withdrawn from this market and turned to consumer loans and payday lending. While some
banks do serve SMEs, in particular Banco Estado via BancoEstado Microempresas (BEME), they generally do not serve
microenterprises. Only a few microfinance entities appear to be serving microenterprises currently, with operations
on a small scale.
26
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consumers to use informal lenders with even more exorbitant rates.35 Affordability and suitability
requirements, combined with strong disclosure and transparency, can be more effective in trying to
protect consumers, without the distortionary effects that accompany interest rate caps. Alternatively,
the methodology for caps on smaller loans could be revised to be less restrictive. This could be done
by raising the cap for smaller loans to a non-binding level by increasing the constant mark-up or by
changing the constant mark-up into a proportional mark-up.
73. Legal changes could be considered to encourage microsavings, beyond contractual

retirement savings. The current regulatory framework only contemplates a limited set of formal
savings products with restrictive policies (such as restrictions on the number of withdrawals,
transfers, and adjustments) and reportedly high administrative costs for FSPs.36 While there are
several factors contributing to the low level of savings in Chile (including a lack of a savings culture),
it does not help that more flexible products that facilitate microsavings are difficult to offer due to
the existing regulatory framework.37 Some FSPs resort to referring consumers to investment
products, which are less appropriate for low-income, low-literacy individuals.
74. To move to the next stage of financial inclusion, it is recommended that a national
financial inclusion strategy (NFIS) be developed that is holistic and comprehensive. Given the
ambitious initiatives currently being pursued related to fintech and retail payments, it will be critical
to ensure that a systematic and well-coordinated approach is taken towards financial inclusion that
fully considers market dynamics and incentives, safety and security, and infrastructural elements that
are necessary to support longer-term, sustainable advances in financial inclusion. An initiative is
already underway to develop a NFIS, but the main pillars of this initiative currently focus on financial
consumer protection, financial education, and access and use of products. To be effective in
advancing digital financial inclusion, the NFIS should take a more systemwide perspective and
incorporate a broader range of topics (including those already currently underway) such as
enhancements to the retail payments ecosystem, credit infrastructure, the enabling environment for
innovative new players, and addressing the impact of interest rate caps. The NFIS should be
developed with active participation from all relevant stakeholders, including the private sector, and
adequately consider necessary resources and capacity of implementing actors.
C. Financial Consumer Protection and Household Indebtedness
75. Considerable progress has been made in strengthening financial consumer protection.
A range of consumer protection measures have been introduced over the years, including product
disclosure and transparency measures. The general consumer protection authority SERNAC (which
enforces financial consumer protection rules implemented under general legislation) has stepped up
35
For example, see Cuesta, Jose Ignacio and Alberto Sepulveda. Price Regulation in Credit Markets: A Trade-off
Between Consumer Protection and Credit Access. Stanford Institute for Economic Policy Research, September 2021.
The results of this research show that interest rate regulation “mostly harmed credit access and overall welfare.”
36
For example, required procedures for opening savings accounts, making deposits and withdrawals, and sending
letters and communications to clients were all noted by FSPs to be cumbersome and excessive.
37
In fact, BCCh launched a public consultation in January 2022 to revise the regulatory framework for savings
accounts to facilitate digital savings accounts and remove certain restrictions and limitations on savings accounts.
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enforcement to address consumer issues identified through its market monitoring, such as with
regard to unfair and hidden fees. CMF – which as part of its mandate supervises market conduct as
well as financial sector stability concerns – recently issued a policy paper describing the future focus
of its market conduct supervision and which sets out several general financial consumer protection
principles CMF expects institutions that it oversees to follow.
76. Nonetheless, there remain gaps that can contribute to consumer over-indebtedness
and other credit-related hardship. Despite these valuable efforts, there are some important
remaining gaps and issues, including (i) a lack of sufficiently specific regulatory consumer protection
requirements for loan affordability and suitability assessments; (ii) widespread problematic industry
practices such as: incentivizing lender staff based on credit volumes, unsolicited credit offers and
extensive bundling of credit protection insurance of potentially questionable value; (iii) gaps in
credit provider oversight, licensing and supervision, which likely are limiting the ability of authorities
to detect and address consumer protection issues (including problematic industry practices of the
kinds noted here).
77. It is important that pandemic-related measures that have helped to lower levels of
household indebtedness do not distract from the need to address these gaps. As noted,
households have used pension withdrawals, and income transfers from government to repay debts,
but over-indebtedness of borrower cohorts can lead to significant consumer hardship. This is
especially the case for lower-income consumers or those with lower levels of financial capability that
are less able to make prudent credit-related decisions.
Loan affordability and suitability

78. Until now, there has not been an obligation for consumer credit providers to carry out
appropriate individual affordability and suitability assessments before providing credit. Chile
has been lacking consumer protection requirements that credit providers assess whether a borrower
is likely to be able to repay a debt without undue financial hardship or whether the type of credit is
suitable for the particular consumer’s needs. The lack of such requirements can result in increased
risk that consumers are provided with credit that leads to over-indebtedness or that is not suited for
their circumstances. CMF previously introduced rules applying a higher capital charge for consumer
credit offered to borrowers whose repayment to income ratio and debt to income ratios exceed
specified thresholds. While these measures may discourage consumer lending to borrowers with
higher indebtedness, they do not restrict it, and they do not apply to credit providers that are not
prudentially regulated.
79. A new creditworthiness assessment obligation seeking to close this regulatory gap was
introduced in December 2021 but will need to be supported by more specific implementing
regulations. The Protection of Consumer Rights Law was amended in December 2021 to oblige all
credit providers to assess, on the basis of sufficient information, the consumer’s solvency in being
able to comply with their obligations under a loan. However, this obligation of itself would be too
generic to ensure appropriate assessment standards and it will be particularly important to
strengthen it through more specific requirements in implementing regulations made under the new
provision. For example, the European Union is working to strengthen general creditworthiness
28
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assessment provisions in its Consumer Credit Directive and recently issued new, more detailed,
binding guidelines on how consumer creditworthiness assessments should be undertaken by
lenders.
Problematic lending practices

