The International Monetary Fund's (IMF) 2004 Financial System Stability Assessment (FSSA) concludes that Chile has a well established supervisory regime for banking. The report, itself, does not provide a detailed compliance matrix of Chile's adherence to the Basel Core Principles (BCPs) for Effective Banking Supervision. However, a report summarizing the findings of the FSSA was published by the Superintendency of Banks and Financial Institutions (SBIF), which provides details on Chile's compliance with the BCPs. The report indicates that Chile complies with 20 of the 30 (Principle 1 is divided into 6 subsections) BCPs, largely complies with 5, and is materially non-compliant with 4 and non-compliant with one. A 2007 IMF report also observes that Chilean banks are well-capitalized, deep, profitable and resilient to external shocks. However, among the weaknesses mentioned by the FSSA is the lack of independence for Chile's banking sector supervisor, the SBIF. The FSSA does note that Chile is already working towards implementing some of its recommendations. Subsequent reports, including those by the IMF and the U.S. Department of State, indicate further progress made by the country in the area of banking supervision. It includes the enactment of the Capital Markets II Reform Law in 2007 that improves Chile's regulatory regime in the areas of capital adequacy, legal protection of supervisory staff, and licensing powers of the SBIF. Further, the strengthening of the anti-money laundering/combating the financing of terrorism framework and the tabling of a draft law, if enacted, would inch Chile closer in compliance with international standards. Finally, the shift of the SBIF's supervisory approach from a compliance-based to a risk-based framework is also expected to improve banking supervision in the country.

General Overview

Chilean banks are well-capitalized, deep, profitable, and resilient to external shocks. This observation is voiced in the IMF's 2004 Financial System Stability Assessment (FSSA) as well as the 2007 IMF Article IV consultation report. The most recent (July 2008) IMF report further notes that credit growth is strong, portfolio quality of Chilean banks is high, non-performing loans are well-provisioned, and capitalization is well above Basel requirements. However, operational costs of banks remain high, and lending dominates bank income, finds the 2007 IMF report. The report mentions the enactment of the Capital Markets II Reform Law in June 2007. The Law simplifies and centralizes the review process for banks' license applications in the Superintendency of Banks and Financial Institutions (SBIF), the country's banking supervisor; enhances the legal protection of the supervisory staff; and introduces reserve requirements in line with Basel II. The 2008 IMF report also commends Chile "for stepping up the monitoring of banks' asset quality, liquidity, and risk management, as well as working toward strengthening the bank resolution framework" (PIN, p. 3) and recommends the country to have an IMF Financial Sector Assessment Program (FSAP) Update "to review the scope for further market reforms and implications for financial sector stability and the supervisory and regulatory setup" (PIN, p. 3).

The 2004 FSSA for Chile conducted jointly by the IMF and the World Bank concludes that "Chile's observance of international financial sector standards and codes is very strong" (p. 32) and the banking "supervisory regime is well established" (p. 33). Detailed compliance levels are not provided in the 2004 FSSA. However, a report by the SBIF (hereafter referred to as the SBIF summary table on compliance) summarizes the findings of the 2004 FSSA, in which it states that Chile complies with 20 of the 30 Basel Core Principles for Effective Banking Supervision, largely complies with 5, is materially non-compliant with 4, and non-compliant with one. The 2004 FSSA also reveals that the Chilean banking system is internationally integrated. The sector is also well-regulated and supervised, with a strong oversight regime; however, some adaptation is required, per the FSSA. The adaptation required pertains to the areas of risk-based supervision, where the FSSA points out that transition to the said framework would require stronger information processing and analytical capabilities at the SBIF. The regulatory framework also needs to be revised to allow for greater strengthening of the SBIF and increasing its independence and accountability, improve consolidated supervision, broaden fit and proper testing to include directors and senior management, and strengthen disclosure regime for banks. Chile's early warning and prompt corrective action regime is effective, but its bank resolution framework has certain gaps that could be exposed if a too-big-to-fail bank collapses or the system is vulnerable to contagion risk. Options like rapid transfer of assets and liabilities of the distressed bank to a sound financial institution; state takeover of a failed bank; and temporary license from the SBIF to a bridge bank are recommended by the FSSA to integrate into the legal framework so as to plug the holes in the otherwise attractive safety net and bank resolution framework.

