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Risk Management

12 Months Ended

Dec. 31, 2021

Disclosure of financial risk management [text block] [Abstract]

NOTE 38

RISK MANAGEMENT

Introduction and general description

The Bank, due to its activities with financial instruments is exposed to several types of risks. The main risks related to financial instruments that apply to the Bank are as follows:

Market risk: rises from holding financial instruments whose value may be affected by fluctuations in market conditions, generally including the following types of risk:

●

Foreign exchange risk: this arises as a consequence of exchange rate fluctuations among currencies.

●

Interest rate risk: this arises as a consequence of fluctuations in market interest rates.

●

Price risk: this arises as a consequence of changes in market prices, either due to factors specific to the instrument itself or due to factors that affect all the instruments negotiated in the market.

●

Inflation risk: this arises as a consequence of changes in Chile’s inflation rate, whose effect would be mainly applicable to financial instruments denominated in UFs.

Credit risk: this is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party.

Liquidity risk: is the possibility that an entity may be unable to meet its payment commitments, or that in order to meet them, it may have to raise funds with onerous terms or risk damage to its image and reputation.

Operational risk: the risk of loss due to inadequate or failed internal processes, people or systems or external events, and have legal, regulatory and reputational effect.

Capital risk: this is the risk that the Bank may have an insufficient amount and/or quality of capital to meet the minimum regulatory requirement to operate as a bank, respond to market expectations regarding its creditworthiness, and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

This note includes information on the Bank’s exposure to these risks and on its objectives, policies, and processes involved in their measurement and management.

Risk management structure

The Board is responsible for the establishment and monitoring of the Bank’s risk management structure, for which purpose it has an on-line corporate governance system which incorporates international recommendations and trends, adapted to Chilean regulatory conditions and given it the ability to apply the most advanced practices in the markets in which the Bank operates.

The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long term, stable earnings growth. Toward that end, our Board and senior management places great emphasis on risk management.

A. Integral Risk Committee

The Integral Risk Committee of the Board is responsible for reviewing and monitoring all risks that may affect us, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises risk in general. It also evaluates the reasonability of the systems for measurement and control of risks.

●

Credit risk

●

Market risk

●

Operational risk

●

Cybersecurity

●

Solvency risk (BIS)

●

Legal risks

●

Compliance risks

●

Reputational risks

This Committee includes six Board members. This committee also includes the CEO, the Director of Risk and other senior level executives from the risk and commercial side of our business.

B. Audit Committee

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. The Chief Executive Officer, General Counsel, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the external auditors and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.

C. Asset and Liability Committee

The ALCO includes the Vice-President of the Board and three additional members of the Board, the Chief Executive Officer, the Chief Financial Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.

The main functions of the ALCO are:

●

Making the most important decisions, approving the risk appetite and limits regarding our exposure to inflation, interest rate risk, funding, capital and liquidity levels.

●

Review of the evolution of the most relevant local and international markets and monetary policies.

D. Market Committee

The Market Committee includes the Chairman of the Board, the Vice Chairman of the Board, two additional members of the Board, the Chief Executive Officer, the Director of Corporate Investment Banking, the Chief Financial Officer, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.

The Market Committee is responsible for:

●

Establishing a strategy for the Bank’s trading investment portfolio.

●

Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio. The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.

●

Reviewing the net foreign exchange exposure and limit.

●

Reviewing the results of the Bank’s client treasury business.

●

Reviewing the evolution of the most relevant local and international markets and monetary policies.

E. Risk Department

All issues regarding risk in the Bank are the responsibility of the Bank’s Risk Department. The Risk Department reports to the CEO but has full independence, and no risk decisions can be made without its approval.

Market risk

Market risk arises as a consequence of the market activity, by means of financial instruments whose value can be affected by market variations, reflected in different assets and financial risk factors. The risk can be diminished by means of hedging through other products (assets/liabilities or derivative instruments) or terminating the open transaction/position. The objective of market risk management is to manage and control market risk exposure within acceptable parameters.

There are four major risk factors that affect the market prices: type of interest, type of exchange, price, and inflation. In addition and for certain positions, it is necessary to consider other risks as well, such as spread risk, base risk, commodity risk, volatility or correlation risk.

Market risk management

The Bank’s internal management measures market risk based mainly on the procedures and standards of Banco Santander Spain, which are in turn based on an analysis of three principal components:

trading portfolio

local financial management portfolio

foreign financial management portfolio

The trading portfolio is comprised chiefly of investments valued at fair market value and free of any restriction on their immediate sale, which are often bought and sold by the Bank with the intention of selling them in the short term to benefit from short–term price fluctuations. The trading portfolio also includes the Bank’s exposure to foreign currency. The financial management portfolios include all the financial investments not considered to be part of trading portfolio.

The main decisions that relate to market risk for the Bank and the limits regarding market risk are made in the Asset and Liability Committee and the Market Committee. The measurement and oversight of market risks is performed by the Market Risk Department. The Bank’s governance rules have established the existence of two high-level committees that, among other things, function to monitor and control market risks: the Asset and Liability Committee and the Market Committee.

The Market Risk department’s functions in connection with trading portfolio include the following:

applies the “Value at Risk” (VaR) techniques to measure interest rate risk,

ii.

adjust the trading portfolios to market and measure the daily income and loss from commercial activities,

iii.

compare the real VaR with the established limits,

iv.

establish procedures to prevent losses in excess of predetermined limits, and

furnishes information on the trading activities to the ALCO, other members of the Bank’s management, and the Global Risk Department of Banco Santander Spain.

The Market Risk department’s functions in connection with financial management portfolios include the following:

performs sensitivity simulations (as explained below) to measure interest rate risk for activities denominated in local currency and the potential losses forecasted by these simulations.

ii.

provide daily reports thereon to the ALCO, other members of the Bank’s management, and the Global Risk Department of Banco Santander Spain.

Market risk – management of trading portfolio

The Bank applies VaR methodologies to measure the market risk of its trading portfolio. The Bank has a consolidated commercial position comprised of fixed–income investments and foreign currency trading. This portfolio is comprised mostly of Central Bank of Chile bonds, mortgage bonds, locally issued, low–risk corporate bonds and foreign currencies, mainly U.S. dollars. At the end of each year, the trading portfolio included no stock portfolio investments.

For the Bank, the VaR estimate is made under the historical simulation methodology, which consists of observing the behavior of the profits and losses that would have occurred in the current portfolio if the market conditions for a given historical period had been in force, in order to infer the maximum loss on the basis of that information, with a given degree of confidence. The methodology has the advantage of precisely reflecting the historical distribution of the market variables and not requiring any assumptions regarding the distribution of specific probabilities. All the VaR measures are intended to determine the distribution function for a change in the value of a given portfolio, and once that distribution is known, to calculate the percentile related to the necessary degree of confidence, which will be equal to the value at risk by virtue of those parameters. As calculated by the Bank, the VaR is an estimate of the maximum expected loss of market value for a given portfolio over a 1–day horizon, with a 99.00% confidence level. It is the maximum 1–day loss that the Bank could expect to experience in a given portfolio, with a 99.00% confidence level. In other words, it is the loss that the Bank would expect to experience only 1.0% of the time. The VaR provides a single estimate of market risk which is not comparable from one market risk to another. Returns are calculated through the use of a 2–year time window or at least 520 data points obtained since the last reference date for calculation of the VaR going backward in time.

We do not calculate three separate VaRs. We calculate a single VaR for the entire trading portfolio, which in addition is segregated by risk type. The VaR software performs a historical simulation and calculates a Profit and Loss Statement (P&L) for 520 data points (days) for each risk factor (fixed income, foreign currency and variable income.) The P&L of each risk factor is added together and a consolidated VaR is calculated with 520 points or days of data. At the same time a VaR is calculated for each risk factor based on the individual P&L calculated for each individual risk factor. Furthermore, a weighted VaR is calculated in the manner described above, but which gives a greater weighting to the 30 most recent data points. The larger of the two VaRs is the one that is reported. In 2021, 2020 and 2019, we used the same VaR model and there has been no change in methodology or assumptions for subsequent periods.

The Bank uses the VaR estimates to provide a warning when the statistically estimated incurred losses in its trading portfolio would exceed prudent levels, and hence, there are certain predetermined limits.

Limitations of the VaR model

When applying a calculation methodology, no assumptions are made regarding the probability distribution of the changes in the risk factors; the historically observed changes are used for the risk factors on which each position in the portfolio will be valued.

It is necessary to define a valuation function fj(xi) for each instrument, preferably the same one used to calculate the market value and income of the daily position, This valuation function will be applied in each scenario to generate simulated prices for all the instruments in each scenario.

