{ "id": "R40751", "type": "CRS Report", "typeId": "REPORTS", "number": "R40751", "active": false, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 351370, "date": "2009-08-11", "retrieved": "2016-04-07T02:20:24.922356", "title": "Financial Regulation and Oversight: Latin American Financial Crises and Reform Lessons from Chile", "summary": "The 111th 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. Latin America stands out as one region that has survived multiple financial crises, and in the aftermath of such devastation, many countries undertook comprehensive regulatory reform. Although a smaller developing economy, Chile provides one important example. Following two financial crises, one the result of extreme over regulation, the other of catastrophic under regulation, Chile redesigned its regulatory system in 1986. Since then, it has had one of the most stable financial systems in Latin America and has overcome regional and global financial crises when other countries in the hemisphere did not. In so doing, new-found soundness of the banking system has not compromised bank profitability, reflecting modernization and efficiency gains that paralleled development of effective prudential regulation and oversight.\nChile\u2019s success rests on a 1986 overhaul of the General Banking Act. Conceptually, reform had two fundamental principles: simplify and streamline prudential regulation and supervision. Under the framework developed in the G-30 report, The Structure of Financial Supervision, Chile adopted what might be classified as an integrated approach to regulation. The architecture was reshaped, consolidated, and vastly strengthened by giving most regulatory responsibility to the Superintendency of Banks and Financial Institutions (SBIF), with supportive oversight by three other specialized agencies. The SBIF has sweeping oversight powers over \u201cbanking enterprises irrespective of their nature and the financial entities whose control is not otherwise entrusted by law to a different institution...[and] shall also be in charge of the supervision of companies whose corporate purpose consists in the issuance or operation of credit cards.\u201d\nExperience from Chile points to the value of establishing: (1) a strong, independent, and consolidated regulatory and oversight agency, with broad and definitive powers; (2) enhanced transparency through a number of specific reporting measures; (3) 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; (4) deposit insurance to cover up to 90% of an individual\u2019s total deposits capped at a specified limit; and (5) 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.\nChile\u2019s experience correlates with testimony by three noted economists before the Joint Economic Committee on April 21, 2009, who challenged policy makers to think very differently about how the financial sector should work and be regulated. In addressing the theme of the hearings, each conveyed the pitfalls of the \u201ctoo big to fail\u201d phenomenon, noting how loose or inappropriate regulation has led to \u201cgargantuan,\u201d opaque firms that can be exploitive and highly difficult to regulate. The witnesses argued that only when risk is internalized and the promise of a bailout withheld will behavior begin to change. Chile has protected itself from severe repercussions of the current crisis, in part because of regulations in place that restrict risky behavior and promote a more traditional commercial banking model, although they are no guarantee of perpetual success in avoiding future crises. Still, the link between a sound financial sector and economic growth and development is now well documented, and evidence from Chile some argue suggests that although there may be tradeoffs between efficiency, growth and prudential regulation, over the long run, avoiding a major financial crisis may more than offset the opportunity costs of a more comprehensive regulatory environment, particularly if a proper balance can be achieved.", "type": "CRS Report", "typeId": "REPORTS", "active": false, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "http://www.crs.gov/Reports/R40751", "sha1": "0736bc2c7bbd81894eb7e4c014fcadc24020323d", "filename": "files/20090811_R40751_0736bc2c7bbd81894eb7e4c014fcadc24020323d.html", "images": null }, { "format": "PDF", "encoding": null, "url": "http://www.crs.gov/Reports/pdf/R40751", "sha1": "83e686a0f32c0d6deab7b9ba1dd9291bf45ea85a", "filename": "files/20090811_R40751_83e686a0f32c0d6deab7b9ba1dd9291bf45ea85a.pdf", "images": null } ], "topics": [] } ], "topics": [ "Economic Policy" ] }