80. Despite a range of regulatory reforms and commendable enforcement efforts,
problematic industry practices remain prevalent. For example, most interviewed credit providers
confirmed that they incentivize the sale of credit by linking financial awards for staff with sales
volumes and targets. There also appear to be a range of unsolicited credit offer practices in the
market such as offers of pre-approved loans that can increase the likelihood of inappropriate credit
offers to consumers and uptake of unaffordable credit.
81. These industry practices require a targeted regulatory and supervisory response.
Among the priorities are requirements that providers mitigate risks of conflicted sales incentives
relating to credit, and strengthening currently limited restrictions on unsolicited offers of credit and
bundling of credit protection insurance (i.e. insurance that covers a borrower’s ability to make
repayments in case of events such as of loss of employment, illness, disability or death). The general
financial consumer protection principles set out in CMF’s recent policy paper include a principle on
mitigation of conflicts of interest, such as arising from conflicted incentives. Increased supervisory
focus by CMF on these issues through such general principles is welcome. However, these principles
do not apply to credit providers not supervised by CMF, and even for supervised providers, more
specific rules should be considered to target specific industry practices.
82. There is also a widespread practice of bundled sales of credit protection insurance
products with consumer credit. Some interviewed providers reported that over 85 percent of their
consumer credit portfolio was covered with such credit protection insurance policies. Unlike product
tying, where the purchase of two products together is mandatory, bundling is not prohibited.
Product bundling is not necessarily unfair, but can cause consumer detriment, if costs for each
product are not transparent, if the optional nature of the additional product is not understood, or if
consumers are unclear about the value added of the additional product given their individual
circumstances.
83. A recently issued rule that requires consumers to ratify acquisition of insurance
products bundled with credit does not apply to credit protection insurance. Credit protection
insurance was expressly excluded from this requirement. Even if the requirement applied, it would
likely need to be strengthened, with more specific parameters to separate the initial transaction and
the consumer’s confirmation of acceptance, to be sufficient to address potential risks.38 It is
38
The rule requires insurers to follow up with consumers, within 30 days of when the relevant bundled policy is sold,
to confirm their acceptance. If the client does not ratify within this timeframe, the insurance becomes invalid. This is
purportedly intended to allow a consumer to avoid being bound to acquire a policy, such if they were unaware of the
bundling or have reconsidered. However, a provider could for instance seek re-confirmation very soon after issuing
CHILE
recommended that the authorities consider implementing alternative requirements for credit
protection insurance that more strictly target relevant risks, such as a ‘deferred sales model’39 being
adopted in other jurisdictions that have experienced significant bundled credit protection insurance
mis-selling concerns.
Credit provider licensing gaps

84. The lack of a comprehensive licensing framework for credit providers limits the
authorities’ abilities to supervise financial consumer protection issues. Currently CMF licenses
prudentially regulated financial institutions that may offer credit (e.g., banks, credit card issuers,
credit cooperatives, insurance providers etc.) and shares relevant licensee information with
SERNAC.40 However, there is currently no general requirement for commercial entities offering credit
to consumers to be licensed (or even registered) before being able to undertake consumer credit
activities. This makes it more difficult for SERNAC, currently responsible for a substantial part of
financial consumer protection supervision, to have oversight of all credit providers that should be
complying with consumer protection requirements. International good practice indicates that having
a comprehensive licensing framework for credit would assist with initial vetting of prospective
providers (including their management, systems, and controls from a consumer protection
perspective etc.). It would also assist ongoing supervision and enforcement, as holding a license
should be dependent on continuing to meet applicable consumer protection requirements.
85. It is recommended that a licensing framework, or at least lighter touch registration,

that covers all consumer credit providers be introduced. This framework should apply on an
activities-basis, rather than on an institution-type basis, to ensure it is sufficiently flexible to cover
different kinds of providers and adapt to new entrants and credit offerings over time. The authorities
should consider carefully which authority should administer this framework. As one example,
SERNAC could be responsible for licensing all credit providers, but lenders already licensed (and
thus subject to vetting) by CMF could be subject to a lighter-touch licensing process or a mutual
licensing arrangement. It is also recommended that any vetting under this new framework replace
the SERNAC Seal initiative,41 which in any case, has not yet had any provider uptake.
Strengthening financial consumer protection supervision

86. SERNAC has been allocated additional resources and provided with expanded
supervision and enforcement powers, although the current setup comes with organizational
challenges. SERNAC has a dedicated 15-person financial sector unit that undertakes market
the policy, taking advantage of the initial momentum and context of the credit transaction. In any case, bundled
credit protection insurance and insurance over an asset provided as collateral are excluded from this requirement.
39
This would require credit insurance to be sold only at a separate, delayed time from when the loan is entered into.
40
CMF’s licensing process does not focus on consumer protection matters of the kinds covered in the Protection of
Consumer Rights Law, for which SERNAC has responsibility.
41
Credit providers can apply to SERNAC to receive the ‘SERNAC Seal’, which they can display publicly and in their
documents. To receive the seal a provider must demonstrate to SERNAC their standard contracts and complaints
handling arrangements meet various requirements.
30
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monitoring and enforcement but for inspections it relies on SERNAC’s general inspection units. This
presumably means vying for resources and priority with a range of other areas, and also that such
inspectors may not be financial sector specialists. SERNAC’s enforcement activities are guided by
extensive complaints data analysis, captured by SERNAC’s separate complaints management unit,
and some periodic reporting by credit providers, but SERNAC does not seem to have been
undertaking a systematic inspection program of providers.
87. In addition, there is scope to strengthen interagency coordination arrangements given