In addition, the VaR methodology should be interpreted taking into consideration the following limitations:

Changes in market rates and prices may not be independent and identically distributed random variables and may not have a normal distribution. In particular, the assumption of normal distribution may underestimate the probability of extreme market movements;

The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in the risk factors in the future, and any modification of the data may be inadequate. In particular, the use of historical data may fail to capture the risk of potential extreme and adverse market fluctuations, regardless of the time period used;

A 1-day time horizon may not fully capture the market risk positions which cannot be liquidated or covered in a single day, It would not be possible to liquidate or cover all the positions in a single day;

The VaR is calculated at the close of business, but trading positions may change substantially in the course of the trading day;

The use of a 99% level of confidence does not take account of, or make any statement about, the losses that could occur outside of that degree of confidence; and

A model such as the VaR does not capture all the complex effects of the risk factors over the value of the positions or portfolios, and accordingly, it could underestimate potential losses,

We perform back-testing daily and generally find that trading losses exceed our VaR estimate approximately one out of every 100 trading days. At the same time, we set a limit to the maximum VaR that we are willing to accept over our trading portfolio. In both 2021and 2020, the Bank has remained within the maximum limit established for the VaR, even in those circumstances in which actual VaR exceed the estimated VaR.

High, low and average levels for each component for 2021 and 2020 were as follows:

VaR	2021 USDMM		2020 USDMM
Consolidated:
High		3.43		12.82
Low		1.11		1.94
Average		1.96		4.45
Fixed-income investments:
High		2.86		11.96
Low		1.12		1.50
Average		1.86		3.19
Variable-income investments
High		0.29		0.01
Low		-		-
Average		0.19		-
Foreign currency investments
High		2.33		6.47
Low		0.09		0.71
Average		0.77		2.85

Market risk - local and foreign financial management

The Bank’s financial management portfolio includes most of the Bank’s non-trading assets and liabilities, including the credit/loan portfolio. For these portfolios, investment and financing decisions are strongly influenced by the Bank’s commercial strategies.

The Bank uses a sensitivity analysis to measure the market risk of local and foreign currencies (not included in the trading portfolio). The Bank performs a simulation of scenarios, which will be calculated as the difference between the present value of the flows in the chosen scenario (a curve with a parallel movement of 100 bps in all its segments) and their value in the base scenario (current market). All the inflation–indexed local currency (UF) positions are adjusted by a sensitivity factor of 0.57, which represents a 57-basis point change in the rate curve for the real rates and a 100 basis point change for the nominal rates. The same scenario is performed for the net foreign currency positions and the interest rates in U.S. dollars. The Bank has also established limits in regard to the maximum loss which these interest rate movements could impose on the capital and net financial income budgeted for the year.

To establish the consolidated limit, we add the foreign currency limit to the domestic currency limit and multiple by 2 the sum of the multiplication of them together both for net financial loss limit as well as for the capital and reserves loss limit, using the following formula:

Consolidated limit = square root of a2 + b2 + 2ab

a: domestic currency limit

b: foreign currency limit

Since we assume the correlation is 0; 2ab = 0, 2ab = 0

Limitations of the sensitivity models

The most important assumption is using an exchange rate of 100 bp based on yield curve (57 bp for real rates). The Bank uses a 100 bp exchange since sudden changes of this magnitude are considered realistic. Santander Spain Global Risk Department has also established comparable limits by country, to be able to compare, monitor and consolidate market risk by country in a realistic and orderly way. In addition, the sensitivity simulation methodology should be interpreted taking into consideration the following limitations:

The simulation of scenarios assumes that the volumes remain consistent in the Bank’s Consolidated Statements of Financial Position and are always renewed at maturity, thereby omitting the fact that certain credit risk and prepayment considerations may affect the maturity of certain positions.

This model assumes an identical change along the entire length of the yield curve and does not take into account the different movements for different maturities.

The model does not take into account the sensitivity of volumes which results from interest rate changes.

The limits to losses of budgeted financial income are calculated based on the financial income foreseen for the year, which may not be actually earned, meaning that the real percentage of financial income at risk may be higher than the expected one.

Market risk – Financial management portfolio – December 31, 2021 and 2020

	2021				2020
	Effect on financial income		Effect on capital		Effect on financial income		Effect on capital

Financial management portfolio – local currency (MCh$)
Loss limit		32,865		84,864		100,000		329,275
High		31,233		80,097		66,504		302,263
Low		13,694		41,653		26,492		214,596
Average		24,018		62,916		45,380		255,070
Financial management portfolio – foreign currency (Th$US)
Loss limit		36,619		34,991		32		53
High		8,545		32,205		19		47
Low		698		1,055		2		12
Average		3,733		17,615		5		33
Financial management portfolio – consolidated (in MCh$)
Loss limit		32,865		84,864		100,000		329,275
High		25,709		78,259		67,584		286,436
Low		12,854		56,857		25,111		210,706
Average		21,041		69,577		46,044		246,292

IBOR – reform

In March 5, 2021, the Financial Conduct Authority (FCA) announced the cessation or loss of representativeness of the LIBOR benchmarks, published by ICE Benchmark Administration (IBA), as follows:

Publication of euro LIBOR, Swiss franc LIBOR, Japanese yen LIBOR, sterling LIBOR, and US dollar LIBOR (1-week and 2-month) will cease immediately after 31 December 2021.

Publication of the overnight and 12-month US dollar LIBOR will cease immediately after 30 June 2023.

Changing methodology calculation to obtain synthetic LIBOR for sterling LIBOR and Japanese yen LIBOR for a further period after end-2021.

In October 2020, the ISDA launched the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol. The fallbacks for a particular currency apply following a permanent cessation of the IBOR/LIBOR in that currency. In each case, the fallbacks will be adjusted versions of the risk-free rates identified in each currency. The fallbacks coming into effect on January 25, 2021. Additionally, on August 19, 2021, the ISDA has published ISDA 2021 EONIA Collateral Agreement Fallbacks offering an efficient way to amend the terms of certain ISDA collateral agreements incorporating a fallback upon the cessation of EONIA.

The main risks to which Banco Santander is exposed are: (i) legal risks derived from potential changes in required documentation for new or existing operations; (ii) financial and accounting risks from market risk models (valuation, hedge, offset and recognition); (iii) business risk, revenue from products linked to the LIBOR decline; (iv) derivatives price risk, how changes could impact the mechanisms of price determination for certain instruments; (v) operational risk, to adapt computer systems, reporting systems or operational processes; (vi) reputational risk derived from relationship with clients during transition period and; (vii) litigation risk from product and services offered by the Bank, which could have negative impact on our profitability.

The Bank has been working since 2019 in a “transition program” to manage the identified risks and address the challenges arise in the transition period. Following the road map established, the Bank identified impacted clients and areas, the risks to which the Bank is exposed, determined working teams and involved senior management in a strong governance plan and, additionally establishing action’s plans for each impacted risk and impacted areas, which we expect will allow us to face the challenges related to RFR elimation.

In this process, CIR (Integral Rick Committee) has been closely monitoring, because is the primarily responsible for monitoring compliance with the Bank’s risk management policies and procedures and reviewing the adequacy of the risk management framework.

During 2021, the IBOR Transition Program has focused on performing contractual, commercial, operational, and technology required changes. In 2022, the program will continue to address the next step of the transition related to management of the contract history and cessation of the US dollar LIBOR on June 2023.

At December 31, 2021 and 2020, the exposures of financial assets and liabilities impacted by the IBOR reform is presented below:

As of December 31, 2021

Loans and advances

Deposits

Debt instruments

Financial derivative contracts

(Assets)

Financial derivative
contracts

(Liabilities)

MCh$

362,331

582,979

200,301

614,035

483,789

As of December 31, 2020

Loans and advances

Deposits

Debt instruments

Financial derivative contracts

(Assets)

Financial derivative
contracts

(Liabilities)

MCh$

609,243

38,819

1,672,422

1,623,725

Credit risk

Credit risk is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party. The Bank consolidates all elements and components of credit risk exposure to manage credit risk (i.e., individual delinquency risk, inherent risk of a business line or segment, and/or geographical risk).

Credit Risk Governance

The Risk Division, our credit analysis and risk management group, is largely independent of our business areas, Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

The Bank’s governance rules have established the existence of the Integral Risk Committee. This committee is responsible for revising and following all risks that may affect us, including reputational risk, allowing for an integral risk management.

This committee serves as the governing body through which the Board supervises all risk functions. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes the Vice Chairman of the Board and five Board members.

The Board has delegated the duty of credit risk management to the Integral Risk Committee, as well as to the Bank’s risk departments, whose roles are summarized below:

●

Formulate credit policies by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submitting reports, documentation and legal procedures in compliance with the regulatory, legal and internal requirements of the Bank.

●

Establish the structure to approve and renew credit requests. The Bank structures credit risks by assigning limits to the concentration of credit risk in terms of individual debtor, debtor group, industry segment and country. Approval levels are assigned to the corresponding officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are continually revised. Teams in charge of risk evaluation at the branch level interact on a regular basis with customers; however, for larger credit requests, the risk team from the head office and the Executive Risk Committee works directly with customers to assess credit risks and prepare risk requests.

●

Limit concentrations of exposure to customers or counterparties in geographic areas or industries (for accounts receivable or loans), and by issuer, credit rating and liquidity.

