Chile’s financial system has sufficient liquidity, central bank says

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Chile’s banking system has adequate liquidity and solvency despite tightening financial conditions that are expected to lead to an economic contraction, the country’s central bank said on Wednesday.

“The banks exhibit limited risk and adequate levels of solvency and liquidity,” the central bank said in its Financial Stability Report (IEF). “This is the result of prudent behavior and the extraordinary measures taken by the financial authorities during the pandemic.

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In the report, the bank states that the main external threats to local stability are a deterioration in liquidity and a rise in long-term interest rates. Other threats include risk premiums to emerging economies due to faster rate adjustments in the United States, a possible escalation of the conflict in Ukraine or a deterioration of the Chinese economy.

In Chile, scaling back stimulus is essential to reduce the cost of inflationary control and avoid a deepening of macroeconomic imbalances from 2021, the report said.

“Initiatives that deepen accumulated imbalances or affect an adequate assessment of credit risk would make it difficult to continue this normalization,” the central bank said.

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It also noted that including early retirement benefits used to help households deal with the economic impact of the COVID-19 pandemic reduced the depth of the local capital market.

The negative effects of withdrawals are visible in both mortgage lending and corporate financing, according to the report.

“The loss of depth that the local capital market has already experienced, along with a more challenging environment, emphasize the importance of not further weakening stable sources of long-term savings,” the central bank said.

It pointed out that the economy is expected to contract for several quarters as more restrictive financial conditions and heightened uncertainty lead to a decline in private consumption and investment. (Report by Fabian Andres Cambero; Writing by Alexander Villegas; Editing by Paul Simao)

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Amanda Peterson: Amanda is an economist turned blogger who provides readers with an in-depth look at macroeconomic trends and their impact on businesses.

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