Following congressional approval of a bill to allow Chileans to withdraw up to 10% of their holdings from private pension funds, for the first time the Chilean Central Bank announced a program on July 30 to conduct repos with pension funds to purchase up to USD10 billion in senior bank bonds. This will allow pensions funds to maintain their investment positions and help reduce pressures that the pension fund withdrawal process would have likely generated on bank bonds and deposits in the short term, according to Fitch Ratings. This policy action reiterates the Chilean Central Bank’s commitment to support the banking system’s liquidity and ability to lend. The central bank’s additional credit facilities and asset purchasing programs have totalled USD28 billion through June 30, 2020. In Fitch’s view, these measures will continue to support the banking system’s funding access and tenors, as well as stabilize funding costs in times of volatility.

Congress approved a law in July 2020 that allows affiliates a one-time withdrawal of up to 10% of their mandatory pension fund account (AFP). Chilean AFP’s total assets under management totalled USD202 billion as of June 30, 2020, of which 19% were invested in Chilean bank instruments. To reduce the impact of the approved law on bank liquidity and the secondary market, the Chilean Central Bank announced specific conditions for AFPs to utilize the repo program with eligible bank bonds. The Central Bank’s maximum purchase amount is distributed according to the banks’ exposures and relative importance within the pension funds’ fixed income portfolio. The repo program covers about 82% of the six largest D-SIB’s outstanding bond issuance and about 17% of mid-sized bank’s bond issuance.

Under this program, AFPs are committed to repurchase the sold portfolio over the next 1-3 months. This will reduce financial disruptions in the secondary fixed income market and also prevent pension funds from selling a large amount of instruments in the market, which would affect their market value and, therefore generate losses in their own managed pension funds. The total program will represent up to 36% of the total bank’s senior bonds held by AFPs (USD28 billion). The Central Bank also announced a program to purchase up to USD8 billion in time deposits to facilitate liquidity operations between financial institutions and the potential selling from AFPs, as time deposits are short-term and highly liquid instruments in the secondary market.

Additionally, the Central Bank will continue its program to purchase up to USD4.1 billion in senior bank bonds from USD8 billion that started in November 2019 and also opened a second credit line facility to banks up to USD16 billion.

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