Banco De Chile (BCH) Risk Factors

Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamics of the Chilean economy or the effects of economic developments in other countries affecting Chile, and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and private investment. In the past, global financial crises, such as the 2008 financial crisis, have dramatically affected economic growth in developed countries, as well as in Chile where a subsequent slowdown in the local banking industry was observed due to lower levels of consumption and deteriorated credit quality in loan portfolios prompted by unemployment and financial stress experienced by certain economic sectors. During 2020, the local economy was severely affected by the impact of the COVID-19 pandemic on overall activity, primarily as a result of the long-lasting lockdowns imposed by the Chilean Government in order to control the spread of the virus across the country, which translated into: (i) a spike in unemployment from 7.1% in December 2019 to a peak of 12.3% in the three-month period between August 2020 and October 2020, which decreased to 10.3% in December 2020, (ii) an 8.0% decline in private consumption, caused by the sharp decrease in disposable income and mobility restrictions and (iii) a contraction of 9.3% in capital expenditures (gross fixed capital formation), since many investment projects were postponed in light of both uncertainty on the economic outlook, social distancing measures and lockdowns that impacted diverse economic sectors. These local events, coupled with the initial effects of the COVID-19 pandemic on Chile's main trade partners' economies, particularly China, Europe and the United States, battered the dynamics of some of its key export products. However, in the fourth quarter of 2020, local economic activity began to recover as mobility restrictions were lifted and certain industries, like construction, restaurants and manufacturing, returned to more normal activity. Likewise, household spending was positively impacted by the fiscal aid package implemented by the government to support individuals and the initial effects of two pension fund withdrawals approved by the Chilean Congress. Accordingly, in the fourth quarter of 2020, GDP recovered to 2019 levels, by advancing 0.4%. However, annual GDP contracted 6.0% in 2020. In 2021, the Chilean economy showed a strong recovery, given both the low comparison base during same period in 2020, as well as a significant rebound in private consumption and, to a lesser extent, in private investment. According to figures reported by the Central Bank, GDP recorded an expansion of 11.7% in 2021 as compared to 2020, primarily driven by household spending, which increased 20.8% as a result of the extraordinary support measures for individuals that began in 2020, such as direct money transfers from the Chilean Government and an additional withdrawal from pension funds approved by the congress that positively impacted individuals' disposable income. Furthermore, most of the mobility restrictions present in 2020 were gradually lifted in 2021, as a significant part of the population became fully vaccinated and contagion rates decreased steadily, which supported the reactivation of diverse industries, particularly those associated with retail, mass consumption and services. In terms of private investment in infrastructure, machinery and equipment, overall capital expenditures grew 15.7% in 2021 as compared 2020, while government spending expanded 13.8% within the same period, fostered by increasing social demands from the Chilean population and efforts to deal with the lingering effects of the COVID-19 pandemic. Furthermore, the dynamics that boosted household consumption and, to a lesser extent, investment, together with constrained inventories, led the Chilean balance of trade (defined as exports minus imports) to become negative in the year ended December 31, 2021, as reported by the Central Bank. In 2022 the Chilean economy followed similar trends when compared to the global economy, characterized by a moderation in GDP growth, higher inflation and fiscal and monetary policy adjustments. According to statistics published by the Central Bank, the Chilean economy grew 2.4% in 2022 as compared to the 11.7% recorded in 2021, as a result of a slowdown in all GDP items as reflected by an annual growth of 2.9% in private consumption due to a sharp decline in the liquidity surplus held bu individuals, an annual expansion of 2.8% in private investment fostered by the uncertainty surrounding the economic and political outlook and an increase of 4.1% in fiscal spending due to the end of expenses related to COVID-19. Despite the lower GDP growth, inflation rose significantly during 2022, as depicted by an annual increase of 12.8% in the CPI, which is the highest level in three decades while being significantly above the monetary policy target of 3.0% defined by the Central Bank. Soaring inflation