Some of the other pertinent recommendations of the IMF FSSA include: (1) institute capital charges on market risks taken by banks; (2) expand consolidated supervision to encompass non-bank subsidiaries of bank holding companies; (3) strengthen banks' credit risk management practices; (4) align accounting norms with international accounting standards; (5) strengthen domestic supervisory cooperation through formal arrangements including memoranda of understanding among different financial supervisors and regulators to keep pace with the evolving nature of financial institutions and blurring of regulatory boundaries; and (6) strengthen anti-money laundering/combating the financing of terrorism (AML/CFT) supervision. The IMF did note that at the time of the FSSA report, Chile was taking steps to effectively implement some of its recommendations. For instance, at the time, the SBIF was placing increasing responsibility on bank management to self-manage their prudential conduct and this, per the FSSA, "is both consistent with international best practice, and is being reflected in changes in the legal and regulatory framework" (p. 33). The SBIF was also observed as placing greater emphasis on corporate governance. As for AML/CFT requirements, the Chilean authorities' response in the FSSA report was that some improvements have been made in the regime that improve reporting requirements for banks and also strengthen their compliance with "know your customer" obligations.

The General Banking Act that was first enacted in 1986, and later revised in 1997, "is considered to be at the core of the current strength of the Chilean banking system" (p. 164), notes an article by Betancour in a 2006 Bank for International Settlements (BIS) publication. The enactment of the Act provided a strong foundation to resolve the financial crisis that afflicted Chile in 1982. The Act improved prudential regulation and supervision and its amendment in 1997 further upgraded the regulatory framework by introducing capital adequacy requirements in line with Basel standards, allowing expansion of banking activities abroad, and facilitated consolidation of the banking sector.

The Superintendency of Banks and Financial Institutions and the Central Bank of Chile (BCCh) share the responsibility of regulating the banking sector; however, supervision is the sole domain of the former. The FSSA attests that the SBIF's supervision is robust, well-established, and reputed for technical expertise and ethical integrity. The SBIF is also moving towards a risk-based supervisory framework away from a strict compliance driven method. The FSSA comments that the lines of responsibilities between the SBIF and the BCCh are not very tidily drawn, and therefore recommends refining the role and objectives of both agencies so as to strengthen their authority. For instance, the FSSA advises that ensuring public confidence in the country's banking system be a responsibility of the BCCh instead of the SBIF. Also, the SBIF should be given the entire responsibility of prudential regulation and supervision of banks including issuing regulations, licensing and supervising banks and applying the necessary sanctions, and withdrawing licenses after consultation with the BCCh.

The 2006 Betancour article provides some statistics on the banking sector in Chile. The article notes that as of 2005, there were 26 banks in Chile, 14 of which are domestic and 12 foreign-controlled or foreign bank branches. One of the domestic banks - the BancoEstado - is state-owned. The banking sector, per the article, has undergone transformation and consolidation in the 1990s, with increasing market share (close to 40 percent of total assets in the sector as of 2005) being cornered by foreign banks.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

CP

According to the SBIF summary table on compliance, Chile is largely compliant with this principle. The 2004 FSSA finds that the SBIF and the BCCh share the responsibility of the regulation of the banking sector; however, supervision is the sole domain of the former. The FSSA attests that the SBIF's supervision is robust, well-established, and reputed for technical expertise and ethical integrity. The SBIF is also moving towards a risk-based supervisory framework away from a strict compliance driven method. Supervision is also aiming at placing more self-regulation responsibility on bank management and directors . The FSSA comments that the lines of responsibilities between the SBIF and the BCCh are not very tidily drawn, and therefore recommends refining the role and objectives of both agencies so as to strengthen their authority. For instance, the FSSA advises that ensuring public confidence in the country's banking system be a responsibility of the BCCh instead of the SBIF. Also, the SBIF should be given the entire responsibility of prudential regulation and supervision of banks including issuing regulations, licensing and supervising banks and applying the necessary sanctions, and withdrawing licenses after consultation with the BCCh . The 2007 IMF report mentions in this context the enactment of the Capital Markets II Reform Law in June 2007. The Law, per the report, simplifies and centralizes the review process for banks' license applications in the SBIF.