●

Develop and maintain the Bank’s credit risk classifications for the purpose of classifying risks according to the degree of exposure to financial loss that is exhibited by the respective financial instruments, with the aim of focusing risk management specifically on the associated risks.

●

Revise and evaluate credit risk. Management’s risk divisions are largely independent of the Bank’s commercial division and evaluate all credit risks in excess of the specified limits prior to loan approvals for customers or prior to the acquisition of specific investments. Credit renewal and reviews are subject to similar processes.

The following diagram illustrates the governance of our credit risk division including the committees with approval power:

Credit Approval: Loans approved on an individual basis

In preparing a credit proposal for a corporate client whose loans are approved on an individual basis, Santander-Chile’s personnel verifies such parameters as debt servicing capacity (typically including projected cash flows), the company’s financial history and projections for the economic sector in which it operates. The Risk Division is closely involved in this process and prepares the credit application for the client. All proposals contain an analysis of the client, a rating and a recommendation. Credit limits are determined not on the basis of outstanding balances of individual clients, but on the direct and indirect credit risk of entire financial groups. For example, a corporation will be evaluated together with its subsidiaries and affiliates.

Credit Approval: Loans approved on a group basis

The majority of loans to individuals and small and mid-sized companies are approved by the Standardized Risk Area through an automated credit scoring system. This system is decentralized, automated and based on multiple parameters, including demographic and information regarding credit behavior from external sources and the FMC.

Impairment assessment

In accordance with the requirements of IFRS 9 the Bank has developed a new credit risk model, applicable from January 1, 2018.

Definition of default and cure

The Bank considers a financial instrument defaulted and therefore Stage 3 for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments.

As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. Such events include:

●

Internal rating of the borrower indicating default or near default

●

The borrower requesting emergency funding from the Bank

●

The borrower having past due liabilities to public creditors or employees

●

The borrower is deceased

●

A material decreases in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral

●

A material decreases in the borrower’s turnover or the loss of a major customer

●

A covenant breach not waived by the Bank

●

The debtor (or any legal entity within the debtor’s group) filing for bankruptcy application/protection

●

Debtor’s listed debt or equity suspended at the primary exchange because of rumors or facts about financial difficulties

Internal rating and PD estimation

The Bank’s Credit Risk Department operates its internal rating models. The models incorporate both qualitative and quantitative information and, in addition to information specific to the borrower utilize supplemental external information that could affect the borrower’s behavior. The internal credit grades are assigned based on the internal scoring policy, PDs are then adjusted for IFRS 9 ECL calculations to incorporate forward looking information and the IFRS 9 Stage classification of the exposure.

The following table shows quality assets and its related provision, based on our internal scoring policy as of December 31, 2021 and 2020:

December 31, 2021
	Corporate
Commercial	Stage 1		Stage 2		Stage 3		Total		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
Portfolio	MCh$		MCh$		MCh$		MCh$		%			MCh$		MCh$		MCh$		MCh$		%
A1		41,025		-		-		41,025		0.11	%		-		-		-		-		0.00	%
A2		751,943		9		-		751,952		2.06	%		1,351		-		-		1,333		0.13	%
A3		2,510,562		6,168		68		2,605,894		7.13	%		4,478		80		23		4,733		0.45	%
A4		2,728,117		9,009		-		2,753,735		7.54	%		7,374		144		-		7,477		0.71	%
A5		2,599,685		41,052		-		2,535,032		6.94	%		12,310		2,335		-		14,214		1.35	%
A6		1,746,362		169,482		841		1,916,685		5.25	%		24,539		13,580		332		38,789		3.69	%
B1		-		754,993		112		755,105		2.07	%		-		45,287		37		45,324		4.31	%
B2		-		238,705		-		238,705		0.65	%		-		21,300		-		21,300		2.03	%
B3		-		80,130		3		80,133		0.22	%		-		8,117		1		8,118		0.77	%
B4		-		55,213		33,316		88,529		0.24	%		-		4,967		9,293		14,260		1.36	%
C1		-		30,929		146,315		177,244		0.49	%		-		3,539		43,150		46,689		4.44	%
C2		-		9,033		93,013		102,046		0.28	%		-		737		24,306		25,043		2.38	%
C3		-		9,603		40,879		50,482		0.14	%		-		702		12,411		13,113		1.25	%
C4		-		1,243		64,771		66,014		0.18	%		-		133		27,009		27,142		2.58	%
C5		-		3,411		98,979		102,390		0.28	%		-		230		57,446		57,676		5.49	%
C6		-		2,388		72,940		75,328		0.21	%		-		183		48,508		48,691		4.63	%
Subtotal		10,377,694		1,411,368		551,237		12,340,299		33.78	%		50,052		101,334		222,516		373,902		35.56	%

		Overall monitoring
		Stage 1		Stage 2		Stage 3		Total		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
		MCh$		MCh$		MCh$		MCh$		%			MCh$		MCh$		MCh$		MCh$		%
Other Commercial		4,716,168		233,158		364,016		5,313,342		14.55	%		38.597		14.655		176.211		229.463		21,82	%
Mortgage		12,966,599		367,838		541,737		13,876,174		37.99	%		25.385		12.728		105.545		143.658		13,66	%
Consumer		4,603,595		178,513		217,139		4,999,247		13.69	%		125.939		38.197		140.275		304.411		28,95	%
Subtotal		22,286,362		779,509		1,122,892		24,188,763		66.22	%		189.921		65.580		422.031		677.532		64,44	%
Total		32,664,056		2,190,877		1,674,129		36,529,062		100.00	%		239.973		166.914		644.547		1.051.434		100,00	%

December 31, 2020
	Corporate
Commercial	Stage 1		Stage 2		Stage 3		Total		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
Portfolio	MCh$		MCh$		MCh$		MCh$		%			MCh$		MCh$		MCh$		MCh$		%
A1		45,862		-		-		45,862		0.13	%		3		-		-		3		0.00	%
A2		1,095,506		3,265		-		1,098,771		3.20	%		900		54		-		954		0.09	%
A3		1,863,480		19,658		-		1,883,138		5.48	%		3,318		339		-		3,657		0.35	%
A4		2,632,793		42,529		-		2,675,322		7.79	%		7,329		606		-		7,935		0.77	%
A5		2,538,748		164,341		232		2,703,321		7.87	%		11,498		4,618		78		16,194		1.56	%
A6		1,588,410		289,460		53		1,877,923		5.47	%		16,541		14,010		53		30,604		2.95	%
B1		-		715,348		-		715,348		2.08	%		-		25,679		-		25,679		2.48	%
B2		-		161,239		233		161,472		0.47	%		-		9,566		138		9,704		0.94	%
B3		-		65,684		695		66,379		0.19	%		-		3,764		434		4,198		0.40	%
B4		-		73,248		49,430		122,678		0.36	%		-		3,008		21,014		24,022		2.32	%
C1		-		29,863		138,171		168,034		0.49	%		-		2,201		48,365		50,566		4.88	%
C2		-		12,282		69,491		81,773		0.24	%		-		926		27,021		27,947		2.70	%
C3		-		1,550		55,378		56,928		0.17	%		-		86		15,603		15,689		1.51	%
C4		-		2,227		48,177		50,404		0.15	%		-		143		21,038		21,181		2.04	%
C5		-		3,981		36,822		40,803		0.12	%		-		267		20,397		20,664		1.99	%
C6		-		5,040		131,384		136,424		0.40	%		-		185		107,364		107,549		10.37	%
Subtotal		9,764,799		1,589,715		530,066		11,884,580		34.61	%		39,589		65,452		261,505		366,546		35.35	%

		Overall monitoring
		Stage 1		Stage 2		Stage 3		Total		Percentage			Stage 1		Stage 2		Stage 3		Total ECL Allowance		Percentage
		MCh$		MCh$		MCh$		MCh$		%			MCh$		MCh$		MCh$		MCh$		%
Other Commercial		4,493,999		228,591		380,019		5,102,609		14.86	%		40,943		44,315		193,268		278,526		26.86	%
Mortgage		11,518,363		392,372		501,090		12,411,825		36.14	%		25,065		8,441		79,016		112,522		10.85	%
Consumer		4,439,163		236,595		265,121		4,940,879		14.39	%		88,825		31,732		158,642		279,199		26.93	%
Subtotal		20,451,525		857,558		1,146,230		22,455,313		65.39	%		154,833		84,488		430,926		670,247		64.65	%
Total		30,216,324		2,447,273		1,676,296		34,339,893		100.00	%		194,422		149,940		692,431		1,036,793		100.00	%

In relation to the credit quality of the investment portfolio, local regulations establish that banks are able to hold only local and foreign fixed–income securities except in certain cases. Additionally, Banco Santander-Chile has internal policies to ensure that only securities approved by the Market Risk department, which are stated in the documents “APS” – Products and underlying Approval, are acquired. The Credit Risk Department sets the exposure limits to those approved APS’s. The APS is updated on daily basis.

