The 111 th Congress has taken a broad approach to capturing the lessons on financial crises as part of the effort to evaluate possibilities for revamping the U.S. regulatory system. Latin America stands out as one region that has survived multiple financial crises, many of which crippled entire financial sectors. In the aftermath of such devastation, many countries undertook regulatory reform. Since then, Chile's financial sector has overcome many regional and global financial crises when other countries in the hemisphere could not. In so doing, soundness of the banking system has not compromised bank profitability, reflecting modernization, efficiency gains, and increased competition that paralleled development of effective prudential regulation and oversight. Conceptually, Chile's comprehensive reform had two fundamental principles: simplify and streamline prudential regulation and supervision. Under the G-30 report framework for financial regulation, Chile adopted what might be classified as an integrated approach to regulation. The architecture was reshaped, consolidated, and vastly strengthened by giving most regulatory responsibility to one agency, the Superintendency of Banks and Financial Institutions (SBIF). As stated in the General Banking Act, the Superintendent is appointed by the President of the Republic, and the SBIF has sweeping oversight powers for "banking enterprises irrespective of their nature and the financial entities whose control is not otherwise entrusted by law to a different institution...[and] shall also be in charge of the supervision of companies whose corporate purpose consists in the issuance or operation of credit cards." In addition to the standard 8% minimum Basel risk-weighted capital-asset ratio, Chilean banks have to meet capital requirements relative to reserves, deposits, and other liabilities. Capital must equal at least 3% of total assets. Perhaps taking a page from U.S. regulations, it was later expanded to cover up to 90% of an individual's total deposits in the banking system to a specified limit. Bank Supervision

Oversight is based on a formal bank rating system following the CAMEL standards (capital, asset quality, management, earnings, liquidity, and later bank management), Basel II guidelines, and additional limitations on bank investment activities (e.g. Conclusions: Chile's Relevance to the United States

Testimony before the Joint Economic Committee on April 21, 2009 by three noted economists challenged policy makers to think very differently about how the financial sector should work and be regulated. In addressing the theme of the hearings, each conveyed the pitfalls of the "too big to fail" phenomenon, noting how loose or inappropriate regulation has led to "gargantuan," opaque firms that can be exploitive and difficult to regulate. The witnesses argued that only when risk is internalized and the promise of a bailout withheld will behavior begin to change. In particular, Chile has protected itself from severe repercussions of the current crisis, which, many argue, is no accident given the regulations in place that improve accountability by restricting risky behavior, enhancing transparency, and promoting a more traditional commercial banking model. The link between a sound financial sector and economic growth and development is now well documented, and evidence from Chile, many argue, suggests that although there may be tradeoffs between efficiency, growth and prudential regulation, over the long run, avoiding a major financial crisis may more than offset the opportunity costs of a more comprehensive regulatory environment, particularly if a proper balance can be achieved.
The 111th Congress has taken a broad approach to capturing the lessons on financial crises as part of the effort to evaluate possibilities for revamping the U.S. financial regulatory system. Latin America stands out as one region that has survived multiple financial crises, and in the aftermath of such devastation, many countries undertook comprehensive regulatory reform. Although a smaller developing economy, Chile provides one important example. Following two financial crises, one the result of extreme over regulation, the other of catastrophic under regulation, Chile redesigned its regulatory system in 1986. Since then, it has had one of the most stable financial systems in Latin America and has overcome regional and global financial crises when other countries in the hemisphere did not. In so doing, new-found soundness of the banking system has not compromised bank profitability, reflecting modernization and efficiency gains that paralleled development of effective prudential regulation and oversight.
Chile's success rests on a 1986 overhaul of the General Banking Act. Conceptually, reform had two fundamental principles: simplify and streamline prudential regulation and supervision. Under the framework developed in the G-30 report, The Structure of Financial Supervision, Chile adopted what might be classified as an integrated approach to regulation. The architecture was reshaped, consolidated, and vastly strengthened by giving most regulatory responsibility to the Superintendency of Banks and Financial Institutions (SBIF), with supportive oversight by three other specialized agencies. The SBIF has sweeping oversight powers over "banking enterprises irrespective of their nature and the financial entities whose control is not otherwise entrusted by law to a different institution...[and] shall also be in charge of the supervision of companies whose corporate purpose consists in the issuance or operation of credit cards."
Experience from Chile points to the value of establishing: (1) a strong, independent, and consolidated regulatory and oversight agency, with broad and definitive powers; (2) enhanced transparency through a number of specific reporting measures; (3) clear capital standards that include the 8% minimum Basel risk-weighted capital-asset ratio, capital requirements relative to reserves, deposits, and other liabilities, and total capital equal to at least 3% of total assets; (4) deposit insurance to cover up to 90% of an individual's total deposits capped at a specified limit; and (5) oversight based on a formal bank rating system following the CAMEL standards (capital, asset quality, management, earnings, liquidity, and later bank management), Basel II guidelines, and additional limitations on bank investment activities.
Chile's experience correlates with testimony by three noted economists before the Joint Economic Committee on April 21, 2009, who challenged policy makers to think very differently about how the financial sector should work and be regulated. In addressing the theme of the hearings, each conveyed the pitfalls of the "too big to fail" phenomenon, noting how loose or inappropriate regulation has led to "gargantuan," opaque firms that can be exploitive and highly difficult to regulate. The witnesses argued that only when risk is internalized and the promise of a bailout withheld will behavior begin to change. Chile has protected itself from severe repercussions of the current crisis, in part because of regulations in place that restrict risky behavior and promote a more traditional commercial banking model, although they are no guarantee of perpetual success in avoiding future crises. Still, the link between a sound financial sector and economic growth and development is now well documented, and evidence from Chile some argue suggests that although there may be tradeoffs between efficiency, growth and prudential regulation, over the long run, avoiding a major financial crisis may more than offset the opportunity costs of a more comprehensive regulatory environment, particularly if a proper balance can be achieved.