1.(2) Operational independence and adequate resources.

NC

Chile is materially non-compliant with this principle, per the SBIF summary table on compliance. Per the 2004 FSSA, though the General Banking Act established the SBIF, the Superintendent is appointed by the President of Chile and can be removed by the same without cause, having no fixed term of office. The Superintendent's term also coincides with that of the President, fuelling the potential of politicization of the office of the Superintendent. Other SBIF's staff face the same insecurity of office: they are appointed by the Superintendent and may be dismissed by her/him without cause. Given this observation, the FSSA does note that the supervisory staff show stable numbers and have high job morale. Another matter of concern noted by the IMF FSSA is the lack of SBIF control over its finances. The tax levied to the commercial banks supervised by the SBIF is equally divided between SBIF and the Ministry of Finance, on the latter's approval. The SBIF does show evidence of adequate financial and staff resources, but the FSSA notes that the informal budgeting arrangement is rife with risks to the operational independence of the SBIF . The 2008 IMF report avers that providing financial and operational independence to the supervisors will have a positive impact on market integrity.

1.(3) A suitable legal framework for authorization and ongoing supervision.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. According to the 2004 FSSA, the SBIF has the sole power to grant licenses and the BCCh has the right to provide a formal opinion on the process. The SBIF can, however, withdraw a license only with prior approval of the BCCh . The 2007 IMF report mentions in this context the enactment of the Capital Markets II Reform Law in June 2007. The Law, per the report, simplifies and centralizes the review process for banks' license applications in the SBIF.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. A 2008 IMF report also commends Chile "for stepping up the monitoring of banks' asset quality, liquidity, and risk management, as well as working toward strengthening the bank resolution framework" (PIN, p. 3).

1.(5) Legal protection for supervisors.

NC

According to the SBIF summary table on compliance, Chile is non-compliant with this principle. The 2004 FSSA finds that the only legal protection afforded to the SBIF supervisory staff is the protection against physical abuse or defamation that could occur in the discharge of their duties. They can, however, be dragged into civil action and financial support to defend themselves. Fear of litigation may, therefore, incentivize the staff to conduct compliance-based supervision that the country is trying to move against in favor of giving self-regulatory initiatives in the hands of bank management. In the long run, the FSSA avers, this could have an adverse impact on staff retention and quality . The 2007 IMF report, however, mentions the enactment of the Capital Markets II Reform Law in June 2007. The Law, per the report, enhances the legal protection of the supervisory staff.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

CP

Chile is largely compliant with this principle, per the SBIF summary table on compliance. The FSSA notes that "co-ordination and co-operation among the various supervisory and regulatory agencies is working effectively, but needs to remain abreast of developments in the financial sector" (p. 35). The SBIF participates in regular meetings with other financial sector supervisors under the aegis of the Superintendents' Committee. Also, meetings in the Capital Markets Committee are joined in by the BCCh and the Ministry of Finance (MdH). The FSSA draws attention to the constantly evolving financial system with an expansion of financial goods and services and the blurring of institutional and regulatory boundaries, and notes that in these changing times, regulatory and supervisory responsibilities also need to change. The FSSA, therefore, calls for clear and formal arrangements for defining and sharing responsibilities among supervisors, for information sharing, for framing regulations, and for responding in a crisis. The FSSA suggests the institution of Memoranda of Understanding (MoUs) among supervisors to formalize such supervisory arrangements, as also clarifying the terms of reference of the Superintendents' Committee to remove supervisory ambiguities and close potential gaps in the supervisory framework. The FSSA further suggests the appointment of a lead regulator during the meetings of the Superintendents' Committee supported by a small secretariat . The 2008 IMF report finds that the BCCh, the financial supervisors and the government meet regularly to discuss financial stability matters and also maintain close contact with foreign supervisors to "follow developments of common interest" (p. 13).