overlapping mandates on financial consumer protection.42 SERNAC and CMF currently have a
recently updated memorandum of understanding in place, but based on discussions, it is
understood that currently CMF and SERNAC do not coordinate supervision activities and there is
scope for enhancing the exchange of information (which could include insights from market
monitoring and market conduct supervision related activities).
88. To address consumer protection issues effectively over the long run financial
consumer protection supervision in Chile will need sufficient resources and expertise, and
dedicated capacity to avoid competing with other supervision priorities. This becomes even
more crucial given new and increased risks from digitalization, increasing complexity of products
and the need to supervise an expanding range of products and market participants which will bring
new challenges for financial consumer protection. It is recommended that the authorities undertake
a review of current financial consumer protection supervision arrangements, resources and
processes against international good practices43 to confirm both that (i) Chile has in place the most
appropriate institutional arrangements in its country context to support adequate resources,
specialized expertise and independence for financial consumer protection supervision into the
future and (ii) appropriate supervisory processes, data infrastructure and dedicated expertise are in
place for effective supervision of the expanding range of consumer issues and products. (While this
recommendation focuses on credit given the scope of our review in this FSAP, it is suggested that
any such review should cover all financial consumer products/sectors).
D. Cross-Cutting Topics
FinTech
89. While Chile’s FinTech sector is expanding rapidly, the lack of a legal and regulatory
framework creates impediments for new entrants and causes conflicts with incumbent
42
SERNAC is responsible for enforcing financial consumer protection rules in the Law on the Protection of Consumer
Rights and regulations issued by the Ministry of Economy, Development and Tourism under that Law. At the same
time, CMF’s mandate comprises market conduct (in addition to stability) concerns that include financial consumer
protection issues, as outlined in CMF’s June 2021 policy paper on general financial consumer protection principles for
market conduct. Chile is among a small number of countries internationally where the general consumer protection
authority (SERNAC) and financial sector authority (CMF) share financial consumer protection supervision
responsibilities.
43
For example, as described in documents including the World Bank’s Good Practices for Financial Consumer
Protection (https://www.worldbank.org/en/topic/financialinclusion/brief/2017-good-practices-for-financial-
consumer-protection) and publications by the G20-OECD Financial Consumer Protection Task Force
(https://www.oecd.org/finance/financial-education/g20-oecd-task-force-financial-consumer-protection.htm) and the
International Financial Consumer Protection Organisation (FinCoNet) (http://www.finconet.org/).
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financial institutions. Thanks to sound internet connectivity and a digitally savvy workforce, Chile is
home to a bustling FinTech sector focused on payment services, enterprise financial management as
well as crowdfunding. However, the legal and regulatory framework has not kept pace with
technological developments and FinTechs operate largely outside the regulatory perimeter and with
limited access to financial infrastructure. The lack of a regulatory framework creates uncertainties
that complicate the growth of new business models (while also posing potential risks to consumers).
Regulatory frameworks are needed that bring FinTechs under formal regulatory oversight, provide
legal certainty regarding new types of business models, take an activity-based approach and create
a level playing field, and appropriately balance fostering innovation with mitigating risks. Further,
tensions have arisen between FinTechs and incumbent financial institutions, with each side accusing
the other of anti-competitive practices, for example, regarding the use of web scraping technologies
or the closure of bank accounts for crypto and FX platforms.44
90. A Fintech Bill has been introduced that establishes a legal framework for
crowdfunding and other fintech activities. The Fintech Bill also introduces an Open Finance
System to allow FSPs to exchange financial information of clients with express consent, which can
help expand the range of tailored products available to consumers. The Fintech Bill should be
passed and will need to be followed by appropriate regulatory frameworks that balance innovation
with risk mitigation for the new types of regulated entities and services envisioned under the Bill.
These initiatives will likely take a few more years to take effect and it is important that interim
solutions, e.g., voluntary guidelines issued by the supervisor, are considered to ensure sound
competition and development of the FinTech sector until comprehensive legal and regulatory
frameworks are in place.
Credit information
91. The credit information system in Chile has been improving but remains fragmented,
with gaps in provider coverage and in the types of credit information available to prospective
lenders. The system comprises two public credit registries and several commercial credit bureaus.
 The first public registry is administered by CMF and holds only a limited range of positive
credit information. It provides a snapshot of a consumer’s current credit liabilities (in
aggregate only), but lacks historical information regarding prior loans, repayment history,
and historical defaults.45 In addition, it is open only to CMF-regulated credit providers, i.e.,
banks, bank-affiliated credit card issuers and credit cooperatives, with non-bank credit card
issuers to be added soon. Other lenders, such as auto finance companies or Cajas de
Compensación, cannot participate. Commercial credit bureaus also do not have direct access
to the CMF registry.
44
The lack of a regulatory framework also applies to the activities of BigTechs in the financial sector, posing risks that
BigTechs leverage their dominance in other markets and adjacent revenue streams or data to adopt aggressive
pricing strategies and potentially anticompetitive practices to gain market shares in the financial sector.
45
Additionally, twice over the past two decades (in 2002 and 2012), laws were passed that reduced the depth of
negative credit information by deleting information on defaults below a certain value threshold. A similar law is
currently discussed and its implementation would present a further significant blow to the depth of credit
information.
32
CHILE
 The second public registry is operated by the Chamber of Commerce and collects negative
credit data, mainly from mandatory reporting of dishonored checks by banks and protested
promissory notes by notaries public. The registry only reports existing delinquencies (for 5
years) and the information is removed immediately once a debt is settled. Entities such as
utilities do not participate in these arrangements as the General Data Protection Law
restricts sharing of alternative data, such as relating to utility and telecommunication
providers. A new data protection bill is currently being developed which would modernize
the legal framework, but would still not allow reporting of alternative data. In addition, a bill
that creates a consolidated credit registry, administered by the CMF, covering positive and
negative credit information is currently under discussion in Congress.
92. The current set up is problematic for financial stability, inclusion, competition, and
consumer protection. The existing system poses an obstacle to FSPs seeking to assess risks of
prospective customers and hinders their efforts to fully understand a client’s total debts owed to
various creditors. The system also harms access to finance for consumers who could benefit from
their positive repayment histories. The preferential access to credit information for some institutions
creates an unlevel playing field for NBLs that cannot access the CMF database. Like most NBLs,
FinTechs do not have access to credit information, one of main reasons why P2P lending models
have not taken off in Chile. Lastly, from a consumer protection perspective, access to accurate,
comprehensive credit information for all lenders can greatly assist lenders to avoid inappropriately
lending to clients who are already overly indebted or whose credit-related behavior indicates
indebtedness concerns.
93. The credit information system in Chile should be strengthened to have more
comprehensive coverage and to include more positive, alternative, and historical data. Credit
information should be made accessible to all types of appropriately regulated credit providers. The
types of credit information that may be reported and shared should also be expanded to comprise
historic positive as well as negative credit information. Authorities should strongly consider
including – as appropriate – alternative data such as from utilities and telecommunications providers
and similar sources. A draft bill that creates a consolidated credit registry, administered by the CMF,
covering positive and negative credit information is currently under discussion in Congress. While
current reforms proposed to expand accessibility and information coverage of the CMF credit
registry would go some way to achieving this, any such reforms should be updated to fully align
with the aims summarized above.
94. It is strongly recommended that the authorities refrain from measures that reduce the
depth of available credit information. A law is current under discussion that would delete
information on defaults below a certain threshold. Similar laws were passed in 2002 and 2012.
PENSIONS AND GREEN FINANCE

