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Santander Central Bank Mandatory Reserves Coverage

$700 million
Summary of Proposed Guarantee

Project description

This summary covers equity investments and shareholder loans by Banco Santander S.A. (Santander) in its subsidiary in Chile, Banco Santander-Chile (Santander Chile). The investor has applied for MIGA guarantees of up to US$700 million in mandatory reserves cover, for a period of up to 7 years. The guarantees are expected to be issued in MIGA’s fiscal year 2021.

Spain-based Banco Santander is one of the largest global financial institutions in the world in terms of market capitalization with retail and commercial operations in countries across Europe, Latin America, and North America. Its subsidiary banks abroad are required to maintain reserves at the central banks in their respective jurisdictions, based on the volume of customer deposits that these subsidiaries have. Mandatory reserves contribute to Santander’s overall risk-weighted assets (RWA) at the consolidated level, resulting in less headroom for other assets at a given level of capital.

Environmental Categorization

This project is categorized as FI-1 under MIGA’s Policy on Environmental and Social Sustainability (2013). Banco Santander is a universal bank with subsidiaries across multiple countries, including Chile. Banco Santander-Chile provides financial products and services to retail and corporate clients in Chile. The MIGA guarantee will provide coverage for Santander’s equity investment in Santander Chile and as such, the MIGA project will support the bank’s general lending activities, with a focus on SMEs and climate finance.

The main environmental and social (E&S) risks of this project relate to Santander Chile’s ability to identify, assess, and manage the E&S risks and impacts associated with its lending activities and the management of labor matters at the bank.  MIGA analyzed Santander Chile’s portfolio for types of transactions, tenor, size, industry sectors, and exposure to MIGA’s Exclusion List. MIGA also analyzed Santander Chile’s E&S risk management procedures in line with the requirements of Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts (PS1), and the bank’s labor practices in line with the requirements of Performance Standard 2: Labor and Working Conditions (PS2). The applicable E&S requirements for this project will be: (i) MIGA Exclusion List; (ii) applicable E&S laws and regulations in Chile; and (iii) MIGA Performance Standards.

As of December 2020, loans to individuals represented 56% of the bank’s portfolio, with SMEs, middle-market and global corporates representing 14%, 24% and 5% respectively. The main sectors financed include commerce, services, manufacturing, agriculture and construction.  These sectors are mostly medium to high-risk sectors. Santander Chile’s corporate/project finance portfolio includes significant exposure to potentially high-risk sectors such as mining and electricity generation.  Santander Chile has limited exposures to activities on the MIGA Exclusion List. The bank’s overall portfolio is considered to have potentially significant E&S risks and impacts; the project has thus been categorized as FI-1.   

Santander Group is an Equator Principles financial institution and is also a signatory to other global sustainable/responsible finance initiatives. As a member of the Santander Group, Santander Chile aligns its E&S risk management procedures with Santander Group’s Environmental, Social and Climate Risk Management Policy. Santander Chile’s E&S risk management procedures are focused on Equator Principles transactions, and transactions in sensitive sectors – mining and metallurgy, energy, defense, and soft commodities.  Santander Chile’s procedures ensure that these transactions are assessed for E&S risks and impacts, and compliance with national E&S laws.  The Equator Principles transactions are assessed in line with the Performance Standards and where required, E&S action plans are developed to address identified gaps. In addition, Santander Chile monitors the E&S performance of its clients.  Although Santander Chile has no formal E&S officer, there are officers who oversee the E&S risk management process, and E&S risk management training has been provided to the bank’s officers on the existing procedures. Santander Chile will be required,  within an agreed time frame, to expand the scope of the E&S risk management procedures to include all lending activities (excluding retail lending) and incorporate MIGA’s E&S requirements into the existing procedures.  The bank will also be required to formally appoint an E&S officer and provide additional training to its officers on the revised E&S risk management procedures. In addition, to complement the ESMS, Santander Chile will be required to develop, within an agreed time frame, a procedure for receiving and addressing E&S concerns and requests for information from third parties, in line with the requirements of PS1.

MIGA also reviewed Santander Chile’s emergency response procedures; the procedures were found to be in line with the requirements of PS1. In response to the COVID-19 pandemic, Santander Chile implemented workplace hygiene and social-distancing measures to minimize the risk of exposure for its employees and clients.

MIGA’s review of Santander Chile’s labor policies and procedures found the bank to be compliant with the requirements of PS2. Amongst other aspects, Santander Chile has labor policies and procedures that address terms of employment, recruitment, renumeration and benefits, grievance management, occupational health and safety, training, sexual harassment, and discipline.

Santander Chile will report periodically to MIGA on the implementation of the E&S procedures and application of the Performance Standards.

Development impact

Given the weakening macroeconomic conditions and the deteriorating global outlook post COVID-19, pressure is mounting on banks to optimize capital allocation and reduce risk exposures. The aim of MIGA’s proposed guarantees is to help Santander reduce the risk of some of its assets, which would lead to a reduction in the group’s RWA on a consolidated basis. The RWA capacity that is freed up is expected to be used by Santander Chile to extend more credit in Chile, including climate finance activities and support to SMEs.

MIGA’s proposed coverage to Santander is aligned with the WBG’s COVID-19 Crisis Response Approach Paper (June 2020), with the MIGA guarantee helping ensure that Chile can embark on a resilient recovery as the economy re-opens. The Project is also aligned with Chile’s most recent WBG Country Partnership Strategy (CPS) FY11-16 (updated by the Performance and Learning Review (PLR) of January 2015), with Result Area 1, Public Sector Modernization, under is objective of strengthening of the financial system and capital markets regulation, as the Project is expected to provide enabling conditions to support credit growth to SMEs. Additionally, it is aligned with Result Area 3, Promoting Sustainable Investments, under its objective of financing private sector investments, as the Project is expected to support climate finance activities. Furthermore, the Project supports the second priority area identified in the FY17 Systematic Country Diagnostic (SCD), namely, enhance the conditions to boost productivity growth: innovation, diversification and energy which notes the need to boost innovation in the country, by supporting entrepreneurs including through SME credit access facilitation.