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. The 2004 FSSA finds that the SBIF has the sole power to grant licenses with formal opinion taken from the BCCh. It can, however, withdraw a license only with prior approval of the BCCh . The 2005 World Bank Policy Research Working Paper authored by Stephanou indicates that permissible activities allowed to banks are clearly defined under Article 69 of the General Banking Act.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

CP

Chile is largely compliant with this principle, per the SBIF summary table on compliance. The 2004 FSSA finds that the SBIF has enabling powers under the law to "assess the ownership structure of banking organizations, including the banks' direct or indirect controlling shareholders, as well as the operations and strategies proposed for the bank" (IMF 2004, p. 35). However, though fit and proper testing is done by the SBIF under the law, it is limited to testing financial solvency and moral integrity of the applicant, and does not test whether the expertise or experience of the bank management is commensurate with the activities the bank is going to undertake. Checks on the competence and experience of controllers of banks is done on an informal basis by the SBIF and therefore do not carry much legal weight . The 2005 report by Stephanou adds that persons controlling a bank who also own more than 10 percent of its shares must provide information of their financial situation to the SBIF.

4. Authority to review and reject transfer of ownership.

FC

Chile is compliant with this principle, according to the SBIF summary table on compliance. The 2004 FSSA finds that the SBIF has enabling powers under the law to "assess the ownership structure of banking organizations, including the banks' direct or indirect controlling shareholders, as well as the operations and strategies proposed for the bank" (IMF 2004, p. 35) . The 2005 report by Stephanou adds that Article 70 of the General Banking Act defines what activities are permitted for subsidiaries of banks. There are also global limits on subsidiaries - fixed assets of 100 percent of capital. Formation/acquisition of subsidiaries is subject to meeting minimum capital, management, and financial strength rating requirements. Subsidiaries are supervised either by the SBIF for banking subsidiaries or by the Superintendency of Securities and Insurance (SVS) for securities subsidiaries. SBIF approval is required before a subsidiary may invest in other companies, and the investment is limited to 5 percent of paid-in capital.

5. Authority to review major acquisitions and investments.

FC

According to the SBIF summary table on compliance, Chile is compliant with this principle. The 2004 FSSA finds that the SBIF has enabling powers under the law to "assess the ownership structure of banking organizations, including the banks' direct or indirect controlling shareholders, as well as the operations and strategies proposed for the bank" (IMF 2004, p. 35). The 2005 report by Stephanou adds that under the General Banking Act, formation/acquisition of subsidiaries is subject to meeting minimum capital, management, and financial strength rating requirements. Subsidiaries are supervised either by the SBIF for banking subsidiaries or the SVS for securities subsidiaries. SBIF approval is required before a subsidiary may invest in other companies, and the investment is limited to 5 percent of paid-in capital.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

Chile is materially non-compliant with this principle, per the SBIF summary table on compliance. However, subsequent IMF reports, including the 2007 Article IV report note that Chilean banks are well-capitalized with their regulatory capital well above the Basel requirements . The 2006 Betancour article also mentions that prudential regulation of banks in Chile has improved since the adoption of Basel I and regulation has evolved towards a modern risk-management approach . One of the weaknesses noted by the FSSA was that market risks are not factored in when computing capital charges for banks . However, the Betancour article notes that amendments to the Chilean prudential framework to apply the Basel Capital Accord implies that it now "incorporates requirements for capital associated to market risks and sets out a methodology to measure the risk related to positions in options" (p. 170). The 2007 IMF report adds that the Capital Markets II Reform Law of June 2007 introduces reserve requirements in line with Basel II . Despite the compliance level assigned to Chile for this principle in the SBIF summary table on compliance, subsequent information indicates an overall improvement in Chile's compliance with this principle. Nevertheless, none of these subsequent reports explicitly address Chile's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. According to the 2004 FSSA, a new regulation inspired by the Basel II framework, came into effect in January 2004 that grades loans into ten categories and determines the provisions for loan losses . The 2007 IMF report adds that non-performing loans in Chilean banks are well-provisioned.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. According to the 2004 FSSA, a new regulation inspired by the Basel II framework, came into effect in January 2004 that grades loans into ten categories and determines the provisions for loan losses . The 2007 IMF report adds that the enactment of the Capital Markets II Reform Law in June 2007 introduces reserve requirements in line with Basel II . Also, as the report finds out, non-performing loans in Chilean banks are well-provisioned . A 2008 IMF report also commends Chile "for stepping up the monitoring of banks' asset quality" (PIN, p. 3), while noting that banks have also tightened their credit standards.