CHILE
A. Pensions
95. The pension system in Chile is known for the 1980 establishment of a defined
contribution (DC), individual account system managed by private pension funds (AFPs) that
has contributed to capital market development and growth. The system is funded by a 10
percent contribution deducted from wages of formal sector employees who are free to choose their
own provider and investment within a life-cycle, ‘multifondos’ system. The creation of the system
has helped to create a deep base of local institutional investors which enabled Chile to attain a level
of capital market development that is atypical for emerging economies. This is an on-going benefit
to the country, given growing recognition by global policy makers that private sources of capital will
be needed along with public funds in order to finance the investment needed to meet the
Sustainable Development Goals (SDGs), Paris Accord and other global targets.
96. There have been ongoing concerns regarding coverage and adequacy provided by the
pension system. In 2008 a major reform of the pension system took place to address ongoing
issues of low coverage and low replacement rates as around 80 percent of pensions received were
below the poverty line. In many cases this was due to low “contribution density,” given movement of
workers between the formal and informal sector and other inconsistent contribution behavior
throughout a career. A Solidarity Pillar was introduced, paid for through general taxation, covering
the poorest 60 percent of workers who had made no or low contributions into their pension funds.
Additional benefits for women, youth and the unemployed were added, along with (gradual)
mandatory coverage for the self-employed. In 2017 further reforms were proposed but were not
approved by Congress – including an employer contribution rate of 5 percent46, part to be directed
to individual accounts, part to a further redistributive solidarity fund. A proposal before Congress
last year included a proposal for an additional 6 percent contribution.
97. Most recently, in response to the COVID situation in 2020-2021 and ongoing
dissatisfaction with the pension system, three rounds of exceptional withdrawals were
allowed from pension accounts. These three rounds of emergency withdrawals have been allowed
from pension funds (efficiently administered with liquidity support from the Central Bank), removing
at least 25 percent of assets (>US $50bn) and leaving almost 4 million of the 12 million individual
accounts empty, which will significantly lower pensions further in future. A proposed fourth
withdrawal was rejected by Congress in December 2021. Beyond this impact to pension accounts,
the May 2021 iteration of withdrawals included a provision for retirees and others to liquidate up to
10 percent of their life annuities, the legality of which was challenged by the insurance companies.
Both the pension withdrawals and insurance annuity payouts posed liquidity risks that have been
managed well thus far but, if this trend were to continue, would pose more significant risk to the
financial system overall given the progressively deeper impact on portfolios.47
46
The former government proposed a 5 percent employer contribution rate in 2017 followed by a proposal from the
current government of 4 percent. Current status of the bill in the Senate is a 6 percent level.
47
The now rejected fourth withdrawal included another insurance annuity advance that would have had particularly
negative impacts on insurance company solvency according to CMF analysis had it been allowed to proceed.
34
CHILE
98. The pension system in Chile will benefit from further reforms but a systemic change
would be ill-considered and costly. Given the country has already borne the generational
transition costs of moving from a ‘pay as you go’ to a funded pension system, it should be
maintained, given the demographic situation in the country with the working age population set to
decrease.48 There are improvements to the system that can help in terms of providing broader
adequacy in the future – notably an increase in the contribution rate.
Benchmarking
99. The Chilean pension system has performed competitively over time on a basis of
returns and overall system efficiency. Contrary to popular perception, the actual investment
performance of the AFPs has been reasonable. Analysis has shown returns to be broadly in line with
stylized benchmarks.49 In the most recent Mercer CFA Institute Global Pensions Index (see figure
below), Chile’s system ranked relatively well, scoring high marks for sustainability and integrity while
relatively lower marks for adequacy.50
100. In terms of pension fee levels, there is more of a mixed story, but international
comparatives do not indicate excessive cost levels. There has been a continuous reduction in
fees overall, especially on the part of the newer AFPs – all fees are charged on a contribution basis
and the most recent auction process (held biennially to determine the AFP who receives all
participants without an active choice) resulted in a low bid of 0.58 percent of contributions.
However, the upper tier of providers is not participating in the auction process and has been able to
charge higher fees (~1.5 percent) to its established, older customer base. Notwithstanding this
reality, overall pension costs in Chile are not far away from international averages.51 The popular
view that AFP profits are ‘excessive’ is also not supported by analysis.52
48
For discussion of PAYG vs. funded systems see: Barr, N.’ The Truth About Pension Reform’ IMF Finance &
Development, September 2001, Vol 38, Number 3 https://www.imf.org/external/pubs/ft/fandd/2001/09/barr.htm and
World Bank (2014), ‘The Inverted Pyramid’ https://openknowledge.worldbank.org/handle/10986/17049
49
See Lopezi, F., Walker, E. (2021), ‘Investment Performance, Regulation and Incentives: The Case of Chilean Pension
Funds’, Journal of Pension Economics and Finance (2021), 20, 125-150.
50
This score predates the multiple withdrawals from the system, so the 2021 score will almost assuredly drop.
51
IOPS Working Paper No. 32 2018
52
AFP profitability has generally been higher in recent years than that of banks in Chile, but this is also the case in
other markets. AFP profitability has been generally coming down, even for some of the established providers (e.g. AFP
Provida and AFP Cuprum both booked ROEs for 2020 below 7percent. AFP Habitat, by contrast, was still able to return
over 28 percent to equity holders)
CHILE
Mercer CFA Institute Global Pension Index 2020
Path Forward
101. It is strongly recommended that no further large-scale withdrawals from the pension
funds be allowed. Although the full amount of withdrawals from the pension system is still
unknown, the impact on the system is already substantial and will have a significant impact on
current and future pension incomes. They will also amplify inequality within the system, due to the
number of participants with emptied accounts or reduced life annuities. Withdrawals work directly
against efforts to increase future replacement rates and add costs for those who will now draw more
from the Solidarity Pillar in the future. This means that the proposed 6 percent increase in
contributions into the pension system will effectively have to repair the damage done to the system
by the withdrawals, rather than fully contributing to improving future pensions. Preventing future
withdrawals will likely become harder the more access is allowed, further undermining the funded
pension system.
102. The solidarity pillar should be strengthened as envisioned in the various pension
proposals, by increasing the covered portion of the population to 80 percent and ensuring at
least a minimum pension at the poverty level.53 However, all solidarity elements should be
covered within this general tax funded pillar. Any other new, unfunded commitments (such as
raising pensions in payment) should be covered within this pillar of the pension system. The World
Bank’s policy recommendation has long been to clearly separate the poverty alleviation component
of pension systems from the consumption smoothing goal achieved by a funded pillar.
103. An employer contribution of at least the proposed 6 percent is needed to improve

pension levels. Given the considerable reduction in pensions which will result from the recent
withdrawals, the gradual introduction of an employer contribution of at least the proposed 6
percent will be needed to raise the pension replacement rate of middle-class workers to around the
minimum wage. The new employer contribution will help to restore the depleted or reduced
53
The situation regarding the pension proposals is fluid, with the most recent proposal creating the ’pension
garantizada’ in place of the Solidarity Pillar, targeting a larger covered population of the bottom 80 percent of the
population, with a maximum benefit of 185,000 CLP. This proposal was passed in January of 2022 as Law 21.419
36
CHILE
accounts and help system participants with enough time to partially restore their pension balances
before retirement. Increasing contribution density alone will not be sufficient and is challenging.
104. The new employer contributions should be managed by a public entity with strong
governance in a way which complements the AFP system. This entity would take a ‘universal
owner’ approach,54 managing funds on a long-term basis, allowing for the capture of an illiquidity
premium and not requiring daily market valuations. Maintaining the current privately managed
individual account system with AFP management of the employee’s 10 percent contributions and
combining with some central management of employer funds would allow for a balance and
spreading of risk between public and private provision.
105. The existing AFP investment regulation should be revised and replaced with a ‘target
date’ default fund structure. The current ‘multifondos’ system in combination with a strong
regulatory and supervisory regime has led to a compliance-led approach to pension investment.55
Given the level of development in the Chilean markets in the last 20 years since the system was
introduced, and the development of investment strategies globally, introducing a more up to date
approach to investment risk management is recommended. A Target Date approach is one whereby
each cohort is invested in a portfolio which is designed to optimize returns over a targeted period
(the target being the expected retirement date). The portfolio is adjusted over time on a ‘life cycle’
basis, shifting into less risky assets the closer the cohort is to retirement.56
106. Introducing an updated investment regime should provide improved outcomes,

