Earlier this month, the Congressional Research Service released a report entitled “Financial Regulation and Oversight: Latin American Financial Crises and Reform Lessons from Chile." The report states that the current Congress “has taken a broad approach to capturing the lessons on financial crises as part of the effort to evaluate possibilities for revamping the U.S. financial regulatory system. Noting that “Latin America stands out as one region that has survived multiple financial crises” and that many Latin American countries have undertaken comprehensive financial reforms that can serve as helpful examples as Congress evaluates a potential overhaul of U.S. financial institution regulation. This report focuses on the Chilean experience during the past two decades.
Chile redesigned its financial regulatory system in 1986 as a result of two national financial crises: one resulting from over regulation and one resulting from under regulation. Chile’s current regulatory scheme involves one primary regulatory agency with broad and definitive powers and three other specialized agencies that provide “supportive oversight.” The report notes that this “simplified and streamlined system of regulation and supervision” has yielded 25 years of stability and soundness in Chile’s banking industry and allowed Chile to overcome regional and worldwide crises when other countries have not. Chile has focused on long-term efficiency and growth with more comprehensive regulatory system that improves accountability by restricting risky behavior, enhancing transparency of financial institutions and encouraging a more conservative commercial banking model. The report asserts that the Chilean experience “points to the value of establishing:
- a strong, independent, and consolidated regulatory and oversight agency, with broad and definitive powers;
- enhanced transparency through a number of specific reporting measures;
- clear capital standards that include the 8% minimum Basel risk-weighted capital-asset ratio, capital requirements relative to reserves, deposits, and other liabilities, and total capital equal to at least 3% of total assets;
- deposit insurance to cover up to 90% of an individual’s total deposits capped at a specified limit; and
- oversight based on a formal bank rating system following the CAMEL standards (capital, asset quality, management, earnings, liquidity, and later bank management), Basel II guidelines, and additional limitations on bank investment activities.
The financial sector of the United States is far more complex that than that of the emerging market of Chile, but insights gained from a regulatory system that has remained stable throughout the world financial crises can be useful in Congress’ search for a regulatory balance between supporting an efficient financial market and ensuring the safety and soundness of the market.