The President of the Central Bank of Chile (BCCh), Rosanna Costa, presented to the Senate Finance Committee the Financial Stability Report (IEF) for the second half of 2022. This document provides the vision of the board of the issuing entity regarding the main risks, vulnerabilities and mitigators for financial stability in the country.
“The assessment we have made of the financial situation of Chilean households and companies indicates that there are no sources of vulnerability with potential systemic risk. This does not preclude, of course, the fact that there are groups that are going through a complex situation,” Rosanna Costa told the Upper House.
The head of the Central Bank said that “without a doubt the challenges we face are significant.” Along with this, he declared that “the Chilean economy is going through a period of adjustment that will allow resolving the significant macroeconomic imbalances accumulated in 2021.”
“This has impacted the cost and availability of credit at a general level, also increasing the risk aversion of the different economic actors,” Costa said, regarding these “imbalances.” At this juncture, the economist said that the evolution of the international scenario has become very important for the purposes of measuring the risks facing our financial system. In fact, the Central Bank estimates that the main source of concern for global financial stability comes from how the external situation develops.
“I would like to pause for a moment to take a more perspective on the evolution of our financial system. In the first place, to highlight the relevance that the financial market has in the development of an economy, especially a small one like Chile, “said Rosanna Costa, adding that “a financial market that works properly plays a very significant role in the economy, since it allows to efficiently channel resources from savings to investment, in addition to satisfying the needs of risk coverage. ” Without this intermediation, he said, “it would not be possible for this to happen with favorable deadlines and costs for all parties.”
“A reduced capacity to intermediate resources deteriorates the country’s growth prospects and economic development, with the consequent loss of dynamism in employment,” he said.
Depth of the financial system
The head of the issuing entity stressed that the importance of a financial market does not end there. “Deep and robust markets are less volatile and help mitigate the impact of external shocks to a small and open economy like ours,” he said.
Costa explained that, in recent decades, one of the distinguishing characteristics of the national financial system was the depth it reached. He added: “This allowed the country to maintain low and stable long-term interest rates, ensuring a relevant source of financing for longer-term projects, including the availability of mortgage loans at lower costs and more years of financing.”
In this regard, he pointed to the impact of the interventions carried out on the AFPs in the context of the crisis generated by the Covid-19 pandemic. “As I explained during my presentation, one of the effects of pension savings withdrawals was to de-deepen the financial market. In fact, the volatility of the exchange rate and long-term interest rates has increased compared to previous periods even in comparative terms to other countries,” he added, specifying that “access to mortgage financing has also deteriorated.”
“A second point to highlight is that a robust financial system, which positively impacts the economy, requires an adequate regulatory framework. Legislation, both by those who issue it and by those who have the role of regulators, plays a fundamental role,” said Rosanna Costa. At this point, it is highlighted that the legislation has been modified, adapting to international standards and generating instances of modern regulation. In this way, mentioned the president of the BCCh, “the Chilean financial system has managed to go through periods of significant global and local stress, without its operations, nor any asset holder has been affected. That’s an important difference from what we saw in the early eighties. Appropriate legislationDa has been key in this result.”
On what is coming, Costa concluded that “it is very important that we continue on a path that aims to consolidate an increasingly healthy and sustainable financial system, due to the consequent positive impacts it has on the development and well-being of people.”
“At the Central Bank we are constantly evaluating the performance of the financial system, its risks and raising the alerts that we estimate are necessary to ensure its proper functioning. With this, we fulfill our mandate to ensure financial stability and contribute to the development of the country,” he concluded.
According to the Central Bank report, the assessment of the financial situation of households, companies and banks suggests that there are no sources of systemic vulnerability, although some sources of concern stand out in lower-income households and in companies in the real estate and construction sectors.
In addition, the IEF indicates that, externally, the main financial risk for emerging economies is that changes in the markets’ perception of Fed adjustments or new tensions trigger greater capital outflows or episodes of high volatility.
IEF 2022 Semester2 by El Mostrador on Scribd
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