13.1 Balance Sheet Levels and Structure¹

The behavior of the economy and the policies adopted by the Central Bank of Chile affect the size and composition of the Bank’s balance sheet, which in turn affects the trend in earnings and losses. Thus, the debt in the form of Central Bank promissory notes on the liability side is largely explained by the need to finance the rescue of the financial system following the crisis in the first half of the 1980s and by the need to sterilize the monetary effects of the accumulation of international reserves in the 1990s and, more recently, in 2008 and 2011.

¹/The balance sheet is prepared in accordance with International Financial Reporting Standards (IFRS). See the Financial Statements (note 2(a)).

Measured in pesos, the size of total assets increased by Ch$3.512 trillion in 2018 (table 13.1). Measured relative to GDP, total assets grew from 13.9 to 14.9% between 2017 and 2018. The largest increase, of Ch$3.748 trillion, was in the foreign reserves balance. This was due to the depreciation of the peso (Ch$2.263 trillion), interest earned ($384 billion), and net deposits by commercial banks and the General Treasury (Ch$1.101 trillion). Other significant changes on the asset side include decreases of Ch$142 billion in monetary policy assets and Ch$143 billion in subordinated debt due to the payment of the annual quota by the Banco de Chile.

Liabilities (excluding equity) increased Ch$1.489 trillion in 2018, although in relative terms they contracted from 17.1% of GDP in 2017 to 16.9% of GDP in 2018. The largest increase was recorded in other monetary policy liabilities (Ch$1.259 trillion) due to greater use of the standing deposit facility, followed by the increases in General Treasury and other public sector deposits (Ch$552 billion), current account balances and commercial banks’ foreign currency reserves (Ch$358 billion), and the monetary base (Ch$190 billion). This was partially offset by decreases in monetary policy securities (Ch$952 billion), due to maturing Central Bank bonds denominated in pesos (BCP) and UFs (BCU).

As a result, the Bank’s equity deficit decreased in 2018, with a larger increase in the nominal value of assets versus liabilities (figures 13.1 and 13.2). The balance sheet carried negative equity of Ch$3.760 trillion, reflecting initial capital of –$5.711 trillion, other reserves of Ch$64 billion, and a net gain in 2018 of Ch$1.886 trillion. The latter is explained by a gain of Ch$2.136 trillion from the monetary restatement of assets and liabilities, mainly due to the exchange rate; interest expense of Ch$164 billion; and nonfinancial costs of Ch$85 billion, mostly deriving from the production and distribution of currency and from personnel and administrative expenses.

13.2 Return on Assets and the Cost of Liabilities

The average return on assets, mainly reserves, is determined by the level of external interest rates on safe, highly liquid instruments. The cost of liabilities is associated with the MPR and its expected trend, which affects the placement rate for Central Bank securities. In 2018, the differential between the interest earned on assets (1.6%) and the cost of liabilities (1.9%) was negative, at 0.3%.

The average interest rate earned on international reserves rose from 1.3% in 2017 to 1.6% in 2018, due to the increase in the coupon rate on short-term instruments and a decrease in long-term rates. Locally, the interest rate on monetary policy securities decreased 10 basis points, primarily due to an increase in the share of short-term debt made up by Central Bank discount promissory notes (PDBC) and a corresponding decrease in BCU and BCP, despite the increase in the MPR.

With regard to adjustments, exchange rate fluctuations generated accounting gains in 2018, while variations in the UF (unidad de fomento, an inflation-indexed unit of account) triggered losses. As usual, the larger contributing factor was the exchange rate effect, given its impact on the value of the international reserves in pesos. Between year-end 2017 and year-end 2018, the peso depreciated against the currencies that make up the foreign exchange reserves, causing the value of the reserves to increase by 9.3% and total assets by 9.1%. At the same time, the effects of higher inflation on UF-denominated promissory notes and the lower cost of currency resulted in an adjustment of 0.7% in the value of total liabilities.

13.3 Balance Sheet Positions by Currency²

The reduction in the Bank’s position denominated and payable in domestic currency is largely explained by negative interest flows and changes in the valuation of the position in domestic currency (Ch$765 billion), primarily due to the costs of Central Bank promissory notes (Ch$612 billion).

²/The positions or balances of assets less liabilities by currency can be used to evaluate equity exposure to foreign exchange risk. By disaggregating the changes into flows from (a) exchanges between balances and (b) interest and valuation changes, it is possible to more closely monitor the policies adopted by the Bank.

The position denominated and payable in foreign currency decreased US$44 million, mainly due to interest, adjustments, and other flows associated with exchange rate losses (the depreciation of other currencies against the dollar) and lower interest earned on international reserves of US$442 million.

13.4 Personnel and Administrative Expenses

These management-related expenses include personnel compensation and benefits; the use and consumption of goods and services; and other expenses necessary for carrying out the Bank’s activities (table 13.2). On the comprehensive income statement, they are broken down as follows: (i) personnel and administrative expenses and (ii) other expenses and income. In 2018, of the total personnel and administrative expenses, personnel costs represented 64.7%; administrative expenses, 32.1%; and retirement benefits, 3.2%.

13.4.1 Personnel Expenses

Personnel expenditures were stable in real terms between 2017 and 2018. In the year, the total staff increased to 668 people, (666 in 2017). Professionals accounted for 79.9% of the total staff as of December 2018.

13.4.2 Administrative Expenses

Administrative costs recorded a real decrease of 0.5% between 2017 and 2018. This was mainly due to a reduction in general services, consulting, surveys, research, and seminars; which was partially offset by an increase in the maintenance of fixed assets and expenditures on computers and technological development.

13.5 External Auditors

The second paragraph of Section 76 of the Basic Constitutional Act stipulates that the Central Bank’s financial statements must include an independent auditors’ opinion and that the Board is to appoint the auditors from among those registered with the Superintendence of Banks and Financial Institutions (SBIF). Through Board Resolution 1,775 of 5 September 2013, The Board awarded the contract for professional auditing services to KPMG Auditores y Consultores Ltda. For the 2014–2016 period; the contract was automatically renewed annually in the 2017-2019 period.