The purpose of central bank-initiated countercyclical capital controls (RCCs) is to “accumulate a capital ‘cushion’ that can be used in the face of severe stress scenarios.” Its main effect is economic protection. This allows banks to continue to extend credit to businesses and households, as it provides funding in the face of difficult times.
Yesterday afternoon on Tuesday, the central bank decided to invoke the 0.5% countercyclical capital requirement (RCC). This consists of accumulating a capital “cushion” (one that all banks must apply) to be available in the face of severe stress scenarios.
If the latter happens, this buffer is released and this additional margin mitigates the negative impact of a sudden limitation of essential services such as the supply of credit (i.e., in the event of a crisis, the bank will provide its ‘cushion’ will continue to give credit to individuals and businesses).
The issuer explained that the requirement is due to the fact that “the financial situation has deteriorated since the end of last year” and therefore the banking system needs to be more resilient in the face of disruption. An episode that could have a significant impact on the economy.
Central Bank Governor Rosanna Costa underscored that this is a macro-prudential measure, assuring local banking institutions that they are solvent.
What is the Countercyclical Capital Requirement (RCC)
The Central Bank of Chile explained that the purpose of the countercyclical capital regulation (RCC) is to “accumulate a capital ‘cushion’ that can be used in the face of severe stress scenarios”.
When this happens, that cushion is released and that extra margin mitigates the negative impact of sudden restrictions on essential services such as the supply of credit.
It should be noted that the RCC has a precautionary logic and is reluctant to reduce capital in moments of tension, as it may give banks vulnerability and stigma.
RCC is therefore classified as a “macroprudential” measure.
Why the central bank decided to activate the RCC
The central bank claimed that the Governing Council decided to invoke the RCC after a “detailed analysis and assessment of external and internal scenarios.”
In the former case, there is more uncertainty than usual about future developments in global financial conditions.
And at the local level, due to its relevance to continuing progress in reconfiguring the economy’s ability to face adverse scenarios.
“The banking system is presumed to have sufficient capacity to absorb this requirement and build additional safeguards to prepare the entire system for future adverse events,” the issuing authority said. rice field.
What are the effects of central bank-initiated RCCs?
According to the central bank’s briefing document, the main effect of the RCC “is to contribute to the protection of the economy as a whole, because it allows banks to continue to extend credit in the face of difficult times, as it allows them to secure funds.” This is because we can
The benefits of this increased resilience for the Chilean economy as a whole “outweigh the potential costs associated with it.”