encourage innovation and also discourage excess fund switching. Target date funds allow for
improved investment returns by ensuring participants are more often in the investment option most
appropriate to their career stage. Introducing Target Date funds as defaults should have the
additional benefit of discouraging switching as these funds have proved to be more “sticky” than
other instruments, as their intuitive appeal to a simple guidepost like retirement year or birth year
promotes higher inertia than other approaches.57 If successful in reducing switching, the funds
should also have a beneficial impact on the current tendencies of the funds to hold too many liquid
assets and to be procyclical in certain circumstances. Finally, the investment regime change required
to implement these funds would also represent an opportunity to encourage more innovation
54
Universal owners are asset owners who recognize that through their portfolios they own a slice of the whole
economy and the market. They adapt their actions to enhance the return prospects of their portfolios, and hence the
prospects for the whole economy and the market as well. See Urwin, R., (2011), ‘Pension Funds as Universal Owners:
Opportunity Beckons and Leadership Calls’, Rotman International Journal of Pension Management, Vol. 4, No. 1, pp.
26-33
55
The current investment regime has strict limits that must be complied with, leaving little room for supervisory
latitude and/or investment manager innovation. By contrast, we are proposing a Target Date regime that would
allow differentiation, more similar to the prevailing approach to designing Target Date funds found elsewhere in the
world, where glidepaths from different providers use disparate combinations of asset classes over time.
56
Mitchell, Utkus, 2012 “Target Date Funds in 401(K) Retirement Plans, NBER Working Paper Series
57
For example, Vanguard saw just 1.7percent of their target-date investors make a change during the first four months
of 2020 despite the dramatic market changes caused by the pandemic; vs. 5.3percent for other plan participants, an
incidence over three times higher for the non-target date investors. Vanguard “Automatic Enrollment: The Power of
the Default” February 2021, Barron’s 2 July 2020 “Target Date Funds Are Performing Well. But Choosing One Can Be
Harder Than You Think.”
CHILE
through relaxation of overly strict limits, thus allowing the supervisor (SP) to adopt more of a truly
risk-based orientation as part of their approach.
B. Green Finance
107. Chile has adopted an ambitious package of measures to improve the flow of finance
towards greener activities in support of Chile’s NDC and SDG commitments. Chile’s investment
needs to meet their NDC and SDG commitments are greater than what can be financed through
public resources alone and the mobilization of private finance is necessary to fill this gap. Chile’s
financial sector authorities are working to strengthen the enabling environment to ensure all
financial sector entities can adequately assess climate related risks and opportunities, and channel
financial flows in ways that can contribute to Chile’s low carbon future. These efforts can be
deepened by: (1) Channeling public sector resources strategically to boost investments in climate
and environmental related priorities; (2) Creating an enabling framework for investors and financial
sector participants to inform greener investment decisions; (3) Improving the availability of climate-
relevant data in the marketplace to ensure comparable sustainability information can inform greener
investment decisions.
108. Chile already hosts the region’s second largest green bond market and has introduced
the world’s first sovereign sustainability-linked bond. Chile’s green bond market (US$ 9.5 billion)
is second only to Brazil (US$10.3 bn), more than doubling Mexico’s (US$4bn) (see Figure). The
strength of Chile’s green bond market is driven by the sovereign issuer’s sizeable green bond
program. Chile has issued nearly 1/6 of the global supply of sovereign labelled debt outstanding,
providing a domestic benchmark for priority climate sectors.58 In March 2022, Chile also issued the
world’s first sovereign-level sustainability-linked bond, a 20-year $US 2billion debt sale with targets
focused on the country’s greenhouse gas emissions and share of energy driven by non-renewable
sources. Externally, these innovative steps have drawn attention to the seriousness of the
government’s efforts to attract private capital towards green mitigation and adaptation activities.
109. Going forward, a sufficient pipeline of future green projects to seed future green
labeled bonds will need to be developed; the sovereign sustainability-linked bond issuance
58
Staff analysis of publicly offered sovereign labelled securities listed on Bloomberg as of September 15, 2021.
38
CHILE
also offers debt managers more flexibility.59 Seventy-percent of the green labelled debt issued by
the sovereign to date has been allocated towards one large capital project (the construction of the
Greater Santiago metro). An integrated system of green budget tagging, coupled with enhanced
linkages with the Ministry of Public Works’ PPP program, could aid in identifying more projects that
can contribute to Chile’s NDC and SDG implementation, amplifying the sovereign’s ability to issue
green-labelled debt in the future. Chile’s successful issuance of the world’s first sovereign
sustainability-linked bond also expands the sovereign debt manager’s ability to pursue different
sustainability-oriented issuance strategies to meet both the sovereign’s financing needs and to take
advantage of market opportunities.
110. Tax credits and other incentives for issuers and investors may spur further demand for
green finance instruments, though more analysis is needed on the type and level of incentives
that would work best in the Chilean context. Despite significant issuance by the sovereign, there
have been less than a dozen non-government green and social bond issuances in the Chilean
domestic market. Tax credit bonds, whereby investors receive tax credits from the government in
lieu of interest payments, could help offset costs borne by issuers of green securities. Tax-exempt
bonds, whereby investors are not obligated to pay income taxes on interest from green bonds they
hold, have also been introduced in such contexts as Brazil.60 In Morocco and Egypt, the capital
market authority has introduced reduced listing fees for corporates who issue green bonds or loans.
In other jurisdictions, grant funds are provided by domestic development banks to offset fees
associated with preparing a green or thematic bond, including defraying the cost of receiving a
second party opinion on the framework or issuance. Enhancing the eligibility of climate-focused
funds for favorable tax treatment as part of savings products could also help attract more interest in
this space.
111. Financial institutions have begun to offer green products to the market, though work
is needed to promote product innovations among more financial institutions. Banco Estado’s
green product portfolio includes preferential rate loans for electric vehicles, mortgages for eco-
friendly homes, and a new green mutual fund offered to retail clients. Banco Santander also offers a
similar portfolio of green products. In general, financial institutions with parent companies in Europe
or North America, have reported a greater familiarity with assessing the climate risk landscape and
offering products to address that demand in the local market. As more prominent investors,
including domestic pension funds integrate climate risks in their risk matrix, market demand towards
green products may emerge in turn. Further subsidy to on-lend preferential rates to consumers will
support this process.
112. MoF’s ‘green tax’ could be made more dynamic with the introduction of an emissions
trading scheme (ETS) and further evaluation of the role of carbon credits in the Chilean
59
See recent analysis by World Bank and CLAPES-UC:
https://openknowledge.worldbank.org/bitstream/handle/10986/35683/Paving-the-Path-Lessons-from-Chile-s-
Experiences-as-a-Sovereign-Issuer-for-Sustainable-Finance-Action.pdf?sequence=1&isAllowed=y
60
Evidence from experiences reducing the tax rate on other financial assets (e.g., withholding taxes on government
securities) has induced demand for these securities, all else being equal. However, more research would need to be
undertaken to determine the optimal use of these fiscal tools to induce demand in the Chilean context.
CHILE
marketplace. Since 2014, Chile’s green tax has levied taxes on imported vehicles and on corporate
carbon emissions. In some jurisdictions, carbon revenues are used to enhance public support for
climate mitigation by supporting investment in low carbon technologies.61 In addition, the 2020 Tax
reform introduced the possibility of offsetting part or all of its emissions subject to the tax by
investing in mitigation projects. Its implementation will begin in 2023 . The recently approved
Framework Law on Climate Change also contemplates such a system, with regulated entities in turn
being able to sell any surplus through an ETS or tradable performance standard. The CMF could
consider assessing the impact of this market-based system on regulated entities, including by
providing guidance on derivative products that could arise after the introduction of such a system.
In other jurisdictions, including Mexico and Singapore, a system for exchanging verified, science-
based carbon credits is under development62 to support the capacity of corporates to reduce their
carbon footprint and support price discovery in the carbon market.
113. Chile’s financial sector authorities could accelerate efforts to implement the Taxonomy
Roadmap and deploy a green taxonomy to guide investors and product development. The EU
adopted a taxonomy in June 2020, with further detail on the classification of adaptation and
mitigation activities offered in 2021. The taxonomy and related Delegated Acts provide a common
classification of economic activities that contribute to environmental objectives, using science-based
criteria. Colombia’s taxonomy is still in draft form and is largely based on the EU model. As an
export-oriented country with an open financial sector, the impacts of EU’s sustainable finance
legislation are already being felt in the Chilean financial sector, particularly among banks, funds, and
insurers that are subsidiaries of European institutions. A taxonomy based on the EU approach,
particularly for priority sectors including mining and agriculture, would be useful to support
implementation of the Framework Law on Climate Change among financial sector participants. A
Taxonomy Roadmap document, developed by the Ministry of Finance in partnership with the Public-
Private Roundtable on Green Finance and the Climate Bonds Initiative, should be implemented.63
The recent announcement on the creation of a preparatory committee for the development of a
green taxonomy is a positive development in this regard.64
114. CMF could take additional steps to improve the credibility of ESG data to bolster the
assessment of the carbon footprint of investor portfolios, among other goals. The Public-
Private Roundtable on Green Finance in 2019 has served as a useful platform through which the
61
See World Bank analysis on use of carbon revenues:
https://openknowledge.worldbank.org/bitstream/handle/10986/32247/UsingCarbonRevenues.pdf?sequence=7&isAll
owed=y
62
DBS, the Singapore exchange, and other partners are developing a carbon credit exchange to provide a credible
way for corporates to reduce their carbon footprint: https://www.sgx.com/media-centre/20210520-dbs-sgx-
standard-chartered-and-temasek-take-climate-action-through-
global?utm_medium=social&utm_source=twitter&utm_campaign=alwayson&utm_term=20052021&utm_content=N
R
63
See the draft Taxonomy Roadmap for Chile: https://www.climatebonds.net/2021/05/taxonomy-roadmap-chile
64
See announcement: https://greenfinancelac.org/resources/news/chile-announces-the-development-of-a-green-
taxonomy/
40
CHILE
broad concept of the importance of green finance could be debated and socialized. The CMF’s
recently issued NCG 461 updates the environmental, social and governance (ESG) standards for
banks, insurance companies, issuers of public offering securities, general fund managers, and stock
exchanges, which is also a critical step to improve understanding by investors of the climate related
risks across their portfolios.65 66 However, gaps remain to continue to improve ESG data
transparency, standardization, availability, and use. Part of this work includes the need to take stock
of the ESG data product universe, their usage in Chile, the methodologies used to assess
environmental, social and corporate governance performance, and any conflicts of interest that may
bias the way in which corporates are assessed. 67 In addition, securities regulators such as the CMF
should bolster capacity to understand and interpret non-financial climate and environmental related
data, by building staff capacity and establishing closer links with the Ministry of Environment and
the scientific community. Enhanced availability of credible climate-related data will also support the
creation of low-carbon benchmarks for public markets, which will provide investors with better
information on the carbon footprint of their investments and portfolios.
65
The regulation is based on the Sustainability Accounting Standards Board indicators, which should allow for
seamless updates in line with IFRS Foundation and other international guidance. The updated regulation can be
found: https://www.cmfchile.cl/portal/prensa/615/w3-article-49804.html
66
See IOSCO Consultation Report for ESG Ratings and Data Products Providers:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD681.pdf and ESMA guidelines on disclosure requirements for
credit rating agencies: https://www.esma.europa.eu/sites/default/files/library/esma33-9-
320_final_report_guidelines_on_disclosure_requirements_applicable_to_credit_rating_agencies.pdf
67
This recommendation is indeed aligned with IOSCO guidance in this regard:
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD690.pdf India’s SEC has been the first securities regulator
globally to announce their intention to provide oversight over ESG ratings providers:
https://www.esginvestor.net/india-to-impose-standards-transparency-on-esg-ratings-providers/
CHILE
Figure 1. Chile: Financial Sector