9. Prudential limits and management information system on concentration of exposure.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. According to the 2004 FSSA, "the Chilean supervisory authorities have adopted a conscious policy of placing increasing responsibility on management, enhancing thus managerial practices and internal controls" (p. 36).

10. Arm's length rule and monitoring for connected lending.

FC

According to the SBIF summary table on compliance, Chile is compliant with this principle. The 2005 report by Stephanou elaborates that Article 84 of the General Banking Act stipulates that on- as well as off-balance sheet loans to any person, connected or not, cannot exceed 5 percent of the bank's capital. This limit may be relaxed to climb up to 30 percent provided certain guarantees, as specified in the Act, are in place. A further restriction is that the sum of all credits to all related parties cannot exceed the bank's consolidated capital. The Act also requires arm's length lending to related parties as defined by the SBIF (one of its discretionary powers ).

11. Policies and procedures for country risk and transfer risk.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. The 2006 article by Betancour further mentions that a new regulatory framework introduced in January 2005 facilitates the identification, measurement, and control of interest rate and currency risks by banks. The new framework incorporates international best practices as contained in Basel I and Basel II recommendations by quantifying risks and limiting the exposure of available capital after deductions associated with credit risks. The Betancour article also points out that banks have devised several mechanisms to transfer risk, such as securitization, credit derivatives, and variable interest rates in mortgage loans. The article, therefore, warns the SBIF to be cognizant of the risks involved in each transfer.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

CP

Chile is largely compliant with this principle, per the SBIF summary table on compliance. The 2004 FSSA observes that although banks are subject to minimum capital requirements under Basel I with respect to their risk-weighted assets and other commitments, market risk is not factored in and therefore, banks are not required to maintain capital against market risks . The FSSA recommends the introduction of market risk regulation that would impose capital charges for these risks . The 2006 Betancour article mentions that a new regulatory framework introduced in January 2005 facilitates the identification, measurement, and control of interest rate and currency risks by banks. The new framework incorporates international best practices as contained in Basel I and Basel II recommendations by quantifying risks and limiting the exposure of available capital after deductions associated with credit risks.

13. Comprehensive risk management processes.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. The 2006 Betancour article talks about the norms on liquidity risk management introduced in 2004 that brought Chile's liquidity risk management in line with international standards. Under the norms, "financial institutions now have to adopt and implement a "liquidity management policy" aimed at ensuring proper payment of obligations, not only in normal conditions but also in exceptional circumstances" (Betancour 2006, p. 171). A 2008 IMF report also commends Chile "for stepping up the monitoring of banks' asset quality, liquidity, and risk management" (PIN, p. 3).

14. Adequate internal controls.

FC

Chile is compliant with this principle, per the SBIF summary table on compliance. Further, according to the 2004 FSSA "the Chilean supervisory authorities have adopted a conscious policy of placing increasing responsibility on management, enhancing thus managerial practices and internal controls" (p. 36).

15. Strict "know-your-customer" rules and high ethical and professional standards.

NC

Chile is materially non-compliant with this principle, per the 2004 SBIF summary table on compliance. However, subsequent sources point towards material improvements in Chile's anti-money laundering/combating the financing of terrorism regime. The 2005 IMF Report on the Observance of Standards and Codes (ROSC) relating to the Financial Action Task Force (FATF) recommendations on AML/CFT comments that "Chile has moved to set in place an integrated legal and institutional framework to comprehensively address AML/CFT matters" (p. 1). Law No. 19.913 of 2003 substantially strengthened Chile's AML/CFT framework, and particularly in the area of preventive measures for the financial institutions, including banks, it imposed stricter reporting obligations, created a Financial Intelligence Unit (FIU), the Financial Analysis Unit (UAF), to issue regulations, monitor compliance and receive and analyze reports filed by supervised entities. However, the ROSC notes that a subsequent Constitutional Court ruling diluted the 2003 Law by seriously undermining the powers of the UAF . The Financial Action Task Force of South America (GAFISUD) mutual evaluation notes, for instance, that Chile is non-compliant with the FATF Special Recommendation relating to suspicious transactions reporting linked with terrorism. The GAFISUD attributes this to the fact that the UAF does not have the legal capacity to receive, analyze or disseminate suspicious transaction reports (STRs) related to the financing of terrorism.

