The purpose of the Financial Stability Report is to provide information on a semiannual basis concerning recent macroeconomic and financial events that may affect the financial stability of the Chilean economy, such as the evolution of indebtedness of the main credit users, the performance of the capital market, and the capacity of the financial system and of the international financial position to adapt adequately to adverse economic situations. In addition, the Financial Stability Report presents the policies and measures that contribute to the normal functioning of the financial system, in order to promote public knowledge and debate concerning these issues.

The release of the 2021 Financial Stability Reports will be on May 5 th and November 3 th.

 

Description of the Financial Stability Report

Objective

The financial system contributes to efficient resource allocation, by channeling funds from savers to those with financing needs, a cornerstone of economic growth. However, it is subject to inherent risks, such as liquidity, credit, contagion, and operational risks. Thus, a particular adverse event could become systemic in the face of vulnerabilities that amplify its impact.

The conceptual framework employed by the Bank considers the financial system to be stable when it performs its functions normally or without relevant disruptions, even in the face of temporary adverse situations. In this way, the appropriate identification of potential risk events, vulnerabilities and mitigating factors, along with impact assessments, contribute to the understanding of the stability of the financial system and make it possible to outline policy measures within the Bank’s scope of action, as well as to recommend others that are a springboard for other financial regulators.

In this context, the Financial Stability Report is the main instrument for communicating various diagnoses concerning the state of the financial system. In particular, the Financial Stability Report presents the Board’s view on the main external and local risks to financial stability. It also reviews the most relevant issues in financial regulation at domestic and international level. Thus, the Bank seeks to actively contribute to the stability of the financial system by providing information, risk analysis and warnings concerning trends that deserve greater attention.

Analysis Framework for Financial Policy

Ensuring financial stability requires a prospective and continuous framework of analysis, the final result of which enables the elaboration of a comprehensive diagnosis of potential risks, vulnerabilities and mitigating factors. The objective of this diagnosis is to contribute to the decision-making processes of the financial system’s participants, as well as of regulatory and supervisory institutions.

In general terms, the Bank’s analysis framework consists in monitoring and studying the financial system’s players (households, companies, credit providers), its components (intermediaries, markets and infrastructures), and the interconnections between them. This analysis is highly demanding in terms of data, research, constant monitoring of best practices and international experience, development of analytical tools and interaction with different regulators and players of the financial sector.

The analysis framework considers a continuous process that enables the identification of potential shocks, vulnerabilities that could amplify them and mitigating factors that could limit their scope, thus assessing their potential impact (Figure 1). This process enables the elaboration of diagnoses regarding the state of the Financial System.

Figure 1

 

Shocks
Vulnerabilities
Mitigators
Impacts

 

Dissemination

The Financial Stability Report has been published semiannually since 2004. Its contents are disseminated through various channels, including presentations to the Senate’s Finance Committee, authorities and other specialized audiences composed by various financial market participants, and to the general public. Likewise, all statistical information contained in the Financial Stability Report is available on the Bank’s website.

Evaluation

The Financial Stability Report is evaluated through surveys carried out on those attending the different presentations. Respondents rated various aspects of the report using a grade scale of 1 to 7.

FSR general appreciation according to surveys (*)
(average, grade in a scale from 1 to 7)

 




Financial Stability Report Second Half 2021 - Summary

Financial Stability Report Second Half 2021 - Summary

Since our last Report, the global economy has continued to recover from the shock caused by the Covid-19 pandemic, thanks to two factors: progress in the management of the sanitary situation and effective economic containment policies. These policies were key to preventing the crisis from spreading to the financial markets. However, the increase in the sovereign debt and the greater exposure of the monetary authorities to the financial sector have reduced their capacity to cushion shocks in the future. In the main economies of the world, and also in Chile, the magnitude of the impulses has contributed to the economic recovery in the short term, and both users and suppliers of credit have remained resilient, with abundant liquidity availability, in a particularly challenging context. However, the persistent boost to local demand and structural changes in the capital market resulting from forced liquidations of institutional investors’ assets, have had a significant impact on asset prices. This has been compounded by the deterioration of public finances and increased uncertainty. Thus, the rise in long-term interest rates, the depreciation of the peso and the fall in stock prices have been at the extremes of international movements. This has begun to be reflected in a deterioration of the financial conditions affecting domestic agents, such as the Treasury’s financing cost, mortgage rates and terms, and the valuation of pension funds. The non-financial corporate and household sectors have seen significant cumulative amounts of capital outflows and an increased preference for dollar denominated assets. The main risk to local financial stability comes from new forced asset liquidations that continue to erode the intermediation of resources and the greater uncertainty that this implies. These developments restrict the capacity of the financial system, firms, and households to withstand corrections and/or disruptive events, which have become more likely to occur, both in the country and abroad. In the latter case, of particular note are the risks of reversal in risk perceptions, difficulties in supply chains and concerns about the Chinese real estate sector. At home, there are concerns about the possibility of a credit contraction in the face of greater risk perceptions, as well as the vulnerability of more leveraged sectors that may be affected by a deterioration of their markets.

