Chile: Selected Issues Paper
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
22 Jul 2014
eISBN:
9781498328357
ISBN:
9781498328357
Language:
English
Keywords:
ISCR; CR; Chile; income; bank; deposit; yield; Chilean bank; panel regression; bank heterogeneity; bank distress; customer deposit; Liquidity requirements; Loans; Commercial banks; Financial soundness indicators; Bank deposits; Global
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In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Chilean Banks’ Loan to Deposits Ratio1

This chapter presents a cross-country comparative exercise using granular public data to understand Chilean banks’ high loan to deposits ratio and its implication for financial stability.

A. Introduction

1. The loan-to-deposits (LTD) ratio is frequently used in the literature as a measure of liquidity or funding stability. It compares the “stable” deposit base with gross loans (excluding interbank activity). When stable deposits are low relative to loans, there is a greater dependence on more volatile funds to cover the illiquid assets in deposit takers’ portfolios. In such circumstances, if liquidity stress arises, there is a greater risk of illiquidity than if a stable deposit base primarily funds the loans. Using country level data, Lund-Jensen (2012) finds that a higher LTD ratio is associated with a higher probability of a banking crisis. In a bank-level panel regression, The Global Financial Stability Report (GFSR) 2013 finds that a higher LTD ratio is associated with a higher probability of bank distress.2

2. The Chilean banking system’s LTD ratio (as reported in IMF FSI database) is high in comparison with its regional peers. In general, more developed countries tend to have a higher LTD ratio, reflecting availability of alternative sources of funding. However, the Chilean ratio is high even relative to OECD countries (Annex II), so looking into this variable is important as it may be indicating a source of vulnerability. It should be noted, however, that the LTD ratio is only a coarse and partial measure of liquidity. For instance, the ratio does not address the “stability” of the liabilities other than customer deposits. Assessing the implications for financial stability requires analyzing balance sheet items that may not be reflected in the LTD ratio.

3. This note uses granular public data for Chile and comparators to understand Chilean banks’ high LTD ratio and its implication for financial stability. This note looks at the LTD ratio for Chilean banks from a cross-country perspective using bank level data from Bankscope database. The sample covers the 15 largest commercial banks for nine Latin American countries (Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, and Uruguay). 3 Using micro data allows identifying risks that may be not be apparent using system level data. Also, using micro data allows extending the cross-country comparison to other balance sheet items that are not reported in the IMF FSI database and that may be important for financial stability. As a drawback, Bankscope does not provide deposits by type of depositor, so the LTD ratios computed are relative to total deposits (excluding interbank). Bank-level data shows Chilean banks’ median LTD ratio only second to Brazil in this sample of Latin American countries.4 Heterogeneity across individual banks is significant.

Figure 1.
Figure 1.

Chile: Loan to Deposit Ratio

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Note: In the first chart, Brazil and Uruguay are not included as the indicator is not reported in the IMF FSI database. In the second chart, the vertical line shows the min-to-max range, the horizontal blue line shows the median for each country, and the square shows 50 percent of the distribution around the median.

B. Institutional depositors

A01sec4ufig13

Loan to Deposits: Customer vs. Total Deposits, 2012

(In percent)

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Sources: Bankscope and IMF FSI database.

4. Chilean banks’ high reliance on institutional deposits is an important factor explaining the system’s high LTD ratio. Retail deposits (characterized by a large number of depositors and relatively low individual amounts) tend to be more stable, even during periods of financial stress. In contrast, wholesale deposits tend to be more sensitive to market volatility, since they are concentrated among a few creditors with better access to information and more sophisticated investment decisions. Therefore, a large share of retail deposits in the banking system’s financing has traditionally been considered a contributing factor for greater stability.5 In the IMF FSI database, customer deposits are defined to include all deposits other than those placed by other deposit takers and other financial institutions.6 The significant difference between the loan-to-customer deposits ratio (from the IMF FSI database) and the loan-to-total (non-interbank) deposits ratio (obtained from Bankscope), suggests that institutional depositors play a particularly large role in bank funding in Chile relative to other countries.7

5. The Chilean Central Bank’s Financial Stability Reports (FSR) have raised repeatedly concerns over the risks associated with high reliance on wholesale deposits. Following Box IV.1 in the December 2013 FSR, three developments are worth flagging:

  1. The share of institutional deposits in total deposits is decreasing in size. Large banks have larger networks and therefore capture the bulk of retail and demand deposits, depending less on institutional deposits.