The financial system has grown steadily… …and before the 2019 and 2020 shocks banks relied
increasingly on market funding
As credit collapsed during the pandemic… …government guaranteed loans took up the slack
With interest rates dropping across the economy… …investment in mutual funds has grown steadily
Interest Rates by Economic Sector

(Index, 2010-2019 Average=100, bank lending, new loans)
140
130
120
110
100
90
80
70 Housing
60 Consumer
50 Commercial
40
2011M1
2012M1
2013M1
2014M1
2015M1
2016M1
2017M1
2018M1
2019M1
2020M1
2021M3
Sources: BCCh, and IMF staff calculations.
42
CHILE
Figure 2. Chile: Selected Banking Indicators
Capital adequacy increased recently as risk-weighted assets

declined due to state guarantees, capital increased, and loans … while bank profitability declined with higher provisions.
contracted…
Non-performing loans have remained low… … but provisions have not kept pace with all past due loans.
Provisioning Ratios
(In percent; specific provisions to all past due loans)
Total Loans
Mortgage Loans
Consumer Loans
Commercial Loans (retail)
Commercial Loans (wholesale)
0 10 20 30 40 50 60
Feb-21 Dec-20 Dec-19 Dec-18
Source: CEIC

CHILE
Figure 3. Chile: Nonbank Financial Institutions and Shadow Banking

… but true shadow
 banking is not large, and is dominated by
Chile NBFIs are large, driven by Pension/Mutual Funds…
fixed income mutual funds (EF1).

Fixed income funds have grown steadily as other shadow Lending dependent on short-term funding (EF2) remains large

banking activities have stayed constant or declined. in Chile, particularly in non-bank consumer lending.