was the consequence of many factors including increased prices of volatile components of the CPI basket, as well as the depreciation of the exchange rate during most of the year, which translated into a 15.9% annual increase in the tradable goods index and a 9.0% increase in the non-tradable goods index. Core inflation, which excludes food and energy prices, rose 8.6% in 2022. The inflation increase was crucial for the Central Bank to deploy an aggressive monetary policy adjustment by raising the reference interest rate from 4.00% in December 2021 to 11.25% in December 2022. Although the Chilean Central Bank has mentioned that inflation should begin to converge to levels of around 3.6% by December 2023, there are various external factors that could keep inflation above the Central Bank's target range, such as additional disruptions to the global supply chain due to the effects of geopolitical conflicts, increases in global energy prices and further depreciation of the Chilean peso, which should translate into higher prices for imported goods in Chile. Although the effects of the COVID-19 pandemic on the local economy and most relevant economies worldwide, such as China, the United States and main European countries, have mostly subsided or significantly improved and the worldwide vaccination process is in progress, it is not clear that new infection waves will not arise, given the appearance of continued or new virus mutations. As such, we cannot assure you that the dynamics displayed by the Chilean economy in 2022 will remain or that the economic growth of Chile's key international partners will improve or return to pre-COVID-19 levels. Likewise, social developments prompted by new variant strains of the COVID-19 pandemic, the economic downturn expected for 2023 or the new constitutional process in progress, could also lead the Chilean economy to severely decelerate, stagnate or even fall into recession, which could have a subsequent adverse effect on our business growth and the business growth of the Chilean banking industry in general. Additionally, social and political developments occurring in Chile could affect both consumer confidence and business sentiment, which may in turn result in lowered demand for loans and banking services. For example, the rejection of the constitution draft in September 2022 and uncertainty around the new process could exacerbate economic deterioration, which together with increasing interest rates, higher inflation and the current economic slowdown could affect our cost of funds, margins, results of operations, business volumes and financial condition. Therefore, we cannot assure you that the local economy will grow in the coming years, as it has in the past, or that developments affecting the Chilean economy and the local banking industry will not materially affect our business, financial condition or results of operations. For more information, see "Item 5. Operating and Financial Review and Prospects-Operating Results-Impact of COVID-19 in 2022," "Item 3. Key Information-Risk Factors-COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition" and "Item 5. Operating and Financial Review and Prospects-Trend Information-Impact of COVID-19 in 2022."

Pandemic disease and health events, such as the outbreak of COVID-19, have the potential to negatively impact economic activities in many countries, including Chile, with subsequent adverse effects on our business growth, results of operations or financial condition. Since the worldwide outbreak of COVID-19 in early 2020, countries have responded by taking various measures which have the potential to negatively impact our business, results of operations and financial condition. In addition, concerns related to the evolution of the world economy due to COVID-19 lowered equity market valuations and decreased liquidity in fixed income markets, ultimately resulting in the fall of stock prices (including the price of our stock). Also, since new variant strains of COVID-19 appear from time to time, there continue to be concerns on the mid- and long-term effects they will have on international trade, travel, employee productivity, securities markets, and other economic activities that may continue to have a destabilizing effect on financial markets and economic activity. Although in most countries some of the restrictions listed above have been relaxed, others have had to re-introduce partial or full-scale lockdowns due to new infection waves. Accordingly, the adverse social and economic effects of the pandemic continue to be a threat for economic growth. In Chile, since the first cases of COVID-19 were detected in March 2020, the Chilean Government has taken diverse measures in order to control its spread. This included, among other measures partial or total lockdowns with varying levels of severity and length. In the fourth quarter of 2020, the process of vaccination helped to decrease contagion and to start lifting lockdowns, a