  2. Banks reduced their dependence on institutional deposits during 2009–11, and mutual funds have become the biggest institutional depositor. This is mostly because pension funds have decreased their allocation in domestic deposits.8 Deposits from mutual funds have on average shorter maturity than those from pension funds.

  3. Small banks have a greater diversification within institutional depositors and usually carry a larger share of liquid assets on their balance sheets and a larger share of own resources in their funding structure.

Figure 2.
Figure 2.

Chile: Institutional Deposits

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

C. Asset side vs. liability side

6. In addition, Chilean banks’ asset allocations also play a role in explaining the relatively higher LTD ratios. Computing the ratio of loans to total deposits (instead of customer deposits) still shows Chile on the higher end of the regional distribution. This means that high reliance on institutional depositors is not the entire story. A decomposition of the ratio into an asset component and a liability component reveals that the asset component is important to understand crosscountry differences.9 Chilean banks’ reliance on non-deposits sources of funding is not high from a cross country perspective.10 However, Chilean banks tend to hold a larger fraction of their portfolio in loans than its regional peers. To the extent that loans are less liquid than other alternative assets, this may pose a limitation in terms of capacity to absorb idiosyncratic funding shocks. As a matter of fact, the Chilean banking sector shows a low ratio of liquid assets to total assets relative to the rest of the region.11

Figure 3.
Figure 3.

Chile: Asset Side vs. Liabilities Side

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

7. As a mitigating factor, Chilean banks show a high reliance on long term funding relative to the region. As mentioned in the introduction, the LTD ratio is a coarse and partial measure of liquidity as it does not cover assets other than loans or liabilities other than deposits. For example, on the asset side, it does not cover a bank’s holding of securities or off-balance sheet items, which can be illiquid. Similarly, the LTD does not cover the stability of nondeposit funding like debt securities. Using Bankscope data allows characterizing those other assets and other liabilities.

  • Other assets: the asset structure of Chilean banks shows that investments in total securities and reserves at the Central Bank are in line with regional peers, while holdings of government securities and interbank lending are relatively low.

  • Other liabilities: the liability structure shows a borrowing structure with a low reliance on short-term maturities and a high reliance on long-term maturities. This borrowing structure is likely explained by the fact that long-term debt is the main source of financing for mortgage loans (accounting for roughly a quarter of bank loans).

A01sec4ufig14

Liquid Assets to Total Assets, 2012

(In percent)

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Source: IMF FSI database.
Figure 4.
Figure 4.

Chile: Asset Side (Banks’ Median)

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Figure 5.
Figure 5.

Chile: Liability Side (Banks’ Median)

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

D. Individual Chilean banks

8. In Chile, LTD ratios are particularly high for small and medium sized banks. System aggregates may hide individual bank heterogeneity. Figure 7 shows the loan-to-total deposits for the largest banks in the Chilean system, using Bankscope and SBIF’s publicly available data. Additionally, the figure shows an estimation of the loan-to-customer deposit ratio.12 Heterogeneity across banks is significant. Small and medium sized banks tend to have higher loan-to-customer deposit ratios, driven mostly by their higher reliance on institutional deposits as a source of funding.

Figure 6.
Figure 6.

Chile: Banks’ Loan to Deposit Ratio

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Figure 7.
Figure 7.

Chile: Banks’ Net Stable Funding Ratio

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

9. Preliminary estimations suggest that the Chilean banking sector is well positioned to meet the Net Stable Funding Ratio (NSFR) in accordance with the Basel timeline. The Net Stable Funding Ratio (NSFR), introduced as part of the Basel III reforms, is a measure of funding risks that extends beyond loans and deposits. 13 The analysis conducted in the context of the Chile FSAP Update (2011), showed that the banking system was well positioned to meet the NSFR in accordance with the Basel timeline.14 In a more recent study, Gobat and others (forthcoming) estimate the NSFR using Bankscope data for a variety of countries including Chile (Annex III). All Chilean banks included in their sample appear to satisfy the 100 percent threshold on the estimated NSFR. However, the paper has two limitations for the purpose of this note. First, the authors exclude subsidiaries operating in Chile (e.g. Santander Chile). Second, their methodology treats all deposits as retail deposits, assigning them a more stable coefficient than Basel prescribes, for example, for institutional deposits. We extend the analysis in Gobat and others to account for these two issues. Figure 7a applies the authors’ methodology to the 14 largest Chilean banks, including subsidiaries of foreign banks. The figure is in line with the result in the paper that most Chilean banks satisfy the 100 percent threshold. When extending the methodology to take into account the difference between retail and institutional deposits (Figure 7b) the estimated NSFR for most banks drops below the threshold. The shortfall appears larger for small and medium sized banks.