As of December 31, 2021, 99% our total investment portfolio corresponds to securities issued by the Chilean Central Bank and US treasury notes.

Exposure at default

The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the client’s ability to increase its exposure while approaching default and potential early repayments too.

To calculate the EAD for a Stage 1 loan, the Bank assesses the possible default events within 12 months for the calculation of the 12mECL. However, if a Stage 1 loan that is expected to default in the 12 months from the balance sheet date and is also expected to cure and subsequently default again, then all linked default events are taken into account. For Stage 2, Stage 3 the exposure at default is considered for events over the lifetime of the instruments.

Loss given default

The credit risk assessment is based on a standardized LGD assessment framework that results in a certain LGD rate. These LGD rates take into account the expected EAD in comparison to the amount expected to be recovered or realized from any collateral held.

The Bank segments its retail lending products into smaller homogeneous portfolios (other commercial), based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (i.e., product type, wider range of collateral types) as well as borrower characteristics.

Further recent data and forward-looking economic scenarios are used in order to determine the IFRS 9 LGD rate for each group of financial instruments. Under IFRS 9, LGD rates are estimated for the Stage 1, Stage 2, Stage 3 IFRS 9 segment of each asset class. The inputs for these LGD rates are estimated and, where possible, calibrated through back testing against recent recoveries. These are repeated for each economic scenario as appropriate.

Significant increase in credit risk (SICR)

The Bank continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12-month ECL or Lifetime ECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition.

The Bank also applies a secondary qualitative method for triggering a significant increase in credit risk for an asset, such as moving a customer/facility to the watch list (Special vigilance). The Bank may also consider that events explained in letter a) above are a significant increase in credit risk as opposed to a default. Regardless of the change in credit grades, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition.

When estimating ECLs on other loan basis for a group of similar assets (Mortgages, Consumer and other commercial loans), the Bank applies the same principles for assessing whether there has been a significant increase in credit risk since initial recognition.

Quantitative criteria for SICR Stage 2:

The quantitative criteria are used to identify where an exposure has increased in credit risk and it is applied based on whether an increase in the lifetime PD since the recognition date exceeds the threshold set in absolute terms. The following formula is used to determine such threshold:

Threshold = Lifetime PD (at reporting date) – Lifetime PD (at origination)

Corporate

Mortgages

Other loans

Revolving

(Credit cards)

Overall monitoring SME

Corporate SME

Middle market

Corporate and Investment Banking

39.57

39.11

15.73

39.11

22.69

4.5

Santander Group criteria

There is also a relative threshold of 100% of all portfolios with the exception of the Corporate and Investment Banking Portfolio.

Qualitative criteria for SICR Stage 2:

The qualitative criteria are based on the existence of evidence that leads to an automatic classification of financial instruments in stage 2, mainly 30 days overdue and restructured. Thresholds of SICR are calibrated based on the average ECL of exposures that are 30 days overdue or with a level of credit risk considered to be “significant”.

				Corporate
Mortgages	Other loans	Revolving (Credit cards)	Overall monitoring SME	Corporate SME	Middle market	Corporate and Investment Banking
Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days	Irregular portfolio > 30 days
Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring	Restructured marked for monitoring
				Clients considered to be substandard or in incompliance (pre-legal action)	Clients considered to be substandard or in incompliance (pre-legal action)	Clients considered to be substandard or in incompliance (pre-legal action)

These thresholds are defined by the Model Committee and the Integral Risk Committee and are evaluated annually with updates made depending on impacts and definitions of the risk models associated to each portfolio.

As of December 31, 2021 and 2020, due to the continuing uncertainties caused by the new variants of the COVID-19 virus and according to our corporate guidelines, our management has decided not to modify the thresholds for SICR defined above.

Measurement of expected credit losses

The Bank calculates the ECL allowance mainly through IFRS 9 models and using cash flow discounted methodology.

Expected credit losses are a probability-weighted estimate of credit losses over the expected life of the financial instrument. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. Because expected credit losses consider the amount and timing of payments, a credit loss arises even if the entity expects to be paid in full but later than when contractually due.

For financial assets, a credit loss is the present value of the difference between: the contractual cash flows that are due under the contract; and the cash flows that the Bank expects to receive. For undrawn loan commitments, a credit loss is the present value of the difference between: the contractual cash flows that are due if the holder of the loan commitment draws down the loan; and the cash flows that the Bank expects to receive if the loan is drawn down.

For financial assets in the corporate portfolio that are (a) credit-impaired at the reporting date (classified in stage 3 with a PD equal to 100%), and (b) is individually significant, the Bank calculates allowance for expected credit losses on an individual basis by using a "Cash flow discounted Methodology". In this instance, the Bank measures the expected credit losses as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. Any adjustment is recognized in profit or loss as an impairment gain or loss. The following table sets up the allowance and exposure at default (EAD) of the loans that meet the two conditions:

	2021		2020
	MCh$		MCh$
Loans and account receivable		373,506		224,087
Allowance for ECL		87,418		119,537

As of December 31, 2021, the expected credit losses related to corporate commercial loans includes MCh$87,418 measured from cash flow discounted methodology (MCh$119,537 in 2020).

ECL allowance calculated on a collective basis:

Commercial loans (except for those described within the "ECL allowance calculated on an Individual basis" description aforementioned), mortgage loans and consumer loans are grouped and assessed on a collective basis by using a credit loss allowance model. The estimation of the collective basis expected credit loss allowance considers qualitative and quantitative information that may affect the changes in credit risk and the development of assumptions related to the probabilities of default and loss given default, including forward looking information, multi-factor analysis such as type of portfolio or transaction and macroeconomic factors.

As of December 31, 2021 the collective basis expected credit loss allowance was MCh$ 964,016 (MCh$ 917,256 in 2020) on total commercial, mortgage and consumer loans of MCh$ 36,155,556 (MCh$ 34,115,806 in 2020).

In April 2020, the Bank completed a calibration of parameters, resulting in an additional allowance for MCh$2,066, for ECLs based on reasonable and supportable information that is available to an entity without undue cost or effort.

As of December 31, 2021, the Bank has released the post-model adjustment (overlay) recorded at the end of 2020 (MCh$59,000), the overlay provision was booked in 2020 due to the uncertainty of the COVID-19 pandemic effects, and released in 2021 due to improvement on the macro economical forward-looking information and scenarios. However, the improvement in macro economical forward-looking information and scenarios generated an increase to provision of MCh$43,000.

Corporate and Other loans (smaller commercial, mortgage and consumer) portfolio

In order to meet the objective of recognizing lifetime expected credit losses for significant increases in credit risk since initial recognition, it is necessary to group or sub-group financial instruments, even if evidence of such significant increases in credit risk at the individual instrument level is not yet available.

Considering to the aforementioned, the Bank evaluates on corporate basis, commercial loans for which prepares individual credit proposals, where it verifies debt servicing capacity (projected cash flow), client’s financial history, evidence of impairment and projections for economic sector. All proposals include an analysis of the client, a rating and a recommendation. For corporations, the evaluation includes subsidiaries and affiliates. Smaller commercial loans, mortgage loans and consumer loans are grouped into other homogeneous portfolios (mortgages, consumer and smaller commercial loans), based on a combination of instrument type, credit risk ratings, collateral type, date of initial recognition, remaining term to maturity, industry and others.

Modified loans

When a loan measured at amortized cost has been renegotiated or modified but not derecognized, the Bank assesses whether the transaction should be treated as a modified asset or a derecognition. If the transaction does not result in derecognition the Bank must recognize the resulting gains or losses as the difference between the carrying amount of the original loans and modified contractual cash flows discounted using the EIR before modification.

If the modification results in derecognition, then the modified asset is a new asset.

	As of December 31, 2021											As of December 31, 2020
	Stage 1		Stage 2			Stage 3			Total			Stage 1		Stage 2			Stage 3			Total
	MCh$		MCh$			MCh$			MCh$			MCh$		MCh$			MCh$			MCh$
Gross carrying amount		32,664,056		2,190,877			1,674,129			36,529,062			30,216,324		2,447,273			1,676,296			34,339,893
Modified loans		-		811,318			889,571			1,700,889			-		799,572			886,021			1,685,593
%		-		37.03	%		53.14	%		4.66	%		-		36.67	%		52.86	%		4,91	%


ECL allowance		239,973		166,914			644,547			1,051,434			194,422		149,940			692,431			1,036,793
Modified loans		-		58,651			357,183			415,744					33,118			409,485			442,603
%		-		35.08	%		55.42	%		39.54	%				22.09	%		59.14	%		42.69	%

COVID-19 support measures

For 2021, the Bank continued granting loans under government guarantees program. In fact, in February 2021, the government approved the FOGAPE 2.0 – or FOGAPE Reactiva - program. The maximum rate was set at a monthly rate of TPM (overnight rate) plus 0.6%, implying an annual rate of 7.2%. The focus was to provide loans for SMEs to encourage investment and not only for working capital. These loans can be granted until December 31, 2021.