process that continued in 2021. The rate of contagion has since fluctuated as a result of the appearance of new variants. During 2022, however, given the high rate of vaccination, health authorities have not raised new concerns regarding new contagion waves while withdrawing certain sanitary measures like the use of mask. According to the Chilean Ministry of Health, as of December 31, 2022, approximately 91.1%, 89.1%, 81.8% and 60.9% of the total population had received at least one dose, two doses and third and fourth booster doses of the vaccine, respectively. As vaccinations have appeared to be effective in slowing down the spread of COVID-19 and new variant strains, while preventing an increase in the death toll, the Chilean Government has continued to gradually modify the restriction program named "step-by-step", which has been in effect since March 2020. The new program includes five stages ranging from the restriction scenario (lockdown) to the opening scenario, depending on many factors, including the number of new cases per capita in a specific area, size of vulnerable population and access to health services. As of the date of this annual report, Chile is on an opening scenario in which the use of mask is only compulsory at health services, no mobility pass is required, there are no restrictions of maximum capacity neither in closed nor in opened locations, and massive events like sports, concerts or festivals are not restricted. From a macroeconomic point of view, these measures and the positive advance in the control of the pandemic contributed to the reactivation of some sectors of the Chilean economy in 2022, such as services. This factor helped to mitigate contractions in other economic sectors in 2022 in the context of the slowdown experienced by the Chilean economy after a period of significant growth in 2021, prompted by external and non-recurrent factors. All in all, during 2022 Chile's GDP increased 2.4%, as a consequence of an important slowdown in household consumption that managed to grow 2.9%, mainly due to reduced liquidity among individuals after a period of high spending motivated by direct money transfers (Emergency Income for the Family or Ingreso Familiar de Emergencia – "IFE") from the Chilean Government and pension fund withdrawals permitted by the Chilean Congress. Likewise, the fiscal spending that increased 4.1% only due to a decline in financial aid to individuals while private investment grew 2.8%. If the vaccination and spread trends do not continue or reverse, or if new variants appear to be resistant to the currently existing vaccines, the health authority could impose new restrictions, such as country-wide lockdowns, which could result in a shutdown involving the Bank, our subsidiaries and some or all of our customers operations, such that we would be unable to meet the needs of our customers for an unknown period of time, which could adversely affect our results of operations by reducing revenues, decreasing our collection capabilities. Furthermore, as the COVID-19 pandemic ushered in a historic economic downturn, financial institutions face increased credit risk, strategic risk, operational risk, and compliance risk. The spread of new variants of COVID-19 or the appearance of other kinds of diseases or viruses that threaten to become a pandemic continues to result, from time to time, in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses associated with our fixed-income trading portfolio, trading derivatives or financial assets measured at fair value through other comprehensive income, which could then cause deterioration of our financial condition or limitations to meet our liabilities. Furthermore, market fears could translate into liquidity constraints and reduced access to funding in both the local and the international markets, negatively affecting our net interest margin and net income. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. In order to prepare for the impacts of this environment, the Chilean financial authorities made various decisions in order to ensure liquidity within the Chilean financial system. The Central Bank, for instance, carried out consecutive reductions to the monetary policy rate by lowering the reference rate to 0.5%, level at which it remained from April 2020 to July 2021, when the Central Bank began to withdraw the monetary stimulus in an attempt to control inflation. However, additional decisions made by the Central Bank based on the evolution of the pandemic may affect our results of operations in the future. Lastly, contingency plans in order to address the emergency, including remote working arrangements, implementation of alternative offsite locations and so on, could have a negative impact on us in terms of operating expenses and lowered net income. In 2022, our results of operations and financial condition reflected the dynamics of the local economy and the banking system after the worst of the pandemic appears