E. Liquidity regulation

10. The Central Bank is currently in the process of reviewing the liquidity rules governing the banking sector with a view to strengthen the framework and increase convergence with international standards. For the liquidity standards, the Chilean regulatory framework currently establishes 30 and 90-day mismatch limits in domestic and foreign currencies. Some of the envisioned changes are aimed especially at achieving a more robust management of wholesale funding sources, in order to mitigate the risk factors described in this note. The draft of the new regulation has been published for public comment until September 2014. The main objectives are as follows:

  • To strengthen liquidity risk management policies in the banking system, establishing minimum criteria for developing stress tests and contingency plans.

  • To include binding regulatory limits on a consolidated basis, in addition to individual limits, so as to take into account the liquidity management of bank affiliates, in particular in banks established overseas that are affiliates of Chilean financial institutions.

  • To standardize the assumptions used by internal models, for banks authorized to use internal models.

To add variables for monitoring the liquidity position of each bank. These include: (i) the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), as proposed in Basel III, (ii) reports on concentration by creditor, instrument, currency and maturity, and (iii) reports on rollover rates for wholesale funding sources. In a first stage, a minimum requirement on the LCR or on the NSFR will not be established, but will be evaluated in the future based on the analysis allowed by improved data collection and the lessons learned from the implementation in G20 countries.

Annex I. Data

Table A1.1.

Chile: Country Coverage

article image

IMF FSI database

The first data source is IMF Financial Soundness Indicator (FSI) database (publicly available at http://fsi.imf.org/).

“Loan to Total Assets” and “Customer Deposits to Total Assets” are computed using the underlying series reported by countries under “Capital to Assets” and “Customer deposits to total noninterbank loans” in the Encouraged Set of the FSIs for deposit takers.

Bankscope data

The sample considers only commercial banks, as recorded in Bankscope database. For each country, we select the largest 15 banks (if available). The total number of banks in the sample is 134. The consolidation method selected is C1, C2, or U1. We use the latest observation available of 2011 or 2012.

Annex II. Broader Cross-Country Comparison

Figure A2.1.
Figure A2.1.

Chile: Loan to Deposit Ratio

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Source: IMF FSI database.

Annex III. NSFR Estimation

The Net Stable Funding Ratio (NSFR) was introduced as part of the Basel III reforms. It is a new prudential liquidity rule aimed at measuring excess maturity transformation risk and promoting funding stability.15

A01sec4ufig15

Estimated NFSR Distribution

(Latin America)

Citation: IMF Staff Country Reports 2014, 219; 10.5089/9781498328357.002.A004

Source: Gobat et al. (forthcoming)

The ratio is defined as a bank’s available stable funding (ASF) divided by its required stable funding (RSF), with banks having to meet at minimum a regulatory ratio of 100 percent beginning 2018. ASF is the portion of a bank’s funding structure that is reliable over a one year time horizon, while the RSF is the portion of a bank’s assets and off balance exposures that are viewed as illiquid over a one year horizon and hence should be backed by stable funding sources. The ASF and RSF weights range from 100 percent to 0 percent to reflect the stability of funding for liability categories and the liquidity of asset categories. A higher ASF weight is attached to more stable funding. For example, regulatory capital enjoys a 100 percent ASF weight while stable non-maturity deposits a 95 percent ASF weight, respectively. In contrast, funding from a financial institution with residual maturity less than six months has a 0 ASF factor. Similarly, liquid assets enjoy lower RSF factors while illiquid assets are assigned higher RSF factors. Central bank reserves have a 0 percent RSF weight and performing loans are assigned an 85 percent RSF weight.

The note applies the Gobat and others (forthcoming) methodology to estimate the Net Stable Funding Ratio (NSFR) based on Bankscope data. Because the degree of granularity in the data is very limited, the estimation should be taken only as indicative and interpreted with caution.

Table A3.1.

Chile: NFSR Estimation Assumed Coefficients

article image
Source: Gobats et al. (forthcoming).Note: Due to missing granular data in Bankscope reporting, we exclude Rabobank in the bank-by-bank NSFR estimation.

The adjusted NSFR applies a weight of zero to Institional Deposits.

It assumes that 40 percent matures between 6 and 12 months and 60 percent mature in less than 6 months. Risk weights are 0.5 and 0, respectively.

References

  • Baba, C., forthcoming, “Liquidity Tools,” IMF mimeo.

  • Banco Central de Chile, 2013, “Informe de Estabilidad Financiera,” Second Half 2013.

