On August 3rd, the Financial Market Commission (CMF, for its initials in Spanish) launched a public consultation on a regulatory proposal aimed at facilitating the adoption of internal methodologies for the measurement of provisions and credit risk capital requirements in the banking industry. The initiative seeks to allow banks to develop their own models for estimating their risks, subject to rigorous standards for validation, supervision, and governance.

The proposal represents a significant opportunity for banks, as it allows for a more accurate measurement of risk in accordance with the characteristics of their portfolios and business models. This could contribute to more efficient management of regulatory capital and strengthen institutions’ ability to develop their specific business strategies.

However, this increased regulatory flexibility comes at a the cost of enhanced control requirements. As banks are granted greater autonomy to model and quantify their risks, it becomes essential to strengthen standards for governance, data quality, validation, and supervisory standards to ensure the consistency and reliability of such measurements. The proposal also contemplates a phased implementation process to facilitate the adaptation of banking institutions.

If approved in terms similar to those currently proposed, the regulation could constitute an important step in the modernization of Chile’s prudential banking framework and in the way institutions manage and quantify their risks.