to have been overcome and market factors appear to reflect the aftermaths of many aid measures taken by authorities during the pandemic. From the perspective of loan growth, in 2022 we recorded an annual expansion of 7.2%, driven by increases of 17.6% and 10.4% in consumer and residential mortgage loans that permitted to soften a slowdown in commercial loans that managed to grow 3.2%. Growth in residential mortgage and commercial loans was primarily prompted by inflation, since demand for loans declined and offer conditions tightened in the context of economic slowdown. Furthermore, in the case of commercial loans, the end of the Fogape-Reactiva program that was present in 2021 also contributed to the slowdown. Consumer loans, instead, displayed real positive growth (well above inflation) as a result of our efforts to reactivate the product and also due to the decrease observed in the level of liquidity among individuals. From the funding perspective, since short-term interest rates increased sharply in 2022 due to the measures adopted by the Central Bank to combat inflation generated –in part– by boosted consumption in 2021 prompted by aid measures to deal with the economic effects of the COVID-19 pandemic, demand deposits balances recorded a significant decrease of 26.7% in year-end balances, given the higher opportunity cost for depositors of handling funds in non-interest bearing current account in a scenario of high interest rates and high inflation. As a result, financing needs were covered with time deposits that increased 57.1% in year-end balances. Likewise, by the end of the year we decided to raise long-term funding in the local market in anticipation of increased competition in the future when most of banks will need to raise funds in order to pay off the FCIC (Funding Conditional to the Increase in Loans) provided by the Central Bank in the context of the COVID-19 pandemic, which amounted to Ch$4,348,400 million for us and is due to expire in March and July 2024. From the capital adequacy perspective, we continued to maintain a strong equity base in 2022, as reflected by a CET1 ratio that increased from 12.9% to 13.6% and a BIS ratio that increased from 17.2% to 17.9% between December 2021 and December 2022 amid the implementation of the Basel III guidelines in Chile that became effective for purposes of measuring capital and risk-weighted assets in December 2021. In terms of results, our net income was Ch$1,445,801 million in 2022 as compared to the Ch$1,056,317 million recorded in 2021. The main driver of this change was the significant increase in net interest income as a result of both the positive effect of double-digit inflation on the contribution of the UF net asset exposure we hold in our balance sheet and the positive impact of higher interest rate on the contribution of demand deposits to our funding cost. These effects were partly offset by an increase in expected credit losses due to normalized credit risk indicators that translated into higher probabilities of default and the increment in operating expenses, mainly associated with inflation-indexed costs. Although economic activity appears to be recovering, because there have been no comparable recent global pandemics that resulted in a similar global impact, we do not yet know the course and, as such, the full extent of the COVID-19 pandemic's long-term effects on our business, operations, or the global economy as a whole. Any future developments continue to be uncertain, including any further action taken by governmental authorities and other third parties in response to the pandemic. As the economic impact due to the COVID-19 pandemic continues we cannot provide any assurances as to how long it will be before the COVID-19 pandemic's impact is ultimately contained and economic activity recovers to pre-COVID-19 pandemic levels.

Over the last decade worldwide financial markets have been subject to stress coming from diverse fronts that has resulted in sharp temporary changes in interest rates and credit spreads, including those related to the effects of the COVID-19 pandemic and, more recently, to the impact of geopolitical issues arising in eastern Europe, all of which have also affected the Chilean financial market. We have material exposures to debt securities issued by the Chilean Government and the Chilean Central Bank and other fixed-income investments in securities issued by local and foreign issuers. Most of these are booked at fair value with direct impact on our income statement or through other comprehensive income, while a remaining minor portion is measured at amortized cost. Therefore, these positions expose us to potential negative fair value adjustments in the short or medium term and to impairments in the long term, due to dramatic and unexpected changes in short- or long-term local and foreign interest rates and credit spreads. Market turmoil generated by the recent bank failures in the United States, and