  • Basel Committee on Banking Supervision, 2013, “Liquidity Stress Testing: a Survey of Theory, Empirics and Current Industry and Supervisory Practices,” Working Paper No. 24, October.

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  • Basel Committee on Banking Supervision, 2013, “Literature Review of factors Relating to Liquidity Stress Tests – Extended versión,” Working Paper No. 25, October.

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  • Basel Committee on Banking Supervision, 2014, Basel III: The Net Stable Funding Ratio,” Consultative Document, January.

  • Gobat, J., J. Maloney, and M. Yanase, forthcoming, “Net Stable Funding Ratio: Impact and Issues for Consideration,” IMF mimeo.

  • International Monetary Fund, 2006, “Financial Soundness Indicators Compilation Guide,” available at http://www.imf.org/external/pubs/ft/fsi/guide/2006/

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  • International Monetary Fund, 2011 “Chile – Financial Sector Stability Assessment,” IMF Country Report No. 11/261, August 2011 (Washington: International Monetary Fund).

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  • International Monetary Fund, 2013, “Changes in Bank Funding Patterns and Financial Stability,” Global Financial Stability Report (GFSR), Chapter 3, October (Washington: International Monetary Fund).

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  • Jara, A. and N. Winkler, 2005, “Riesgo de liquidez y fondeo de la banca en Chile,” Informe de Estabilidad Financiera, Banco Central de Chile, Segundo semestre.

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  • Jensen, L., 2012, “Monitoring Systemic Risk Based on Dynamic Thresholds,” Working Paper 12/159, (Washington, D.C.: International Monetary Fund).

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1

Prepared by Nicolas Arregui (MCM).

2

Additionally, a number of empirical papers find that more general measures of reliance in wholesale funding are positively related with bank instability.

3

Annex II extends the cross-country analysis to OECD countries using system-wide data.

4

Brazil does not report the LTD ratio to the IMF FSI database. Possible explanations for Brazil’s high median LTD ratio include: the on-lending of loans originated by the Brazilian Development Bank-BNDES- (not funded by deposits) through other institutions, and the use of Letras Financeiras (bonds with minimum term of 2 years), Letras de Crédito Agrícolas, Letras de Crédito Imobiliário, and other deposit-like instruments that are not counted as deposits.

5

See BCBS 2013.

6

See IMF FSI Compilation Guide.

7

Note that Chilean banks’ loans-to-total asset ratio was similar in the two databases, confirming the idea that the difference in the two ratios stems from the type of deposits included in each definition.

8

This was in part a response to the gradual increase in pension funds’ overall limit on offshore investments during August 2007 and September 2011.

9

The asset component and liability component of the LTD ratio refer to the numerator and denominator, respectively, of the decomposition: LoanTotalDeposits=LoanTotalAssests/TotalDepositsTotalAssests.

10

That is, Chilean banks’ reliance on total deposits (i.e., ignoring the distinction between retail and wholesale deposits) is in line with other countries in the region.

11

Mortgages, accounting for 25 percent of banks’ loan portfolio, are typically kept on banks’ books and not sold or securitized. While this is relevant for liquidity risk, it may also make underwriting standards less likely to be compromised at origination.

12

The estimation combines Bankscope data with the bank-by-bank institutional deposits share of term deposits provided by the Banco Central de Chile.

13

In 2012, the Basel Committee on Banking Supervision agreed on a revised framework for the Liquidity Coverage Ratio with an extended phase-in period. The design of the Net Stable Funding Ratio is under discussion.

14

The analysis also found that the system was well positioned to meet the Liquidity Coverage Ratio (LCR).

15

After undergoing review following strong criticism from the industry, the revised package has now been issued for public consultation with a plan of making it binding in 2018.

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Cover IMF Staff Country Reports
Chile: Selected Issues Paper
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2014: Issue 219
Publisher:
International Monetary Fund
ISBN:
9781498328357
ISSN:
1934-7685
Pages:
61
DOI:
https://doi.org/10.5089/9781498328357.002

Chile: Loan to Deposit Ratio

Loan to Deposits: Customer vs. Total Deposits, 2012

(In percent)

Chile: Institutional Deposits

Chile: Asset Side vs. Liabilities Side

Liquid Assets to Total Assets, 2012

(In percent)

Chile: Asset Side (Banks’ Median)

Chile: Liability Side (Banks’ Median)

Chile: Banks’ Loan to Deposit Ratio

Chile: Banks’ Net Stable Funding Ratio

Chile: Loan to Deposit Ratio

Estimated NFSR Distribution

(Latin America)