Source: FSB.
Notes:
“Shadow Banking” = FSB’s “Narrow Measures of NBFIs” which comprises:
EF1: Collective investment vehicles with features that make them susceptible to runs
EF2: Lending dependent on short-term funding
EF3: Market intermediation dependent on short-term funding
EF4: Facilitation of credit intermediation
EF5: Securitization-based credit intermediation
44
CHILE
Figure 4: The state of financial inclusion in Chile
Chile has achieved a high level of account ownership relative to Gaps in financial inclusion remain for underserved segments such
its level of economic development, though below OECD levels. as those outside the labor force…
% age 15+ who report having an account at a bank or In labor force Out of labor force
other type of financial institution
100
100
80
80 94.7 83.9
60 76.6
70.8
60 74.3 73.1 58.5
70.0 40
46.7 26.5
55.1 18.6 41.5
40 48.7 20 12.3
4.7
20 0
Account Borrowed Debit card Made or Saved at a
0 from a ownership received financial
Chile Argentina Brazil LAC Upper OECD financial digital institution
Middle institution payments in
Income the past year
Use of digital payment instruments is slightly above UMI levels,

… as well as for less educated consumers. though below OECD levels.
Secondary education or more Primary education or less Chile Argentina Brazil LAC Upper Middle Income OECD
100 100
80 80 65.4
80.9 59.8
60 73.6 60 53.4
68.2 46.5
40 54.2
40 29.8
14.6 9.8 40.2
20 33.9 7.1
25.7 20
0
Account Borrowed Debit card Made or Saved at a 0
Debit card Credit card Debit card Used a debit Made or
from a ownership received financial ownership ownership used to make or credit card received
financial digital institution a purchase in to make a digital
institution payments in the past year purchase in payments in
the past year the past year the past year
… but scores slightly lower than UMIs in percentage of adults with

Chile scores higher than UMI in percentage of adults that borrowed
productive finance (i.e. borrowed to start, operate, or expand a farm
from a financial institution or used a credit card…
or business).
% age 15+ % age 15+
60 30
50 56.8 25 27.6
40 20
30 15
30.9 10.4 11.1
20 24.4 26.3 10
21.3 22.4 4.6 5.4
10 5 3.2
0 0
Chile Argentina Brazil LAC Upper OECD Chile Argentina Brazil LAC Upper OECD
Middle Middle
Income Income
Source: Global Findex 2017

CHILE
Figure 5. Mutual Funds, Social Unrest, and COVID-19

Social unrest and COVID-19 generated a flight-to- …with type 3 MFs suffering redemptions while MMFs saw
quality… inflows.
Corporate bonds gained share from Treasuries and bank …since corporate bonds were not eligible for collateral for
bonds… BCCh.
COVID-19 had a more muted impact on composition… …though there was significant heterogeneity in both
episodes.
Sources: CMF, and IMF staff calculations.
46
CHILE
Figure 6. Pension Funds, Social Unrest, and COVID-19

Type E PFs saw significant pressures during social unrest… …and resorted to using Treasuries while increasing Bank
CDs.
Such pressures were more contained on the onset of …though the same can be observed in terms of
COVID-19… composition.
Sources: SP, and IMF staff calculations.

CHILE
Figure 7. Chile: Bank Stress Test Scenarios



Exchange Rate
(Peso per Dollar)
850.0
800.0
750.0
700.0
650.0
2019 2020 2021 2022 2023
Baseline Adverse
Sources: BCCh, and IMF staff projections.
48
CHILE
Figure 8. Chile: Bank Solvency Stress Test Results

Large dispersion among bank results with two falling Solid internal capital generation capacity in the baseline,
below regulatory minimum, mainly due to low starting mainly due to elevated net interest income, overcoming
points and Basel III phase-in impact. transitory capital reductions attributed to Basel III
In the adverse, losses eat into banks’ capital buffers, and in Credit losses and lower net interest income risk losses
some cases landing ratios are below the regulatory drives the negative result in Year 3 of the adverse scenario.
minimum…
The effects of stressed interest and non-interest income Net income after taxes would only start recovering under
and significant credit impairments in the adverse scenario Year 3 of the adverse scenario on the back of a favorable
are only partially offset by lower effective taxes and interest rate environment and contained credit
restrictions on dividend payouts. impairments.
Source: IMF staff calculations.

CHILE
Figure 9. Chile: Stress Test Results — Sensitivity Analysis

The 3-year cumulative impact of unwinding FCIC and LCL In the adverse scenario, the impact of partially
measures might reach 150 bps, banks should anchor their unwinding the effect of 2020 policy support measures
capital planning on the unwinding timeline… could exceed 60 bps in terms of capital ratios...
50
CHILE
Figure 10. Chile: Liquidity Stress Test Results

The impact of extraordinary liquidity support measures
and pension fund withdrawals on LCRs has been Weak U.S dollar LCR outlook warrants some attention in
spectacular; the transitory effect of measures should not be order not to amplify systemic liquidity stress…
ignored…
The ASF component of NSFR also affected by stable Some small liquidity shortfalls under the 3-month cash-
funding injections; potential cliff-effects as policies phase flow analysis stress; large funding profile dispersion
out and the requirement becomes binding… requires regular monitoring via liquidity stress testing...

CHILE
Figure 11. Chile: Climate Change – Physical Risks

Historical data on physical risk event losses were used to In the GFM macroeconomic model framework shock in
estimate an adverse physical risk shock; capital destruction investment in Year 2 was used to proxy the capital stock
shock was anchored at 2 percent of GDP. shock…
A 2 percent shock (in GDP terms) corresponds to a 0.5 … which translates into a very benign shock in output
percent shock in capital stock terms… level of approximately -0.6 percent…
Given the low magnitude of the physical risk loss, the

decline in the CAR horizon path is approximately 7 bps.
Source: IMF and WB staff calculations.
52
CHILE
Figure 12. Chile: Climate Change – Transition Risks

The approach captures sectoral differentiation of carbon price For industries with smaller emission footprint, differences in
impact, supported by heterogeneous carbon intensity by pre- and post-stress PDs might be marginal…
industry.
Proof-of -concept validated, PD translation captures portfolio Delta PDs can be easily translated to PD path projection using
heterogeneity among banks… the bank specific starting points…
1/ Bank ordering and ranking is random, 2/ Random starting points were used for illustration purposes
CHILE
Figure 13. Liquidity Stress Testing of Type 3 Mutual Funds

Type 3 MF saw unprecedented redemptions during social …and to a lesser extent on the onset of the COVID-19
unrest… crisis.
Stress-testing of type 3 MF was undertaken… …showing that liquidity buffers may be less than desirable.
54
CHILE
Figure 14. Pension Fund Switching and Stress Testing of Type E Pension Funds
Pension Fund switching has seen an increasing trend. Default funds B, C and D are not heavily affected…
But funds A and E have been severely affected…. …with switching negatively correlated between the
extreme portfolios.
Stress-testing of type E pension funds was undertaken… …confirming that AFPs have ample liquidity buffers.

