Chilean financial system has enough liquidity, central bank says

May 18 (Reuters) – Chile’s banking system has adequate levels of liquidity and solvency despite tighter financial conditions that are expected to cause the economy to shrink, the country’s central bank said on Wednesday.

“Banks have limited risks and adequate levels of solvency and liquidity,” the central bank said in its Financial Stability Report (IEF). “This was the result of prudent behavior and the extraordinary measures implemented by financial authorities during the pandemic.

In the report, the bank said the biggest external threats to local stability are a deterioration in liquidity and an increase in long-term interest rates. Other threats include risk premiums for 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, the reduction of stimulus measures is essential to mitigate the cost of controlling inflation and prevent a deepening of macroeconomic imbalances from 2021, the report indicates.

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

He also noted that early pension withdrawals that have been used to help households cope with the economic impact of the COVID-19 pandemic have reduced the depth of the local capital market.

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

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

He pointed out that the economy is expected to contract for several quarters as tighter financial conditions and greater uncertainty lead to lower private consumption and investment. (Reporting by Fabian Andres Cambero; Writing by Alexander Villegas; Editing by Paul Simao)

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Don F. Davis