For the 2020, the Bank provided payment holidays and loans granted by government (Fogape Loans). The payment holiday program granted to our consumer 3-month grace periods, modified terms and installments, and allowed modified interest rate to the current market lower rate in 2020. These amendments were considered a substantial modification of the original contractual terms and conditions. The 3-month installment deferred were added after the original maturity of the loan and recognized as new financial assets. In line with our internal guide, these modifications are classified as modifications for commercial reasons, because they are not attributable to the financial difficulty of the debtor, and a new loan operation has been originated under current market conditions.

For mortgage loan portfolio, original contractual conditions were not modified, instead, the clients signed an addendum for the postponed installments, and a complementary operation was generated, with the mortgage guarantee covering both operations. Neither the monthly installments nor the rates were modified. This relief was granted only to clients with less than 30 days past due, and we observed that our clients are meeting their obligations properly. In line with our internal guide, these modifications granted to customers with no past due days, and were classified as modifications for commercial reasons, meanwhile clients with any past due or that have had some restructuring (marked special risk), were classified as modifications for financial difficulty of the debtor, and the Bank has calculated the difference between the gross carrying amount and the present value of the modified loans discounted at the original effective interest rate. The amount was not material to the Bank.

The summary of the support relief measures is as follows:

COVID-19 measures	As of December 31, 2021		As of December 31, 2020
	MCh$		MCh$
Fogape loans		1,331,940		2,076,119
Fogape Reactiva		876,698		-
Payment holiday		7,877,036		9,098,028
Payment holiday – current		104		734,986
Payment holiday - expired		7,876,932		8,363,042

The payment holiday mainly granted mortgage loan agreements, and postponed monthly installment which comprises principal, interest, inflation and related insurances. The following table show residual maturity of payment holidays that have not expired as of December 31, 2021:

<= 6
months

<= 12
months

<= 2
years

> 2 year
<= 5 year

MCh$

Payment holiday – current

104

From the expired payment holidays, MCh$7,667,563 has been paid, which represent the 97%, evidencing a good payment behavior of our clients. The expired payment holidays by stage are as follows:

Stage 1

Stage 2

Stage 3

MCh$

Payment holiday – expired

7,876,932

7,338,640

295,415

242,877

j.	*Macro economical forward-looking information and scenarios*

The annual growth forecasts for the most relevant macroeconomic variables for each of our scenarios are as follows:

	Average estimates 2021 - 2022
	Unfavorable scenario 2			Unfavorable scenario 1			Base scenario			Favorable scenario 1			Favorable scenario 2
Official interest rate		0.8	%		1.7	%		2.9	%		4.0	%		4.9	%
Unemployment rate		10.7	%		9.8	%		8.6	%		7.4	%		6.5	%
Housing Price growth		0.2	%		1,6	%		3.5	%		5.5	%		6.9	%
GDP growth		(2.1	)%		(0.5	)%		1.5	%		3.5	%		5.0	%
Consumer Price Index		5.2	%		7.4	%		10.2	%		13.4	%		15.6	%

The highest probability of occurrence is associated to the base scenario, while the extreme scenarios have a lower probability than the more moderate scenarios.

The methodology used for the generation of the local scenarios is based on the Methodology Framework of the Corporate Research Service and is applied to the loan portfolio with the exception of loans from the Corporate and Investment Banking segment which uses global scenarios as defined by the Santander Group. The probabilities for the scenarios must total 100% and be symmetrical.

Local scenario			Global scenario
	Probability weighting			Probability weighting
Favorable scenario 2	10	%	Favorable scenario 1	10	%
Favorable scenario 1	15	%	Base scenario	20	%
Base scenario	50	%	Unfavorable scenario 1	70	%
Unfavorable scenario 1	15	%
Unfavorable scenario 2	10	%

The ECL allowance sensibility to future macro-economic conditions is as follows:

	As of December 31,
	2021			2020
	MCh$			MCh$
Reported ECL allowance		1,051,702			1,038,147
Gross carrying amount		36,628,705			34,410,578
Reported ECL Coverage		2.87	%		3.02	%
ECL amount by scenarios
Favorable scenarios 2		926,695			876,654
Favorable scenarios 1		994,883			930,044
Base scenarios		1,061,809			981,671
Unfavorable scenarios 2		1,144,741			1,047,127
Unfavorable scenarios 2		1,204,015			1,083,371
Coverage ratio by scenarios
Favorable scenarios 2		2.55	%		2.55	%
Favorable scenarios 1		2.71	%		2.71	%
Base scenarios		3.05	%		2.86	%
Unfavorable scenarios 2		2.86	%		3.05	%
Unfavorable scenarios 2		3.15	%		3.15	%

During the 2021, the Bank has updated the macro-economical scenarios, and for hence, the post-model adjustment (overlays) established for 2020 were released in the second half of 2021.

Analysis of risk concentration

The following table shows the risk concentration by industry, and by stage before ECL allowance of loans and account receivable at amortized cost:

	As of December 31,
	2021									2020
		Stage 1		Stage 2		Stage 3		Total			Stage 1		Stage 2		Stage 3		Total
		MCh$		MCh$		MCh$		MCh$			MCh$		MCh$		MCh$		MCh$
Commercial loans
Agriculture and livestock			490,225		159,158		54,863		704,247			555,132		103,388		59,473		717,993
Fruit cultivation			483,684		156,621		32,564		672,869			469,663		130,163		28,044		627,870
Forest			142,705		23,292		12,288		178,285			141,892		23,463		13,820		179,175
Fishing			244,555		22,209		4,519		271,283			209,182		20,128		4,842		234,152
Mining			202,599		6,683		6,067		215,348			265,195		161,631		6,789		433,615
Oil and natural gas			89,635		-		16		89,651			2,672		-		18		2,690
Manufacturing Industry:
Food, beverages and tobacco			326,347		22,769		14,990		364,107			261,746		40,081		14,633		316,460
Textile, leather and footwear			84,338		10,629		6,641		101,608			80,461		17,317		6,996		104,774
Wood and furniture			83,337		4,957		6,036		94,330			75,459		5,779		9,317		90,555
Cellulose, paper and printing			57,520		10,195		5,459		73,173			65,748		10,531		4,315		80,594
Chemicals and petroleum derivatives			142,581		5,804		790		149,175			124,596		12,339		1,206		138,141
Metallic, non-metallic, machinery, or other			471,646		15,420		15,055		502,121			572,210		44,314		31,173		647,697
Other manufacturing industries			221,399		21,643		15,491		258,533
Electricity, gas, and wáter			650,654		37,948		6,868		695,470			347,177		27,848		6,559		381,584
Home building			242,787		22,373		16,746		281,906			221,819		20,123		15,649		257,591
Non-residential construction			587,446		55,120		45,890		688,456			589,988		41,705		70,085		701,778
Wholesale trade			1,538,052		182,403		120,680		1,841,135			1,351,873		220,092		148,888		1,720,853
Retail trade, restaurants and hotels			1,182,087		124,861		87,689		1,394,637			1,180,632		170,255		88,719		1,439,606
Transport and storage			626,278		123,778		32,195		782,251			621,901		97,624		58,076		777,601
Telecommunications			294,247		21,488		6,392		322,127			294,957		28,433		7,725		331,115
Financial services			891,411		3,478		3,576		898,465			578,543		2,972		3,770		585,285
Real estate services			2,245,893		201,914		148,774		2,596,581			2,549,770		223,884		89,684		2,863,338
Social services and other community services			3,794,435		411,783		271,665		4,477,883			3,698,182		416,236		240,304		4,354,722
Subtotal			15,093,862		1,644,526		915,253		17,653,641			14,258,798		1,818,306		910,085		16,987,189
Mortgage loans			12,966,599		367,838		541,737		13,876,174			11,518,363		392,372		501,090		12,411,825
Consumer loans			4,603,595		178,513		217,139		4,999,247			4,439,163		236,595		265,121		4,940,879
Total			32,664,056		2,190,877		1,674,129		36,529,062			30,216,324		2,447,273		1,676,296		34,339,893

l.	*Collateral and other credit enhancement*

Banco Santander controls the credit risk using collateral in its operations. Each business unit is responsible for credit risk management and formalizes the use of collateral in its lending policies. Guidelines are in place covering the acceptability and valuation of each type of collateral.

Banco Santander uses guarantees in order to increase their resilience in the subject to credit risk operation. The guarantees can be used fiduciary, real, legal structures with power mitigation and compensation agreements. The Bank periodically reviews its policy guarantees by technical parameters, normative and also its historical basis, to determine whether the guarantee is legally valid and enforceable.

Credit limits are continually monitored and changed in customer behavior function. Thus, the potential loss values represent a fraction of the amount available.