What does this IEF tell us?

The economy has managed to recover from the recession caused by the Covid-19. The policies implemented prevented the bankruptcy of firms, and the contagion of the crisis towards the banking sector, which remains resilient.

The economy has managed to recover from the recession caused by the Covid-19. The policies implemented prevented the bankruptcy of firms, and the contagion of the crisis towards the banking sector, which remains resilient.

However, the strong increase in private consumption has pushed the economy beyond its potential, fiscal accounts have deteriorated, and forced financial assets liquidations by pension funds have created a complex scenario.

However, the strong increase in private consumption has pushed the economy beyond its potential, fiscal accounts have deteriorated, and forced financial assets liquidations by pension funds have created a complex scenario.

These factors, together with high uncertainty, have raised the exchange rate, and long-term interest rates beyond those observed in other countries, which has affected the mortgage market, and the valuation of pension funds.

These factors, together with high uncertainty, have raised the exchange rate, and long-term interest rates beyond those observed in other countries, which has affected the mortgage market, and the valuation of pension funds.

New forced liquidations of financial assets represent a significant risk to financial stability. The Central Bank of Chile will continue to act to contain short-term volatility but cannot reverse structural changes.

New forced liquidations of financial assets represent a significant risk to financial stability. The Central Bank of Chile will continue to act to contain short-term volatility but cannot reverse structural changes.

The economy has managed to recover from the recession caused by the Covid-19. The policies implemented prevented the bankruptcy of firms, and the contagion of the crisis towards the banking sector, which remains resilient.

  • The substantial stimulus measures, while allowing many companies to stay in business, has helped the economy to recover faster, based on a buoyant private consumption.
  • Fiscal support for households increased their liquidity and made it possible to compensate for income drops, helping to keep delinquency rates in check.

However, the strong increase in private consumption has pushed the economy beyond its potential, fiscal accounts have deteriorated, and forced financial assets liquidations by pension funds have created a complex scenario.

  • The reduction in the size of the intermediated funds directly affects the provision of long-term financing, which combines with other factors that have caused a deterioration in financial conditions.
  • Moreover, because of high uncertainty, the demand for dollar assets has soared and capital outflows have intensified after rising since the social outbreak. These elements have eroded national savings, thus increasing the country’s dependence on external financial markets.

These factors, together with high uncertainty, have raised the exchange rate, and long-term interest rates beyond those observed in other countries, which has affected the mortgage market, and the valuation of pension funds.

  • Financial conditions have worsened as a result of uncertainty and massive asset liquidations by institutional investors that are reducing the depth and adjustment capacity of the capital market.
  • Both the exchange rate and local interest rates have shown strong corrections compared to other economies, accompanied by increased volatility of various asset prices.

New forced liquidations of financial assets represent a significant risk to financial stability. The Central Bank of Chile will continue to act to contain short-term volatility but cannot reverse structural changes.

  • New forced liquidations of financial assets would increase uncertainty and further reduce the capacity of the fixed-income market to provide financing and cushion external shocks.
  • This would further increase the cost of financing and impose greater restrictions on access to mortgage credit for individuals, investment funds for companies and government funding.
  • These elements, in turn, would result in slower long-term growth. Furthermore, the derivatives market would become shallower, which would restrict foreign exchange risk management mechanisms for companies. All these elements would make the Chilean economy more vulnerable to external fluctuations and changes in global financing conditions.
Presentations