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.

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.

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.

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.

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.

The Mandate

In line with the Central Bank’s second objective, namely, to guarantee the normal functioning of the internal payments system, the institution must ensure the efficient management of the cash cycle.

Since its creation in 1925, the Bank has held the sole legal authority to issue banknotes and coins. There are currently five banknote denominations in Chile (1,000, 2,000, 5,000, 10,000, and 20,000 pesos) and four coin denominations (10, 50, 100, and 500 pesos). The one and five peso coins were withdrawn from circulation in November 2017.

9.1. Operating Results

• Banknotes and coins issued increased 5.6% in annual terms, nearly two percentage points more than in 2017 (3.7%).
• The quantity of banknotes in circulation¹/ grew 1.9%, around the same rate as in 2017 (2.2%).
• This translated into an additional 18.5 million banknotes circulating in the economy.

9.2 Withdrawal of the old 100 peso coins

In accordance with acquired experience and to facilitate the functionality of the coins in circulation for both the general public and coin machines, on 2 November 2018 the Bank began withdrawing from circulation the $100 coins issued from 1981 to 2001, removing those that are currently held by commercial banks and cash-in-transit companies. The goal is to gradually eliminate the coexistence of two coins in circulation that have the same face value, but completely different physical characteristics.

In late 2019, the Bank expects to complete the final sale of the metals from the $1, $5, and old $100 coins withdrawn from circulation, following a tender process open to national and international firms.

9.3 National Survey on Cash Use and Preferences

Since 2012, the Central Bank of Chile has carried out an uninterrupted annual National Survey on Cash Use and Preferences, to contribute to the knowledge and monitoring of the population’s use and preferences with regard to banknotes and coins.

9.4 Logistics Center Project

In 2018, the Treasury Management continued to work actively on the development and construction of its new facilities, in the framework of the Logistics Center Project. This initiative aims to improve the Bank’s cash management processes, by increasing the efficiency of logistical operations and storage.

A site was purchased in the El Montijo Industrial Park, in the Renca neighborhood of the Santiago Metropolitan Region, and consultant studies were contracted and consucted on project logistics, security, structural engineering, soil mechanics, and strategic communications.

10.1 Be part of the Central Bank

The Bank is committed to offering an employee value proposition that inspires people to grow and develop their full potential, in a collaborative environment of team work, continuous learning, and professional and personal challenges, so as to attract and retain the best talent, aligned with the Bank’s strategic objectives and organizational values.

10.2 Gender Equality

The Bank maintains an almost stable gender ratio of 30-70 between women and men regardless of age range.

The salary differential between men and women with a current contract at year-end was estimated at 2% in favor of women. This demonstrates the Bank’s policy of equal pay for men and women with the same education level and job responsibilities.

10.3 Culture and Leadership Management Project

In the year, the culture and leadership management project was launched to determine the leadership style and culture that the Bank needs in order to better implement the challenges laid out in the 2018–2022 Strategic Plan.

The project started with an assessment of the current culture based on a participative process encompassing all the Bank’s employees. This provided the basis for defining the desired culture, together with initiatives for achieving it, to be implemented in the 2019–2022 period.

10.4 Training to Be the Best

In the year, a broad range of training and education activities were implemented for the Bank’s employees.

10.5 Ethics and Values

In conjunction with the Office of the General Counsel, a program was implemented to work on ethical and value issues at the Bank, through membership in the Fundación Generación Empresarial, a Chilean nonprofit organization dedicated to promoting business ethics. The program consisted in training sessions for all the Bank’s staff, developed with support from export consultants. Activities included the following:

10.6 Work Climate Survey

A work climate survey entitled “Pulse of the Organization” was conducted during the year, with the voluntary participation of 70% of the Bank’s areas. This is an abbreviated version of the survey used in past years, and it showed the same results as in 2017: 73.4% positive assessment.

In 2018 a leadership skills program was implemented, featuring workshops on feedback, effective interviewing, difficult conversations, organization and planning, and the preparation of skill development plans.

10.7 Work-Life Balance

In line with good practices, the Bank created a pilot plan for reconciling work and personal life. This includes the possibility of telecommuting and opting for flexible schedules when the position allows.

At the same time, to facilitate family life, the Bank implemented actions like the gradual return to work after the birth of a child and early leave during pregnancy.

10.8 Scholarships for Bank Staff

EIt is in the Bank’s interest to have employees with an excellent educational background. A proposal was therefore developed to improve the international scholarship process, which will go into effect in 2019. The goal is to simplify the process, making it easier to use and more transparent. With regard to national scholarships, employees can now apply for part-time doctorate programs at local universities.

10.9 Labor Relationships

The Central Bank Labor Union was founded in 1970, and it is still the only employee union at the institution. Currently, 82% of employees with a contract are members.

The syndicate plays an active role in the daily lives of workers, providing broad-ranging support in areas such as legal advice, well-being, collective negotiations, and scholarships for employees’ children.

11.1 Procurement and Contracting Policy

The Procurement and Contracting Policy of the Central Bank of Chile establishes the conditions and processes for purchasing goods and contracting services from external suppliers.