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. The main type of collateral obtained are the following:

●

For securities lending and reverse repurchase transactions, cash or securities

●

For corporate and small business lending, charges over real estate properties, inventory and trade receivables and, in special circumstances, government guarantees

●

For retail lending, mortgages over residential properties

The following table show the maximum exposure to credit risk by class of financial asset, associated collateral and the net exposure to credit risk:

	As of December 31,
	2021								2020
	Maximum exposure to credit risk		Collateral		Net exposure		Associated ECL		Maximum exposure to credit risk		Collateral		Net exposure		Associated ECL
	MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$		MCh$
Commercial loans		17,724,326		10,171,168		7,553,158		602,011		17,057,874		9,887,154		7,170,720		646,426
Mortgage loans		13,876,174		13,331,941		544,233		143,658		12,411,825		11,931,235		480,590		112,522
Consumer Loans		4,999,247		619,624		4,379,623		304,411		4,940,879		653,066		4,287,813		279,199
Total		36,599,747		24,122,733		12,477,014		1,050,080		34,410,578		22,471,455		11,939,123		1,038,147

(*) Includes Loans and account receivable at FVOCI

One very important example of financial collateral is the collateral agreement. Collateral agreements comprise a set of highly liquid instruments with a certain economic value that are deposited or transferred by a counterparty in favor of another party in order to guarantee or reduce any counterparty credit risk that might arise from the portfolios of derivative transactions between the parties in which there is exposure to risk.

Collateral agreements vary in nature but, whichever the specific form of collateralization may be, the ultimate aim, as with the netting technique, is to reduce counterparty risk.

Transactions subject to a collateral agreement are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to the net balance arising from these assessments, from which the collateral amount (normally cash or securities) payable to or receivable from the counterparty is obtained.

For real estate collateral periodic re-appraisal processes are in place, based on the actual market values for the different types of real estate, which meet all the requirements established by the regulator.

Specifically, mortgage loans are secured by a real property mortgage, and threshold mitigate counterparty credit risk of derivative instruments.

Personal guarantees and credit derivatives

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Bank. They include, for example, security deposits and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognized for capital calculation purposes.

Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets.

Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions. According to the Bank’s policy when an asset (real state) is repossessed are transferred to assets held for sale at their fair value less cost to sell as non-financial assets at the repossession date (assets received in lieu of payments).

Assets Received in Lieu of Payment

Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognized at their fair value (as determined by an independent appraisal). The excess of the outstanding loan balance over the fair value is charged to net income for the period, under “Provision for loan losses”. Any excess of the fair value over the outstanding loan balance, less costs to sell of the collateral, is returned to the client. These assets are subsequently adjusted to their net realizable value less cost to sale (assuming a forced sale).

At December 31, 2021, assets received or awarded in lieu of payment amounted to Ch$27,415 million (gross amount: Ch$27,821 million; allowance: Ch$403 million). At December 31, 2020, assets received or awarded in lieu of payment amounted to Ch$31,447 million (gross amount: Ch$32,643 million; allowance: Ch$1,196 million).

m.	*Maximum exposure to credit risk*

Financial assets and off-balance sheet commitments

For financial assets recognized in the Consolidated Statements of Financial Position, maximum credit risk exposure equals their carrying value. Below is the distribution by financial asset and off-balance sheet commitments of the Bank’s maximum exposure to credit risk as of December 31, 2021 and 2020, without deduction of collateral, security interests or credit improvements received:

			As of December 31,
			2021		2020
			Amount of exposure		Amount of exposure
	Note		MCh$		MCh$
Deposits in banks		4		1,998,236		2,137,891
Cash items in process of collection		4		390,271		452,963
Financial derivative contracts		7		10,123,607		9,032,085
Financial assets held for trading		5		73,347		133,718
Loans and account receivable at amortized cost / Loans and account receivable at FVOCI		8/ 10		35,577,003		33,372,431
Debt instrument at fair value through other comprehensive income		11		5,803,139		7,162,542
Debt instruments at amortized cost		9		4,691,730		-
Off-balance commitments:
Letters of credit issued				323,531		165,119
Foreign letters of credit confirmed				53,777		82,779
Performance guarantees				1,390,410		1,090,643
Available credit lines				8,986,535		8,391,414
Personal guarantees				579,051		441,508
Other irrevocable credit commitments				265,517		406,234
Total				70,256,154		62,869,327

Foreign derivative contracts

As of December 31, 2021, the Bank’s foreign exposure -including counterparty risk in the derivative instruments’ portfolio- was USD 2,639 million or 1.58% of its assets. In the table below, exposure to derivative instruments is calculated by using the equivalent credit risk; which equals the replacement carrying amount plus the maximum potential value, considering the cash collateral that minimizes exposure.

Below, there are additional details regarding our exposure for those countries classified above 1 and represents our majority of exposure to categories other than 1, as of December 31, 2021, considering fair value of derivative instruments.

Country	Classification		Derivative Instruments (adjusted to market)	Deposits	Loans	Financial investments	Total Exposure
		US$ millions
China	2		8.94	-	-	-	8,94
Italy	2		-	1.99	0.13	-	2.12
Mexico	2		3.30	0.03	-	-	3.33
Panama	2		1.84	-	-	-	1.84
Peru	2		0.13	-	-	-	0.13
Uruguay	2		-	-	0.06	-	0.06
Total			14.21	2.02	0.19	-	16.42

Our exposure to the group is as follows:

Counterpart	Country	Classification			Derivative instruments (market adjusted)		Deposits MUSD		Loans MUSD		Financial Investments MUSD		Exposure MUSD
				US$ millions
Banco Santander Hong Kong	Hong Kong		2			-		8.93						8.93
Banco Santander Mexico	Mexico		2			3.30		-		-		-		3.30
Banco Santander EEUU	EEUU		1			2.53		1,000		-		-		1002.53
Banco Santander España	Spain		1			146.88		230.05		-		-		376.93

The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, there is no credit exposure.

As of December 31, 2021, we had no applicable sovereign exposure, no unfunded exposure, no credit default protection and no current developments.

Security interests and credit improvements

The maximum exposure to credit risk is reduced in some cases by security interests, credit improvements, and other actions which mitigate the Bank’s exposure. Based on the foregoing, the creation of security interests are a necessary but not a sufficient condition for granting a loan; accordingly, the Bank’s acceptance of risks requires the verification of other variables and parameters, such as the ability to pay or generate funds in order to mitigate the risk being taken on.

The procedures used for the valuation of security interests utilize the prevailing market practices, which provide for the use of appraisals for mortgage securities, market prices for stock securities, fair value of the participating interest for investment funds, etc. All security interests received must be instrumented properly and registered on the relevant register, as well as have the approval of legal divisions of the Bank.

The risk management model includes assessing the existence of adequate and sufficient guarantees that allow recovering the credit when the debtor’s circumstances prevent them from fulfilling their obligations.

The Bank has classification tools that allow it to group the credit quality of transactions or customers. Additionally, the Bank has historical databases that keep this internally generated information to study how this probability varies. Classification tools vary according to the analyzed customer (commercial, consumer, SMEs, etc.).

Below is the detail of security interests, collateral, or credit improvements provided to the Bank as of December 31, 2021 and 2020:

	As of December 31,
	2021		2020
	MCh$		MCh$
Non-impaired financial assets:
Properties/mortgages		27,013,636		25,424,161
Investments and others		1,813,714		2,306,062
Impaired financial assets:
Properties/ mortgages		1,715,628		1,548,568
Investments and others		69,083		65,668
Total		30,612,061		29,344,459

Credit risk mitigation techniques

The Bank applies various methods of reducing credit risk, depending on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (i.e., real estate guarantees) while others apply to groups of transactions (i.e., netting and collateral arrangements).

Liquidity risk

Liquidity risk is the risk that the Bank may have difficulty meeting the obligations associated with its financial obligations.

Liquidity risk management

The Bank is exposed on a daily basis to requirements for cash funds from various banking activities, such as wires from checking accounts, fixed-term deposit payments, guarantee payments, disbursements on derivatives transactions, etc. As typical in the banking industry, the Bank does not hold cash funds to cover the balance of all the positions, as experience shows that only a minimum level of these funds will be withdrawn, which can be accurately predicted with a high degree of certainty.

The Bank’s approach to liquidity management is to ensure-- whenever possible--to have enough liquidity on hand to fulfill its obligations at maturity, in both normal and stressed conditions, without entering into unacceptable debts or risking the Bank’s reputation. The Board establishes limits on the minimal part of available funds close to maturity to fulfill payments as well as over a minimum level of interbank operations and other loan facilities that should be available to cover transfers at unexpected demand levels. This is constantly reviewed. Additionally, the Bank must comply with the regulation limits established by the FMC for maturity mismatches.

These limits affect the mismatches of future flows of income and expenditures of the Bank on an individual basis. They are:

mismatches of up to 30 days for all currencies, up to the amount of basic capital

ii.

mismatches of up to 30 days for foreign currencies, up to the amount of basic capital

iii.

mismatches of up to 90 days for all currencies, twice the basic capital

The Financial Management Division receives information from all the business units on the liquidity profile of their financial assets and liabilities, as well as breakdowns of other projected cash flows stemming from future businesses. On the basis of that information, the Financial Management Division maintains a portfolio of liquid short–term assets, comprised mainly of liquid investments, loans and advances to other banks, to make sure the Bank has sufficient liquidity. The business units’ liquidity needs are met through short–term transfers from the Financial Management Division to cover any short–term fluctuations and long–term financing to address all the structural liquidity requirements.