CHILE
Figure 15. Switching in Pension Funds Type A and E

Type A PFs saw large inflows during social unrest… …while type E funds say large swings, though tilted to
outflows.
At the onset of COVID-19, type A funds saw large inflows… …while type E funds were even more strained than in 2019.
56
CHILE
Table 3. Chile: Selected Economic Indicators
Est. Proj.
2019 2020 2021 2022
(Annual percentage change, unless otherwise specified)

Output
Real GDP 1.0 -5.8 12.5 1.5
Total domestic demand 0.9 -9.3 22.0 -0.3
Consumption 0.9 -6.9 17.4 1.7
Investment 2/ 1.0 -17.8 40.5 -6.9
Net exports 3/ 0.0 3.6 -8.9 1.8
Employment
Unemployment rate (annual average) 7.2 10.8 8.9 7.1
Consumer prices
Inflation (End of period, %) 3.0 2.9 5.8 3.9
Inflation (average, %) 2.3 3.0 4.3 5.0
(In percent of GDP, unless otherwise specified)

Public sector finances
Central government revenue 21.6 20.0 23.8 23.1
Central government expenditure 24.5 27.4 31.6 24.7
Central government fiscal balance -2.9 -7.3 -7.8 -1.6
Structural Fiscal Balance -1.6 -1.4 -1.2 -1.0
Structural Non-Mining Primary Balance (% of NGDP) -3.0 -3.4 -11.7 -5.2
Central Government gross debt 28.2 32.5 34.3 35.6
of which, FX-denominated Debt 5.8 7.5 12.8 12.3
Central Government Net Debt 8.0 13.4 19.6 20.3
Public sector gross debt 4/ 49.0 59.4 61.2 62.5
Public sector net debt 4/ 11.6 20.8 27.0 27.7
Of which, share of FX-denominated Debt (in %) 20.6 23.1 37.4 34.6
(Annual percentage change, unless otherwise specified)

Money and credit
Broad money 9.4 6.1 21.8 6.8
Credit to the private sector 9.7 3.2
Balance of payments
Current account (% of GDP) -3.7 1.4 -2.8 -2.3
Current account (in billions of U.S. dollars) -10.4 3.5 -9.0 -7.5
Foreign direct investment net flows (% of GDP) -1.2 1.3 -1.6 -0.9
Gross international reserves (in billions of U.S. dollars) 40.7 39.2 54.0 54.0
Gross Reserves (Months of next year import) 5.7 5.9 9.8 6.8
Gross external debt (% of GDP) 66.1 77.7 73.5 73.5
Public 6.2 8.9 13.2 13.7
Private 59.9 68.8 60.3 59.8
(Annual percentage change)

Relative prices
Real effective exchange rate (real appreciation +) -4.8 -8.2
Terms of trade -1.7 10.0 16.5 -0.5
Memorandum items
Nominal GDP (in billions of pesos) 196444.4 200276.4 243863.5 260516.2
(percentage change) 3.0 2.0 21.8 6.8
Nominal GDP (in billions of USD) 279.3 252.8 323.8 332.5
(percentage change) -6.1 -9.5 28.1 2.7
Sources: Central Bank of Chile, Ministry of Finance, Haver Analytics, and IMF staff calculations and projections.
Notes: 1/ The annual numbers occasionally show a small discrepancy with the authorities' published figures, as they are
calculated as the sum of the quarterly series. Seasonally-adjusted by staff. 2/ Investment is defined as: gross fixed capital
formation + changes in inventories. 3/ Contribution to growth. 4/ Include liabilities of the central government, the Central Bank
of Chile and public enterprises. Excludes recognition bonds.
CHILE
Error! Bookmark not defined.Table 4. Chile: Structure of the Financial System
58
CHILE
Table 5. Chile: Financial Soundness Indicators
(In percent, unless otherwise specified)

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Public Disclosure Authorized

FOR OFFICIAL USE ONLY

Prepared By A joint IMF-World Bank led remote visits to Chile

GLOSSARY ____________________________________________________________________________________________ iii

EXECUTIVE SUMMARY ____________________________________________________________________________ 1

MACROFINANCIAL BACKGROUND ______________________________________________________________ 6

FINANCIAL STABILITY ANALYSIS _______________________________________________________________ 11

FINANCIAL SYSTEM OVERSIGHT ________________________________________________________________ 16

CRISIS PREPAREDNESS AND FINANCIAL SAFETY NETS _______________________________________ 20

COMPETITION, FINANCIAL INCLUSION AND FINANCIAL CONSUMER PROTECTION ______ 22

PENSIONS AND GREEN FINANCE _______________________________________________________________ 33

AML/CFT Anti-Money Laundering and Combatting the Financing of Terrorism

In the context of a challenging political economy, the need to address long-standing

Competition, financial inclusion, and financial consumer protection

Comparatively high levels of lower-income consumer indebtedness give a special urgency to

Lastly, Chile’s credit information system should be strengthened to increase provider

Pensions and green finance

Table 1. Chile: FSAP Key Recommendations

GDP Growth and Government Deficit, 1960-2021

Real GDP growth, annual %

Source: WDI and IMF.

3. The authorities engaged in a massive, well-coordinated response to these shocks.

4. Congress approved three extraordinary pension fund withdrawals. Access to the

Household and Commercial Loan Delinquency Rate, 2014-21

Commercial loans Consumer loans Mortgage loans Total

Mortgage Total SMEs Non-SME firms

Source: BCCh. Sources: BCCh, CMF, and SII.

8. Chile’s financial sector is large,

Bank Funding and Exposures to NBFIs

Use of funding from NBFIs Exposures to NBFIs

Other OFIs SFVs Other OFIs SFVs

Finance companies Broker-dealers Finance companies Broker-dealers

MMFs Other investment funds MMFs Other investment funds

FINANCIAL STABILITY ANALYSIS

Table 2: International Debt Indicators

B. Stress Testing and Interconnectedness

Bank Solvency and Liquidity Stress Tests

Mutual and Pension Funds Liquidity Stress Tests

FINANCIAL SYSTEM OVERSIGHT

40. Key reform areas include:

 Establishing an integrated risk management framework. There is no regulatory requirement

Mutual Fund Supervision

Pension Fund Regulation and Supervision

Insurance Sector Supervision

Cross-cutting Themes - Climate Risk Regulation and Supervision

CRISIS PREPAREDNESS AND FINANCIAL SAFETY NETS

intervention framework, including by enabling the authorities to require firms to submit

COMPETITION, FINANCIAL INCLUSION AND

Concentration in the banking sector

Asset concentration Asset HHI (international comparison)

Top-3 market share Top-6 market share

Lending rates (%)

B. Digital Financial Inclusion

73. Legal changes could be considered to encourage microsavings, beyond contractual

C. Financial Consumer Protection and Household Indebtedness

Loan affordability and suitability

Problematic lending practices

Credit provider licensing gaps

85. It is recommended that a licensing framework, or at least lighter touch registration,