The planning and execution of these processes must ensure compliance with the principles of transparency, equal opportunity for suppliers, strict adherence to the bidding terms, absence of arbitrary discrimination, efficiency, objectivity, and publicity.

11.2 Contracts in 2018

The Bank’s operations necessitate the use of specialized suppliers for a range of different products and services. Furthermore, the Bank is subject to the provisions in its Basic Constitutional Act governing the periodic release of information on the fulfillment of its public duties.

12. ENVIRONMENTAL RESPONSIBILITY

The day-to-day operations of the Central Bank are not exempt from the generation of waste and emissions, which could be a source of pollution, such as the use of batteries in power generators or the retirement of computer equipment, or not a source of pollution, such as the waste generated by the destruction of damaged banknotes.

The Bank is aware that its operations have an environmental impact and therefore takes the following precautions:

12.1 Waste Management

In the last two years, the Bank has implemented a number of initiatives aimed at reducing the total waste generated annually and increasing the quantity of waste that is recycled. As a result, the share of waste destined for recycling increased 21%, from 31.17 tons in 2017 to 37.75 tons in 2018.

12.2 Emissions Reduction

The Bank recognizes the importance of monitoring its atmospheric emissions, which are mainly generated by air conditioners and power generators. Air pollution has many consequences for human, animal, and plant health, as well as the potential to contribute to climate change. Air quality remains a top priority in the country’s environmental management, and the Bank hopes to make a positive contribution.

12.3 Restoration of the Central Bank Façade

In April 2018 a ceremony was held to mark the completion of the total remodeling of the façade of the Central Bank building. The work spanned 16 months and constituted the most extensive building maintenance project undertaken since the 1940s. It also coincided with the Bank’s 90th anniversary at its current location.

12.4 Energy Efficiency

Over the last two years, the Bank has monitored energy consumption at its facilities, in order to measure the results of its initiatives to promote the efficient use of energy and resources.

The biggest reductions have been achieved at the main building on Agustinas Street; the Constitution Plaza building, located on Morandé Street; and the warehouse on Cumming Street. The total energy savings between 2017 and 2018 was 674,911 KWH of electricity.

12.5 Sustainable Infrastructure Projects

• Replacement of temperature control systems
  In all Bank buildings to help reduce energy consumption.
• Modernization of central heating and air-conditioning systems
  To promote more efficient energy use and increase energy savings.
• Pilot plan to upgrade lighting system
  Development of a pilot plan using motion sensors to control lighting.
• Infrastructure improvements
  Energy savings, efficient water use, and better insulation.
• Modernization of the elevators
  Project to modernize the elevators using new technologies that are faster and use less energy.
• Accessibility
  Improved access for people with reduced mobility.
• Solar panels
  Evaluation of a project to install solar panels within five years (2018–2022) to prioritize the use of renewable energy, generate electricity at Bank buildings, and possibly contribute electricity to the public power system.

13.1 Balance Sheet Levels and Structure

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.

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%.

13.3 Balance Sheet Positions by Currency

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).

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%.

13.5 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.

APPENDIX I
MAIN MONETARY AND FINANCIAL POLICY MEASURES

January

4.

The Bank reported that the Board, at its regular session on 4 January 2018, approved the Annual Debt Plan, which does not include any new bond issues in 2018.

February

1.

At its Monetary Policy Meeting, the Board of the Central Bank of Chile voted unanimously to hold the monetary policy interest rate at 2.5% in annual terms.

APPENDIX II:
INTERNATIONAL RESERVE MANAGEMENT

A. INTRODUCTION

In line with the Bank’s transparency policies,¹/ this appendix reports on the annual international reserve management. The next section B describes the investment policies and benchmark structure used in managing reserves. Section C reports on external portfolio managers. Section D summarizes the risk management policies and the results of the international reserve management.

APPENDIX III:
FISCAL FUND MANAGEMENT (ESSF AND PRF)

INTRODUCTION

As fiscal agent, the Central Bank of Chile manages resources in the name and on the account of the General Treasury. These resources are part of the Economic and Social Stabilization Fund (ESSF) and the Pension Reserve Fund (PRF).

The following sections describe the institutional context in which this fiscal agency operates. They also report on the investment policy, the fund structure, the reporting system, the management results, and the costs of managing the resources..

APPENDIX IV:
COLLABORATIVE WORK

PARTICIPATION WITH OTHER INSTITUTIONS

Because the information handled by the Central Bank is fundamental for good decision-making at the national level, the institution participates on a number of commissions and councils where its opinion is needed. These are discussed below.

Commission on Price Distortions

The National Commission on Price Distortions is in charge of investigating the existence of price distortions on imported goods. It is a technical body composed of representatives from public institutions in the economic sector. Its task is to advise the President of Chile on the application of antidumping measures, countervailing duties, and safeguard measures. The Commission operates independently from the Bank, although the Technical Secretariat resides within the Bank as stipulated in Law 18,525. Its functions include gathering background information for investigations, preparing technical reports, channeling communication among the parties involved, and carrying out pertinent notifications.