the emergency sale of Credit Suisse, are two such examples of the exposure that we have to international financial events. Any of these factors could have a material adverse effect on our results of operations and financial condition. In 2022, the Chilean financial market was characterized by an inverted yield curve, whereby nominal shorter term interest rates rose above nominal longer term interest rates, which was the consequence of a number of factors including, but not limited to: (i) a tighter monetary policy deployed by the Central Bank in an effort to control inflation, evidenced by the increase of the monetary policy rate seven times between December 2021 and December 2022 from 4.00% to 11.25%, (ii) the gradual removal of temporary factors that boosted GDP growth, particularly private consumption, during 2021, (iii) the expectation that inflation would take longer than the time period suggested by the Central Bank's forecast to return to normalized levels, (iv) political uncertainty associated with both the constitutional referendum held on September 4, 2022 and the speed of implementation and depth of the reforms proposed by the administration that took office in March 2022 in many economic fields, and (v) initiatives that have arisen from time to time in Congress with the aim of approving new pension funds withdrawals. All of these factors resulted in significant increases for nominal and real interest rates, particularly for shorter terms. For instance, the average interest rates paid by Chilean banks on 90 to 360 day deposits increased from 5.06% in December 2021 to 11.12% in December 2022. Longer terms interest rates, instead, showed a mixed trend during the year by increasing steadily during the first three quarters while decreasing sharply in the fourth quarter after the constitutional referendum failed, and after inflation began to show moderate signs of easing, Thus, whereas average annual interest rates of the Central Bank's ten-year Chilean peso denominated bonds increased from 4.36% in 2021 to 6.26% in 2022, the rates paid by the same instrument decreased slightly from 5.69% in December 2021 to 5.34% in December 2022. Likewise, the path taken by the Chilean Central Bank, similarly to most central banks worldwide, was to begin by implementing tightening cycles in order to control inflation. As an example, the Federal Reserve of the United States increased the reference rate from 0.25% in December 2021 to 4.5% in December 2022, while the European Central Bank took the monetary policy interest rate from -0.5% in December 2021 to 2.0% in December 2022. Similarly, rates of U.S. ten-year bonds increased from 1.51% in December 2021 to 3.88% in December 2022. All of these factors negatively impacted the market value of financial assets for the entire industry and us, including both financial instruments measured at fair value with direct impact on the income statement and those measured at fair value through other comprehensive income. As of December 31, 2022, our fixed-income portfolio was composed of securities measured at fair value through profit and loss statement (including debt securities and other trading positions) amounting to Ch$3,691,070 million (approximately U.S.$ 4,341 million), financial instruments measured at fair value through other comprehensive income amounting to Ch$3,967,392 million (approximately U.S.$ 4,666 million), and financial instruments measured at amortized cost (so not affected by changes in market factors in terms of fair value adjustments) for an amount of Ch$902,355 million (approximately U.S.$1,061 million), which are mostly concentrated in bonds and notes issued by the Central Bank and the Chilean Government. Likewise, as of the same date we maintained asset and liability balances in trading and hedge accounting derivatives measured at fair value of Ch$2,987,783 million (approximately U.S.$3,514 million) and Ch$3,324,485 million (approximately U.S.$3,910 million), respectively. The approval of an additional pension fund withdrawal, increased uncertainty regarding economic and social reforms to be implemented by Chile's new administration, escalation or the persistence of armed conflicts in eastern Europe including the involvement of additional countries leading to a global conflict, market turmoil associated with the failure of two U.S. banks and the forced sale of Credit Suisse and internal or external forces sustaining persistent inflation, among other factors, could cause further increases in short- and long-term local interest rates, which could have additional impacts on the market value of our fixed-income portfolio measured at fair value. See also "Item 3. Key Information-Risk Factors-Risks Relating to our ADSs-Developments in international financial markets may adversely affect the market price of the ADSs and shares" and "Item 3. Key Information-Risk Factors-Risks Relating to our ADSs-COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition."