The Bank monitors its liquidity position every day, determining the future flows of its outlays and revenues. In addition, stress tests are performed at the close of each month, for which a variety of scenarios encompassing both normal market conditions and conditions of market fluctuation are used. The liquidity policy and procedures are subject to review and approval by the Bank’s Board. Periodic reports are generated by the Market Risk Department, providing a breakdown of the liquidity position of the Bank and its subsidiaries, including any exceptions and the corrective measures adopted, which are regularly submitted to the ALCO for review.

The Bank relies on demand deposits from Retail, Middle-Market and Corporates, obligations to banks (including the Central Bank), debt instruments, and time deposits as its main sources of funding. Although most obligations to banks, debt instruments and time deposits mature in over a year, customer (retail) and institutional deposits tend to have shorter maturities and a large proportion of them are payable within 90 days. The short–term nature of these deposits increases the Bank’s liquidity risk, and hence, the Bank actively manages this risk by continual supervision of the market trends and price management.

Liquidity risk management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated.

The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO now uses as its liquidity portfolio those defined by the FMC and the Chilean Central Bank, which are in line with those established in BIS III. As of December 31, 2021 and 2020, the breakdown of the Bank’s liquid assets by levels was the following:

	As of December 31,
	2021		2020
	MCh$		MCh$
Balance as of:
Cash and cash equivalent		1,106,152		988,320
Level 1 liquid assets (1)		1,223,824		2,490,810
Level 2 liquid assets (2)		9,792		12,681
Total liquid assets		2,339,768		3,491,811

(1)

Includes available balances held in the Central Bank of Chile, financial instruments issued by the Chilean Treasury or Central Bank and other financial instruments issued or guaranteed by States, multilateral development banks or foreign central banks that have a first-class rating. Collateral under the FCIC funding program with the Central Bank of Chile and technical reserves in the Central Bank are not included

(2)

Includes instruments issued by governments, central banks and development banks of foreign countries with a risk rating of A- to AA+ and mortgage bonds issued by Chilean banks that are acceptable at the Chilean Central Bank’s repo window.

Central Bank of Chile liquidity measures during the pandemic

In response to the COVID-19 pandemic, the Chilean Central Bank established two credit lines for banks to reinforce their liquidity: The first is the Credit Facility Conditioned to Increase of Loans (FCIC1), whose objective was for banks to continue financing households and companies’ loans. The FCIC1 amounted to US$24 billion for the whole banking system and have maturities of up to 4 years and must be secured by government bonds, corporate bonds or highly rated large commercial loans as collateral. The FCIC2 amounted US$16 billion and was available only for banks who must have previously drawn upon FCIC1. The FCIC3 was announced in January 2021 and amounted to US$10 billion. The second credit line was the Liquidity Credit line (LCL) and it was an unsecured loan facility that had maturities of up to 2 years. In addition, the LCL was limited to the aggregate amount of the liquidity reserve requirements of each bank. As of December 31, 2021, and 2020, we had borrowed Ch$5,611,439 and Ch$4,959,260, respectively, under these lines of credit.

Exposure to liquidity risk

A similar, but not identical, measure is the calculation used to measure the Bank´s liquidity limit as established by the FMC. The Bank determines a mismatch percentage for purposes of calculating such liquidity limit which is calculated by dividing its benefits (assets) by its obligations (liabilities) according to maturity based on estimated repricing. The mismatch amount permitted for the 30 day and under period is 1-time regulatory capital and for the 90 day and under period – 2 times regulatory capital.

The following table displays the actual derived percentages as calculated per above:

	As of December 31,
	2021 %		2020 %
30 days		1		30
30 days foreign currency		2		15
90 days		2		32

The maturity of financial assets and liabilities, and other commercial commitments (including accrued interest) is as follows:

As of December 31,	Demand			Up to 1 month			Between 1 and 3 months			Between 3 and 12 months			Between 1 and 3 years			Between 3 and 5 years			More than 5 years			Total
2021	MCh$			MCh$			MCh$			MCh$			MCh$			MCh$			MCh$			MCh$
Maturity of financial assets (Note N°20)		5,454,325			5,010,170			2,013,914			5,287,477			7,905,288			7,477,525			29,432,968			62,581,667
Maturity of financial liabilities (Note N°20)		(19,625,676	)		(5,720,212	)		(3,886,855	)		(6,075,164	)		(10,533,015	)		(4,737,817	)		(7,195,087	)		(57,773,826	)
Net maturity financial assets/(liabilities)		(14,171,351	)		(710,042	)		(1,872,941	)		(787,687	)		(2,627,727	)		2,739,708			22,237,881			4,807,841
Other Commercial Commitments
Pledges and other commercial commitments		-			(29,336	)		(44,479	)		(442,801	)		(52,665	)		(798	)		(8,972	)		(579,051	)
Confirmed foreign letters of credit		-			(29,379	)		(20,199	)		(4,199	)		-			-			-			(53,777	)
Letters of credit issued		-			(77,679	)		(156,045	)		(89,794	)		(13	)		-			-			(323,531	)
Performance guarantee		-			(93,792	)		(178,894	)		(649,643	)		(423,555	)		(37,463	)		(7,063	)		(1,390,410	)
Net maturity including commitments		(14,171,351	)		(940,228	)		(2,272,558	)		(1,974,124	)		(3,103,960	)		2,701,447			22,221,846			2,461,072

As of December 31,	Demand			Up to 1 month			Between 1 and 3 months			Between 3 and 12 months			Between 1 and 3 years			Between 3 and 5 years			More than 5 years			Total
2020	MCh$			MCh$			MCh$			MCh$			MCh$			MCh$			MCh$			MCh$
Maturity of financial assets (Note N°20)		4,034,824			2,639,165			1,848,268			4,655,603			5,589,111			4,399,179			31,437,931			54,604,081
Maturity of financial liabilities (Note N°20)		(15,867,957	)		(7,821,474	)		(4,029,845	)		(3,589,747	)		(4,714,324	)		(8,142,738	)		(6,817,582	)		(50,983,667	)
Net maturity financial assets/(liabilities)		(11,833,133	)		(5,182,309	)		(2,181,577	)		1,065,856			874,787			(3,743,559	)		24,620,349			3,620,414
Other Commercial Commitments
Pledges and other commercial commitments		-			(33,588	)		(29,958	)		(367,164	)		(10,798	)		-			-			(441,508	)
Confirmed foreign letters of credit		-			(18,247	)		(48,056	)		(16,163	)		(313	)		-			-			(82,779	)
Letters of credit issued		-			(42,089	)		(83,764	)		(36,201	)		(3,065	)		-			-			(165,119	)
Performance guarantee		-			(114,653	)		(181,399	)		(437,835	)		(303,165	)		(46,971	)		(6,620	)		(1,090,643	)
Net maturity including commitments		(11,833,133	)		(5,390,886	)		(2,524,754	)		208,493			557,446			(3,790,530	)		24,613,729			1,840,365

Operational risk

The Bank defines operational risk as the risk of losses arising from defects or failures in its internal processes, people, systems or external events, thus covering risk categories such as fraud, technological, cyber, legal and conduct risk.

Operational risk is inherent to all products, activities, processes and systems and is generated in all business and support areas. For this reason, all employees are responsible for managing and controlling the operational risks generated in their sphere of action. The Bank’s goal in terms of operational risk management and control is focused on identifying, evaluating and mitigating sources of risk, regardless of whether they have materialized or not. The analysis of operational risk exposure contributes to the establishment of risk management priorities.

Operational risk governance

The risk management program contemplates that all relevant risk issues must be reported to the Board of Directors, the Integral Risk

Committee and the Non-Financial Risk Committee.

Risk identification, measurement and assessment model

A series of quantitative and qualitative techniques and tools have been defined by the Bank to identify, measure and assess operational risk. The quantitative analysis of this risk assessment is carried out mainly with tools that record and quantify the level of potential losses associated with operational risk events. The qualitative analysis seeks to assess aspects of exposure and hedging (including the control environment). The most important operational risk tools used by the Bank are an internal events database, operational risk control self-assessment, analysis of operational risk scenarios, appetite of corporate and local indicators, internal audit and regulatory recommendations, among others.

Operational risk management

To accomplish our operational risk objectives, we have established a risk model based on three lines of defense, with the objective of continuously improving and developing our management and control of operational risks. The defense lines consist of: (i) the business and support areas (first line of defense), responsible for managing the risks related to their processes; (ii) the non-financial risk area (second line of defense), in charge of supporting the first line of defense in relation to the fulfillment of its direct responsibilities and; (iii) the internal audit function (third line of defense) responsible for verifying, independently and periodically, the adequacy of the risk identification and management processes and procedures, in accordance with the guidelines established in the Internal Audit Policy and submitting the results of its recommendations for improvement to the Audit Committee.

