A healthy and robust financial system supports the economic development of a country because it streamlines capital investments on productive activities, such as construction, industry, technology or market expansion. It also contributes to the advancement of society helping to provide solutions to meet its needs, such as housing, education and employment, to name a few
Without a doubt, banks bring value to society. The banking sector’s product offering is built on five pillars: solidity, trust, transparency, innovation and competitiveness, all of which are essential in satisfying the challenging demands of customers. The presence and interaction of these pillars allow the financial system to fulfill a pivotal role as driver of prosperity in countries: it attracts and assigns savings, helps to better find and identify projects, monitors how the companies and individuals to whom it provides funding use their resources, determines and diversifies risks, enables the trade of financial goods, services and instruments.
Also, by concentrating efforts on the best initiatives and ideas, banks boost productivity by ensuring that the funds are funneled to fund the best projects, while favoring entrepreneurship and expanding opportunities for people, thus fulfilling its citizen and public service role.
In 2010, financial services contributed to a relevant 5.6% of the country’s Gross Domestic Product (GDP). This share increased to 6.4% in 2015. In terms of direct employment, the sector contributes with nearly 200 thousand jobs, and is responsible for the creation of more jobs than any other economic sector. Regarding this last point, if in 2010-2011 the financial sector’s contribution to the country’s job market stood at 1.8%, in average. in 2016 to date it has increased to 2.3%.
To support people and companies, solvency is a necessary condition that ensures the viability and sustainability of banks. In this respect, the industry’s capital position in recent years has remained solid. Since 2009, the capital adequacy index has always remained above capital adequacy regulatory requirements. The banking sector’s leveraging level – measured as the basic capital to total assets ratio – has remained stable at around 7%, a figure that is also above current regulatory requirements, which set the minimum threshold at 3%. Moreover, in an international comparison considering the capital to total assets ratio alone - not factoring in risk-weighted assets and other regulatory aspects - the country ranks in a favorable position.
The country is going to be facing significant changes in terms of capital requirements that will not pose an unavoidable challenge. The new General Banking Law will introduce new and stricter capital requirements to homologate national regulations to Basel III requirements. Our assessment is that these additional capital requirements are limited and that the banking industry as a whole will not have any problems provisioning them within the deadlines established by the authority.
Confidence and transparency
The toughest and more complex challenge that will mark the future of Chilean banks is another one. Undoubtedly, the financial activity is suffering from a loss of social legitimacy at a global scale, which is accompanied by a growing demand for accountability. The regulatory pressure in the sector is increasing, especially in everything that has to do with customer protection. Also, the concern for social, environmental, corporate governance and ethical issues is growing among investors and shareholders. In this context, confidence and transparency are essential qualities banks will need to nurture in order to deliver the financial intermediation services required to support the productive projects of people and companies. The banking industry has been successful, but the challenge that looms is a major one, and not all players in the industry will be able to overcome it.
Certainly, the ever growing base of customers that trust banks to deposit and manage their savings proves that the model used has been for society at large. In 2004-2015, the number of deposit accounts increased from 3 to 15 million, while savings and time savings accounts increased from 12 to 15 million and mortgage savings accounts doubled, from 2 to almost 4 million. Additionally, within the many achievements of the banking industry, the deployment of quick and safe cash delivery systems has evolved in a noteworthy manner in Latin America.
Competition and innovation
Competition and innovation materialize in the systematic development and the promotion of groundbreaking financial services. The investment in technological advances has allowed the sector to evolve from face-to-face and intermediation services towards mass and transactional banking models, where the key goal is always to deliver the best and friendliest customer service. The accelerating development of mobile banking will entail the access to different remote services, based on applications for mobile devices. And this goes beyond having only one method of payment as it also involves information services and management of methods of payments, among others. The banking industry is already hard at work on this, and has, since the beginning of the year, already announced the rollout of several new mobile banking services.
Looking forward, the financial industry is facing a new era, where ethical and principle-based behavior will play an increasingly pivotal role in the system’s sustainability and its ability to build trust. Some behaviors are becoming increasingly intolerable. Banks will need to adjust profitability to the fundamental principles of the industry: integrity, prudence and transparency. Clear and transparent communication and financial education help people make more informed and responsible decisions, generating significant value for the company, the financial industry and society at large. But words are not enough to implement an ethical culture. They need to be followed by specific behaviors and facts: “walk the talk”