Banks and other financial institutions are regulated by the SBIF, notes the ROSC. Law No. 19.913 mandates reporting entities to keep records for five years, and inform the UAF of any suspicious cash transactions exceeding a prescribed threshold. This obligation is supplemented by the obligation under the General Banking Act to keep account books, forms, correspondence, documents, and other paperwork for at least six years. The SBIF has issued instructions to banks relating to customer identification. The measures urged to be taken by banks include thoroughly identifying their customers by verifying their official identification, tracking their account activities; verifying the authenticity of their corporate customers, identifying and keeping track of the initiators and beneficiaries of funds transfers. Banks are also asked to ascertain reasons for specific transactions by customers, especially if they appear disproportionate to a customer's accounting activity or line of business, or otherwise suspicious as determined in international recommendations. The SBIF instructions apply to all domestic and foreign banks operating in Chile. The Act also obliges banks and financial institutions to have procedural manuals in place guiding them to avoid being embroiled in money laundering or terrorism financing or becoming a conduit for such operations , mentions the ROSC. According to the GAFISUD mutual evaluation, internal controls, compliance and audits are conducted by entities overseen by the SBIF. However, as noted by the ROSC, the Act does not impose sanctions on supervised entities for non-compliance with their reporting obligations.

A 2008 report by the U.S. Department of State (DoS) mentions a further law enacted in 2006 that pertains to Chile's AML/CFT efforts. Law No. 20.119 of 2006 imposes sanctions on entities found non-compliant with their AML/CFT obligations or their suspicious/cash transactions reporting requirements. The UAF has also been empowered to access government information not protected by secrecy or private laws. Though the UAF has not been granted regulatory powers, it is authorized to issue general instructions on entities' reporting obligations, including reporting on suspected terrorism-linked activities. The U.S. DoS report adds that the anti-money laundering laws in Chile has stipulations on AML/CFT controls and know-your-customer guidelines pertaining to checking accounts, but none relating to savings accounts, and therefore rigorous application of AML/CFT controls on non-current accounts by banks was not pervasive. The UAF has expressed dissatisfaction with the quality of the STRs filed by banks, but the U.S. DoS report observes that it is the responsibility of the UAF to train banks on producing quality reports. The UAF has, however, approached Colombia's FIU to provide training on STRs to Chilean banks in 2008, finds the report. In relation to Chile's CFT efforts, the report mentions that the SBIF circulates the United Nations Security Council Resolution No. 1267 Sanctions Committee's consolidated list to banks and financial institutions. The list is also available on the UAF's website, and reporting entities are instructed by the UAF to report any activities/transactions by those on the list.

Bank secrecy laws are cited by the U.S. DoS report as forming one of the major obstacles to AML/CFT enforcements and investigations in Chile. Much financial and tax information of Chilean persons are guarded by the country's strict secrecy laws. The General Banking Act imposes secrecy provisions on deposits and transactions, stipulating that banks may not divulge account activity and balances to third parties. Prosecutors are allowed to access such information only on a judicial order. The series of actions required by various law enforcement agencies, the UAF, the judicial courts, and the relevant banks to ultimately reach to the pertinent information result in enormous delays and substantially decrease the effectiveness of such actions. Some respite from this maze has been provided by Law No. 20.119, but it is precious little in terms of increasing the effectiveness of investigations or encouraging aggressive examination of suspicious activities by the UAF. A law addressing this major drawback (that has even drawn criticism from the Organisation for Economic Co-operation and Development in October 2007) has been drafted and introduced in the Congressional Commission since May 2007; however no progress has been reported ever since. The U.S. DoS report avers that the passage of this law "would bring Chile closer to compliance with ... FATF recommendations."

16. Effective supervisory system consisting of on-site and off-site supervision.

FC

Chile is compliant with this principle, per the 2004 SBIF summary table on compliance. The 2004 FSSA finds that the SBIF is empowered to conduct on-site inspections of all supervised banking groups and their subsidiaries, whether located domestically or abroad. Off-site supervision, on the other hand, comprises of analyzing internal and external auditors' reports, results of the on-site inspections and public information on banks. To facilitate off-site supervision, banks are required to submit financial information and reports to the SBIF. They are complemented by external auditors' reports and publicly available information disseminated by the banks.