Our methodology consists of the evaluation of the risks and controls of a business from a broad perspective and includes a plan to monitor the effectiveness of such controls and the identification of eventual weaknesses. The main objectives of the Bank and its subsidiaries in terms of operational risk management are the following:

•

Identify, evaluate, inform, manage and monitor the operational risk in connection with activities, products, and processes carried out or commercialized by the Bank and its subsidiaries;

•

Build a strong culture of operational risk management and internal controls, with clearly defined and adequately segregated responsibilities between business and support functions, whether these are internally-developed or outsourced to third parties;

•

Generate effective internal reports in connection with issues related to operational risk management, with a clearly defined escalation protocol; and

•

Control the design and application of effective plans to deal with contingencies that ensure business continuity and losses control.

Cyber-security and data security plans

The Bank continuously monitors cyber-security risks and has implemented preventative measures to be prepared for any attack of this kind. The Bank has evolved its internal cyber-security model to reflect international standards, incorporating concepts which can be used to assess the degree of maturity in deployment. Based on this assessment model, individual in-situ analyses have been carried out to identify deficiencies and steps to remedy any such deficiencies have been identified in our cyber-security defense plans.

The Bank has a Cybersecurity Framework which defines the governance and policies on preventing and confronting cybercrime. The Chief of Cybersecurity or CISO (Chief Information Security Officer) has been defined as the officer responsible for cybersecurity, a function performed by the Manager of Technology and Operational Risk. Embedded in the Bank’s Technology and Operations division is the Cyber and Technology Risk Department, which is the front line of defense against cyber-security threats and data security. In addition, the Non-Financial Risk Department through the Cyber Risk (a specialized area) enforces the policies and controls that the different areas must follow regarding technology and cyber-security risks. In turn, there is a group of supervisory bodies that include the Cybersecurity Committee, the Non-Financial Risk Committee, the Chief Executive Officer’s Management Committee and the Board’s Integral Risk Committee. We also coordinate with Santander Spain’s headquarters and units in other countries regarding strategy, best practices and experience-sharing.

All this architecture has been created with the aim of identifying cyber risks, the development of a culture and education in cybersecurity, the creation of cyber scenarios to anticipate potential threats, and the fulfillment of the regulatory framework set by the authorities.

Finally, the intelligence and analysis function has also been reinforced by contracting a threat-monitoring service, and progress has been made in the incident registration, notification and escalation mechanisms for internal reporting and reporting to supervisors. In addition, observation and analytical assessment of the events in the sector and in other industries enable us to update and adapt our models for emerging threats.

During 2021 we completed the 4th year of the Global Cybersecurity Transformation Plan that has allowed us to reach advanced levels of maturity in cybersecurity.

During 2021, the Bank did not face a material loss due to cybersecurity breaches. However, even though we have thorough cybersecurity practices and governance in place, we cannot assure that in the future a material adverse event will not occur.

Operational risk management during the COVID-19 pandemic

Overall, the pandemic situation has resulted in increased exposure to inherent operational risk, although the Bank has established greater oversight over controls in order to maintain pre-COVID-19 operational risk levels, in addition to reinforce existing ones. The risk of transaction processing increases due to the volume of new loans and multiple changes in existing portfolios resulting from payment holidays and the FOGAPE program. Transactional volume also increased due to public assistance programs and the rise in the number of checking accounts and volumes as more clients searched for digital payment solutions. Close monitoring has been carried out on the following aspects:

●

Business continuity plans to effectively to support our employees, customers and businesses.

●

The scenario of the pandemic and remote work has a direct impact on the field of cyber threats and their associated risks as more employees work from home. We have strengthened patching, navigation control, data protection and other controls.

●

Increase in technological support to ensure adequate customer service and the correct provision of services, especially in online banking and call centers.

●

The risk of transaction processing increases due to the volume of new loans and multiple changes in existing portfolios resulting from public assistance programs and internal policies.

The following table summarizes our net losses from operational risks in 2021 compared to 2020.

	As of December 31,
Net losses from operational risks	2021		2020
Fraud		977		4,703
Labor related		3,215		443
Client / product related		13		250
Damage to fixed assets		228		(2,592	)
Business continuity / Systems		144		1,570
Processing		8,251		3,992
Total		12,828		8,366

Capital risk

The Bank defines capital risk as the risk that the Bank or any of its companies may have an insufficient amount and/or quality of capital to: meet the minimum regulatory requirements in order to operate as a bank; respond to market expectations regarding its creditworthiness; and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

The objectives in this connection include most notably:

	●	To meet the internal capital and capital adequacy targets
	●	To meet the regulatory requirements
	●	To align the Bank’s strategic plan with the capital expectations of external agents (rating agencies, shareholders and investors, customers, supervisors, etc.)
	●	To support the growth of the businesses and any strategic opportunities that may arise

The Bank has a capital adequacy position that surpasses the levels required by regulations.

Capital management seeks to optimize value creation at the Bank an at its different business segment. The Bank continuously evaluates it risk-return ratios through its basic capital, effective net equity, economic capital and return on equity. With regard to capital adequacy, the Banks conducts its internal process based on the FMC standards which are based on Basel Capital Accord (Basel I), Economic capital is the capital required to support all the risk of the business activity with a given solvency level.

Capital is managed according to the risk environment, the economic performance of Chile and the business cycle, Board may modify our current equity policies to address changes in the mentioned risk environment,

Minimum Capital

Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately Ch$24,793 million or USD$29 million as of December 31, 2021) of paid-in capital and reserves, calculated in accordance with Chilean GAAP.

Capital adequacy requirement

Chilean banks are required by the General Banking Law to maintain regulatory capital of at least 8% of risk-weighted assets, net of required loan loss allowance and deductions, and paid-in capital and reserves (“basic capital”) of at least 3% of total assets, net of required loan loss allowances. Regulatory capital and basic capital are calculated based on the consolidated financial statements prepared in accordance with the Compendium of Accounting Standards issued by the FMC the Chilean regulatory agency. As we are the result of the merger between two predecessors with a relevant market share in the Chilean market, we are currently required to maintain a minimum regulatory capital to risk-weighted assets ratio of 11%. As of December 31, 2021, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions under BIS I, was 14.49% and our core capital ratio was 5.72%.

Regulatory capital is defined as the aggregate of:

●

a bank’s paid-in capital and reserves, excluding capital attributable to subsidiaries and foreign branches or basic capital;

●

its subordinated bonds, valued at their placement price (but decreasing by 20.0% for each year during the period commencing six years prior to maturity), for an amount up to 50.0% of its basic capital; and

●

its voluntary allowances for loan losses for an amount of up to 1.25% of risk weighted-assets,

The levels of basic capital and effective net equity at the close of each period are as follows:

					Ratio
	As of December 31,				As of December 31,
	2021		2020		2021		2020
	MCh$		MCh$		%		%
Basic capital		3,400,220		3,567,916		5.72		6.69
Regulatory capital		5,184,363		5,143,843		14.49		15.37

Basel III Implementation in Chile

The new General Banking Law (updated through Law 21.130) defines general guidelines to establish a capital adequacy system in line with the international standards of Basel III, giving the FMC the power to dictate the capital framework in a prudential way through regulations. In particular, the FMC has been empowered, with the prior favorable agreement of the Central Bank of Chile, to define through regulation, the new methodologies for calculating credit, market and operational risk weighted assets; the condition for hybrid instruments AT1, and the determination and capital charges for banks of local systemic importance. It also introduced the conservation and counter-cyclical buffers and expanded the FMC’s powers to make prudential discounts to regulatory capital and additional requirements, including higher capital, from banks that show deficiencies in the supervisory evaluation process (Pillar 2). The implementation of Basel III makes possible to focus risk management towards more comprehensive vision of them, with a focus on capital adequacy.

The FMC completed the process of issuance of regulatory capital framework of Basel III at the end of 2020. However, the FMC in coordination with the Central Bank of Chile and in line with the measures adopted by international regulators has decided to postpone the implementation of the APR calculation for one year (until December 2021). Additionally, it has disposed to advance a capital mitigation mechanism to facilitate the development of the debt agreement market (Credit Risk Weighted Assets) and complements a similar treatment of government guarantees granted by the FMC. In the case of Pillar 3, implementation was postponed until 2023.

The Bank is working in the implementation of these capital regulations through a multidisciplinary team, which are performing the exercises and required developments, including the implementation of the required files designed by the FMC in accordance with a gradual implementation (2021- 2025 implementation scheme). As of December 31, 2021, the Bank was required to calculate the Common Equity Tier 1 capital and Regulatory capital under Basel III is as follows:

	As of December 31, 2021
	MCh$		%

Common Equity Tier 1 capital (CET1)		3,494,580		5.73
Regulatory capital		5,776.831		15.86