Javascript is disabled in your web browser.
Please, to view this site correctly,
enable javascript.
For instructions to enable javascript
In your browser, click here.
Although the Financial Stability Report (IEF) of the Central Bank for the first semester revealed, among other things, that the external scenario continues to be the main source of risks for local financial stability, it also analyzed the internal situation in the country.
The document – through which the Board of the Issuing Institute provides the vision regarding the main risks, vulnerabilities and mitigators of the financial system and its capacity to absorb severe shocks – determined that global financial conditions remain tight, that geopolitical risks are relevant and that uncertainty persists about the start and speed of the reduction of the monetary policy rate in the United States.
The above, explained the BC, has affected short-term market rates and warned that “it can generate abrupt corrections in the high valuations shown by some financial assets.”
The IEF detailed that “in the first quarter of 2024, the credit granting conditions would have become more restrictive for construction and real estate companies.”
The president of the Central Bank, Rosanna Costa, pointed out that “to the extent that the monetary policy rate decreases, the financing cost of these companies should begin to mitigate.”
Meanwhile, regarding long-term rates, he recalled that they remain high and the risks surrounding sovereign debt are relevant at a global level.
Lagging sectors
At the internal level, although he indicated that the “resolution of the macrofinancial imbalances accumulated in previous years has contributed to normalizing the aggregate financial situation of credit users, reducing their financial burden and indebtedness,” he warned that “certain groups are further behind in recovery.”
The above has translated into an increase in defaults, concentrated in smaller firms that obtained Fogape-Covid loans and in the commerce, construction and real estate sectors.
In this context, the IEF recalled that “the vulnerabilities identified in previous reports are still present in this (real estate) sector.” Thus, the available stock of finished homes for sale and the vacancy of rental units have continued to increase, while rental profitability has fallen.
“If the weakness in demand persists, real estate companies could need to make adjustments to their prices, reducing the profitability of the business and their payment capacity,” the issuing entity warned.
In turn, the document detailed that in the first quarter “credit granting conditions would have become more restrictive for construction and real estate companies.”
In this regard, during her presentation in the Senate Finance Committee – as is usual when the BC publishes the IEF -, the president of the governing body, Rosanna Costa, classified the situation in the real estate sector as a “point of attention”, explaining that the greatest lag is concentrated in the residential segment.
Photo: Julio Castro
The economist added that “as the monetary policy rate decreases, the financing cost of these companies should begin to mitigate.”
In addition, he recalled that “the higher long-term rates have also had an impact on the cost of mortgage loans, in a context where the low dynamism of the residential real estate sector has continued for several quarters.”
Specifically, he explained that in the sector the available stock of finished homes for sale has continued to increase, the profitability of rentals has fallen and greater vacancy has been observed. This is the environment in which the Central Bank warned that non-payment by companies in the sector has increased and their access to credit has been restricted.
The above, established the IEF, has been mitigated by a lower financial burden given the lower short-term interest rates.
“On the other hand, in the non-residential sector, the availability of warehouses is normalizing,” said Costa.
However, in his presentation before Congress, Costa added that the exercises carried out for the report show that the Chilean economy has the capacity to face scenarios of financial tension.
“On the one hand, progress in the inflationary convergence process has allowed monetary policy to reduce its level of restriction, a process that will continue. This will continue to favor better financing conditions, a reduction in the financial burden and an economy that will approach expansion rates consistent with its potential level,” said the president of the BC.
In this context, he estimated that “it is expected that the sectors that are currently furthest behind in the recovery will also improve their performance.”
A resilient bank
The publication of the report was preceded by the decision made this Monday by the Board of the Central Bank to maintain the Countercyclical Capital Requirement (CCR) for the banking system at a level of 0.5% of risk-weighted assets. This requirement was activated by the Central Bank a year ago at that level, as a macroprudential measure to strengthen resilience.
In the midst of this scenario, the document highlighted that the bank has managed the increase in credit risk and has accumulated provisions and guarantees. The stress tests of the banking system, which are presented in the IEF for the first semester, show that it has a sufficient level of provisions and capital to face a severe stress scenario.
“However, banks must continue to prepare for the next challenges they face, associated with the convergence towards Basel III,” the Central Bank said in a press release.
The helmsman of the issuing institute explained that “banking must continue to adapt to the full entry into force of Basel III, which will occur at the end of 2025.” Costa recalled that “this is a process that has been taking place progressively since the approval of a new General Banking Law in 2019. In fact, its adoption schedule had adjustments during the pandemic, precisely to allow banking to adapt as best as possible. possible way.
Regarding the Countercyclical Capital Requirement, the economist added that “as we announced in November of last year, during this year we have been delving into the application framework of the RCC, reviewing elements such as the definition of its neutral level” and announced that “ “Once we have a definition in this regard, it will be communicated in a timely manner.”
Capital market depth has not yet managed to recover its pre-pandemic level
One of the points that the Central Bank sees necessary to address is the depth of the capital market.
Thus, in her presentation before the Senate Finance Committee, the president of the Central Bank, Rosanna Costa, reflected: “It is important to note that the associated indicators have not recovered and remain below those observed prior to the pandemic. A smaller capital market affects medium- and long-term financing conditions and is less able to mitigate external shocks that the economy may face,” she commented.
The report also warned that “the high maturities of local public and private debt in the future may exert greater upward pressure on financing rates and spreads given the lower demand for local financial assets.”