17. Regular contact with bank management and understanding of bank's operations.

FC

Chile is compliant with this principle, per the 2004 SBIF summary table on compliance.

18. Analytical reports and statistical returns on solo and consolidated basis.

FC

Chile is compliant with this principle, per the 2004 SBIF summary table on compliance. The 2004 FSSA finds that to facilitate off-site supervision, banks are required to submit financial information and reports to the SBIF. They are complemented by external auditors' reports and publicly available information disseminated by the banks.

19. Independent validation of supervisory information through on-site examination or external auditors.

FC

According to the 2004 SBIF summary table on compliance, Chile is compliant with this principle. The 2004 FSSA finds that the SBIF is empowered to conduct on-site inspections of all supervised banking groups and their subsidiaries, whether located domestically or abroad. Off-site supervision, on the other hand, comprises of analyzing internal and external auditors' reports.

20. Ability to supervise on a consolidated basis.

NC

Chile is materially non-compliant with this principle, per the 2004 SBIF summary table on compliance. The 2004 FSSA finds that consolidated supervision by the SBIF is restricted to the supervision of bank holding companies. Supervision of other non-bank companies making up the financial conglomerate, and other activities associated through a common director or a common name, fall beyond the scope of SBIF's supervision. This leaves the consolidated company at the risk of failing its depositors if one of the associated companies not supervised by the SBIF becomes distressed. Further, the SBIF may request but not oblige bank holding companies to provide information on their financial situations and other interests outside banking activities. The FSSA recommends that the SBIF be given powers to elicit such information mandatorily.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

CP

Chile is largely compliant with this principle, per the 2004 SBIF summary table on compliance. According to the 2004 FSSA, "the audited financial statements of banks do not follow closely internationally accepted practices and standards, hindering comparison with other countries. However, these differences do not raise any particular prudential concerns" (p. 36). The FSSA points out that though the differences are not material from the supervisory standpoint (since the SBIF has robust requirements for loan-loss provisioning and write offs), comparability of audited financial statements prepared under Chilean GAAPs and under international accounting standards is jeopardized, breeding doubts about the stability and soundness of Chilean banks . The FSSA, therefore, advises Chile to expedite adoption of International Financial Reporting Standards (IFRSs). The same recommendations are forwarded by the 2004 World Bank Report on the ROSC on Accounting and Auditing in Chile. In line with these recommendations, according to the Deloitte IAS Plus website, Chile embarked upon a project for the gradual adoption of IFRSs laid out in four phases. Chile will be adopting IFRSs for all SBIF regulated entities over a three-year period beginning 2009 and ending 2011. Other than a few exceptions, according to this plan, all major banks and financial institutions will present financial statements in accordance with IFRSs by 2009.

22. Adequate supervisory measures to ensure timely corrective action.

FC

Chile is compliant with this principle, per the 2004 SBIF summary table on compliance. The 2004 FSSA notes that the SBIF has "sufficient and comprehensive powers for prompt corrective action, through either rehabilitation procedures or closure and liquidation" (p. 36) under the law. The SBIF also has a wide range of powers to impose graduated corrective actions . A 2008 IMF report also commends Chile "for ... working toward strengthening the bank resolution framework."

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

FC

Chile is compliant with this principle, per the 2004 SBIF summary table on compliance, and the 2004 FSSA notes that the SBIF "has the authority to perform global consolidated supervision" (p. 36). The 2008 IMF report adds that "bank supervisors remained in close contact with foreign counterparts to monitor cross-border activities" (p. 16), indicating satisfaction with the current state of affairs.

24. International exchange of information with other supervisors.

FC

Chile is compliant with this principle, per the 2004 SBIF summary table on compliance, and the 2004 FSSA notes that the SBIF "has the authority to share information with foreign supervisors" (p. 36). The 2008 IMF report adds that "bank supervisors remained in close contact with foreign counterparts to monitor cross-border activities" (p. 16), indicating satisfaction with the current state of affairs.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

FC

According to the 2004 SBIF summary table on compliance, Chile is compliant with this principle, and the 2004 FSSA notes that the SBIF has signed MoUs with the relevant foreign supervisory agencies.