The CMF is the entity that oversees and regulates the Chilean financial market, which is comprised of publicly traded companies, insurance companies, insurance brokers, mutual funds and investment funds as well as the Chilean banking industry as a whole and some non-bank lenders. In addition to being subject to regulation by the CMF, in certain matters, we are also subject to regulations issued by the Central Bank. See "Item 4. Information on the Company-Regulation and Supervision." Pursuant to the Ley General de Bancos (the "General Banking Act") all Chilean banks may, subject to the approval of the CMF, engage in certain non-banking businesses approved by the law. The CMF's approval will depend on the risk of the activity and the strength of the bank. Furthermore, the General Banking Act currently imposes on the Chilean banking system the Basel III capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices (the "Basel Committee") and limits the discretion of the CMF to deny new banking licenses. Impact of Basel III Implementation In 2018, the Chilean Congress passed modifications to the General Banking Act in various sections by means of Law No. 21,130 that was enacted on December 27, 2018 and subsequently published on January 12, 2019. This law addresses four main topics aimed at modernizing the Chilean banking framework by: (i) adopting the Basel III guidelines, considering a phased-in transition (the implementation date was postponed from December 2020 to December 2021 in light of the impact that the COVID-19 pandemic had on the economy), (ii) introducing changes to the local regulator's corporate governance by transferring powers formerly vested in the Superintendencia de Bancos e Instituciones Financieras de Chile (the "Superintendency of Banks and Financial Institutions" or "SBIF") (the former banking supervisor) to the CMF in June 2019, (iii) reforming the resolution regime for Chilean banks in the case of insolvency, and (iv) introducing changes in relation to confidential information of banks' customers, among others topics. For more information, see "Item 4. Information on the Company-Regulation and Supervision- Modifications to the General Banking Act." In regards to Basel III guidelines, in May 2019, the CMF began the publication for comment in respect of their rule-making on a diverse and wide array of topics associated with this framework. By December 2021, all the final rules related to Basel III had been issued by the CMF. However, the methodology to activate or deactivate the countercyclical buffer that should be defined by the Central Bank and monitored by the CMF, is still pending issuance. Regarding capital requirements, since December 1, 2021 new regulatory thresholds have been imposed on local banks, based on the specific regulations issued by the CMF, as follows: ØCET1 = 4.5% of risk-weighted assets (CET1 ratio); ØCET1 = 3.0% of total risk assets (Leverage ratio); ØTier 1 = CET1 + AT1 = 6.0% of risk-weighted assets (Tier 1 ratio); ØTier 1 + Tier 2 = 8.0% of risk-weighted assets (Total Capital ratio); ØConservation Buffer = 2.5% of risk-weighted assets; ØCountercyclical Buffer of up to 2.5% of risk-weighted assets, if any; ØSystemically-Important Banks ("D-SIB") Buffer ("systemic buffer") in the range of 1.0% to 3.5% of risk-weighted assets, if any; and ØPillar 2 Buffer of up to 4.0% of risk-weighted assets, if any. For more detailed information on each specific regulation currently in effect and capital thresholds, see "Item 4. Information on the Company-Regulation and Supervision-Modifications to the General Banking Act." As of December 31, 2022 we were in full compliance of capital adequacy requirements as set forth by the following actual capital adequacy ratios: Basel III Capital Ratio  Actual Ratio   Leverage Ratio   8.6% CET1 Ratio   13.6  Tier 1 Ratio   14.1  Total Capital Ratio   17.9% On March 31, 2021 the CMF announced that based on the information provided by local banks for the year ended December 31, 2020, there are six domestic systemically important banks, including us, which would be subject to systemic buffers, which would be determined by means of the methodology defined by the CMF. On March 30, 2022 the CMF announced the systemic buffers for the six previously-determined systemically important banks. Based on the methodology established by the CMF for this purpose, the Chilean regulator has imposed a systemic buffer equivalent to 1.25% of risk-weighted assets on us, which is being gradually introduced over a four-year period starting December 1, 2022, and continuing at an annual and cumulative rate of 25% every year, completing the 1.25% (if maintained unchanged) on December 1, 2025. Accordingly, by December 2022 we were subject to a phased-in systemic buffer of 0.3125%. In addition, on December 19, 2022 the CMF announced the removal of the former requirement associated with Article 35 bis of the General Banking Act that was expected gradually decrease at a 25% rate per year beginning on December 1, 2021 while coexisting with the systemic buffer set under Basel III until November 30, 2024. Furthermore, on March 31, 2023 the CMF announced the systemic buffers that the systemically important banks must comply with, based on market data for the year ended December 31, 2022. In