The Mandate

Section 3 of the Central Bank of Chile’s Basic Constitutional Act establishes a second objective, that of safeguarding the normal functioning of the internal and external payment systems, which is related to the stability of the financial system.

Internal payment systems comprise the set of institutions and instruments that facilitate the realization of transactions in the economy, including the institutions that make up the national financial system and the international capital markets.

The Basic Constitutional Act grants the Central Bank the authority to regulate the financial system and the capital market. The Bank is therefore able to design and implement policies that contribute to the secure and efficient functioning of the associated market infrastructures.

These infrastructures include the payment systems, which safeguard the circulation of money in the form of cash, payment cards, electronic transfers, and bank instruments (cashier’s checks, personal checks, etc.).

The Central Bank secures the normal functioning of these systems through the regulation and operation of large-value payment systems and the constant monitoring of financial risk. This includes managing the real-time gross settlement (RTGS) system and publishing the Financial Stability Report twice a year.

Public confidence in the payment systems is crucial for the functioning of the economy. History shows that a loss of confidence can trigger a financial crisis, which can have a severe impact not only on people with savings and deposits, but on the population at large.

Consequently, the Basic Constitutional Act empowers the Central Bank to regulate the financial system and the capital market, as well as to adopt measures aimed at protecting the stability of the financial system.

The Bank is also authorized to act as the lender of last resort, that is, to supply liquidity to institutions that are temporarily experiencing cash flow problems.

The Central Bank is a permanent advisor to the Chilean Financial Stability Board (FSB), which was created by the Finance Ministry to coordinate actions and the exchange of information between the supervisory bodies. The Board meets regularly for the preventive management of systemic financial risk.

The Financial Stability Reports for the first and second halves indicated that there were no significant disruptions in the Chilean financial system, including the internal and external payment systems. The payment systems, including the large-value systems, also functioned normally.

5.1 Performance in the Year

A number of important steps were made in 2018 to strengthen Central Bank’s response capability and intellectual leadership in the area of financial policy.

The publication of the Financial Stability Report was separated from the Monetary Policy Report, together with the introduction of a separate communication strategy. The publication was further strengthened with the inclusion of new thematic chapters, one on technological innovations in the first half and one on the real estate sector in the second half.

In the regulatory area, a work schedule was established for updating the Compendium of Foreign Exchange Regulations, in addition to a series of other initiatives.

In 2018, a research agenda was defined in line with the priorities established for the area of Financial Policy, and significant progress was made on implementation. This agenda includes promoting the use of the Household Finance Survey (HFS) and other sources of microdata, as well as structural and semi-structural macro-financial models for risk monitoring and policy analysis.

In September, the results of the 2017 Household Finance Survey (HFS) were published. This was the fourth survey carried out at the national urban level. The HFS, which is applied every three years, is a joint project of the Financial Policy and Statistics Divisions. The objective is to provide detailed information on the financial situation of households, both currently and over time. In particular, the data include information on households’ socio-demographic characteristics, labor status, possessions, use of payment means, income, debt levels, assets, and savings. The survey has 4,549 observations covering cities throughout Chile, which represents around 4.9 million urban households.

With regard to implementing the regulatory agenda, in 2018 the Bank established new liquidity management requirements for the banking industry, incorporating minimum requirements for the short-term liquidity coverage ratio (LCR) into Chapter III.B.2.1 of the Compendium of Financial Regulations. This is an essential requirement of the Basel III recommendations.

With respect to the general regulations applicable to large-value payment systems (LVPS), the Bank issued a new Chapter III.H of the Compendium of Financial Regulations, adhering to the Principles for Financial Market Infrastructures (PFMI). The new Chapter III.H.2 establishes a contingency protocol for the LVPS in Chile.

For the derivatives markets, the Bank issued a new Chapter III.D.2, which consolidates and strengthens the requirements for close-out netting of derivative transactions contracted under Master Agreements recognized by the Bank. The issue of this Chapter represents a move toward the greatest possible convergence with international standards that provide a high degree of certainty to these markets, while also preserving essential prudential safeguards.

Additionally, to move forward on the development of a more modern and transparent derivatives market, the Bank opened a public consultation on a draft of the new Chapter III.D.3 and the corresponding operating rules. This regulatory framework will establish an Integrated Derivatives Information System (IDIS), in order to increase the quantity and quality of information available on transactions in this market, following international guidelines for financial market infrastructures.

Finally, new modifications were incorporated to the regulations governing payment means, after analyzing the implementation of regulations issued in 2017.

5.2 Cybersecurity

As in previous years, cybersecurity was one of the critical issues on the Bank’s 2018 agenda.

In response to cybersecurity events in the banking industry, the Central Bank undertook an in-depth review of its computer equipment and networks, in order to determine whether any of its platforms could potentially be compromised, despite the security measures currently in place.

The assessment was conducted by a prestigious international company that is a global leader in cybersecurity. While the Bank was positively evaluated in the review, the assessment will be carried out regularly, as a preventive measure.

At the same time, a Cybersecurity Committee was established, made up of managers from different units, which will be responsible for promoting and monitoring all the Bank’s cybersecurity initiatives. In addition, a new Cybersecurity Department was created within the Technology Division, to strengthen the hiring of new professionals in this subject. The new department will be responsible for information and computer security.

Implementation was completed on the recommendations of the SWIFT Customer Security Program (CSP), which incorporates a series of technological controls and operating procedures that improve the level of security.

A project was also launched to develop a disaster recovery (DR) processing site, in addition to the two existing operating sites. This will ensure the operational continuity of the Bank’s main business processes in the event of a major disaster or cyberattack at its main sites.

Finally, work continued on a series of projects to upgrade the main security tools; a cybersecurity monitoring service was incorporated; and a cyberattack prevention service was contracted.

5.3 Provision of Large-Value Payment Services

The real-time gross settlement (RTGS) system is the main large-value payment system in Chile and is managed by the Central Bank. Transactions are settled immediately and on a gross basis in the accounts of each bank, in a format that removes credit or liquidity risk, thereby contributing to the stability of the financial system.

At year-end, the number of participants in the RTGS system had fallen to 21, following the exit of two banks, BBVA Chile (September) and Nación Argentina (December), and the entry of the Bank of China (July).

In 2018, the RTGS system settled an average of 1,684 payments per day, including the Bank’s own transfers, with an average daily value of Ch$14.95 trillion (equivalent to US$23 billion). Relative to 2017, the average daily value increased 23%, with a sharper rise in the fourth quarter. This derived from a reduction in payments processed by ComBanc, due to the reduction in counterparty limits between participants as a result of credit risk management mechanisms.

To increase the efficiency of the RTGS system, the Bank supplies liquidity throughout the day via access to an intraday credit facility, conditional on the provision of eligible collateral or guarantees pledged to the Bank. The latter includes bonds issued by the General Treasury.

In 2018, the average daily value of credit supplied through the intraday credit facility, including both types of collateral, was Ch$1 trillion. The largest value provided by the intraday credit facility occurred on 8 October, at Ch$2.49 trillion, the highest level since 2005.

In 2018, the availability of the RTGS system was 99.96%, while that of the open market operations system, which provides intraday liquidity, was 99.74%. The former reflects the effect of two incidents that brought the system down for a total of 53 minutes. In the case of the latter, four incidents caused total downtime of 332 minutes.

In response to the operating incidents recorded in 2018, the Bank provided temporary operating platforms in the Central Bank building for the direct operations of one of the affected banks, using physical spaces specifically designated for this type of situation (the RTGS system’s contingency room). The Bank also coordinated three business continuity exercises, in conjunction with participants of the large-value payment system and financial market infrastructures, to contribute to improving the resilience of the financial system as a whole.

Finally, in August 2018, the Bank published “Contingency Protocol for Large-Value Payment Systems,” the objective of which is to preserve the operational continuity of both the RTGS system and the large-value payment clearing house (CCAV) operated by ComBanc in response to critical operational events. Both operators formalized their voluntary adherence to this regulation through the signing of a joint agreement outlining the terms and conditions for its implementation.

5.4 Technology Observatory

The Bank’s Strategic Plan takes into consideration the technological changes that are transforming the global economy, creating new ways of doing business, and affecting many organizations and institutions around the world, including central banks.

In 2018, the Technology Observatory was launched to provide a tool for capturing and diffusing knowledge within the Bank on disruptive technologies, coordinating the potential adoption of technologies in specific business areas, and generating national and international networks in this subject.

Issues were identified and prioritized for attention by the observatory, centered on eight innovation areas.

Information in these eight areas was collected and organized for internal circulation. The work was supported through internal talks, the strengthening and expansion of our contact networks, and participation in seminars and collaborative projects.