this announcement, the CMF reaffirmed the systemic buffer on us at the level of 1.25%, which is due to be completed on December 1, 2025, as mentioned earlier. Likewise, on January 13, 2023 we received confirmation from CMF that based on the overhaul of our Internal Capital Adequacy Assessment Process for the year ended December 31, 2021, no further capital requirements associated with Pillar 2 have been set for us. Although based on these buffers we continue to be in full compliance with minimum requirements, we cannot be certain about any other potential capital buffers the regulator could impose to us and, therefore, we cannot assure you that our profitability will not be impacted by actions we may take in order to fulfill new regulatory thresholds. For more information, see "Item 4. Information on the Company-Regulation and Supervision-Modifications to the General Banking Act." Regarding banking resolution, on January 31, 2023 the CMF published a white paper "Guidelines for a new banking resolution framework and deposit insurance in Chile". Through this document the Chilean regulator addresses the recommendations that arose from the assessment of the local financial system carried out by the International Monetary Fund and the World Bank during 2020 and 2021. In particular, the white paper describes the main legal and regulatory gaps of the current Chilean resolution regime when compared to international practices, while proposing the creation of a new agency, with financial and operating independence, in charge of both the administration and resolution of deposit insurance. In business-as-usual times, this entity should develop contingency and resolution plans for systemically-important banks. In times of crisis, this agency would be in charge of the resolution process. In addition, the paper proposes that systemically-important banks should comply with a loss absorption capital requirement of at least 1.0% of total assets in order to ensure an equity level that facilitates the stabilization scheme, including a bail-in mechanism. This capital requirement would be composed of hybrid instruments, such as perpetual bonds, similar to those computing as AT1 capital. This additional capital, however, would not be computed as part of the Total or Regulatory Capital for capital adequacy compliance, although if not fulfilled, restrictions to dividend distribution will apply for banks. Likewise, the paper discusses the key topics of an insurance deposit scheme, which should be funded by banks that apply for its use. Although the CMF has not proposed specific changes to the banking regulation in order to address these topics in the short-term, the paper was published for comment until July 31, 2023, since the local regulator expects this paper to be the basis for advancing in rule-making design that permits to ensure the continuity of critical financial services while enhancing the protection of depositors. Since the comment period is still open and no specific changes have been proposed yet we cannot assure you that the implementation of a new resolution framework will not have an impact on our profitability, since as a systemically-important bank we could be subject to further capital requirements if this or another framework is adopted by the Chilean regulator. Regulatory Liquidity Requirements Since 2016 banks have been required to report and monitor liquidity ratios, such as Liquidity Coverage Ratio ("LCR") and Net Stable Funding Ratio ("NSFR"), for information purposes only. Through amendments to Chapter III.B.2.1 of the Compendio de Normas Financieras (the Compendium of Financial Norms) on May 4, 2018 and March 8, 2022 the Central Bank set minimum requirements for both the LCR and the NSFR. Accordingly, the regulatory limit for LCR became 100% in June 2022 while the threshold for NSFR was also set at 100% although being phased-in over a four year period starting in June 2022 at 60% and increasing 10% on January 1 of each year until reaching 100% on January 1, 2026. Likewise, in the last amendment to the Chapter III.B.2.1 of the Compendio de Normas Financieras the Central Bank also: (i) removed the regulatory limit for 30-day and 90-day cash flows mismatches in local currency as measured by C46 index while maintaining the limit for 30-day cash flows mismatches in foreign currency as measured by the C46 index, and (ii) introduced specifications on the treatment of securities pledged as technical reserve (arising from demand deposits levels) in order to take them into account as high quality liquid assets. As part of the same amendment, the Central Bank established that banks are required to carry out an Internal Liquidity Adequacy Assessment Process ("ILAAP"). The final rules associated with ILAAP were published on January 16, 2023, based on which we have submitted our first ILAAP to the CMF in April 2023 as requested by the regulation. The possibility of imposing additional High Quality Liquid Assets ("HQLA") requirements based on the information disclosed in the ILAAP will be in effect as of April 2025. As of December 31, 2022 our LCR and NSFR were 338% and 133%, respectively and we were in full compliance with the prevailing regulatory requirements. Regardless of the current levels of our main liquidity ratios, we cannot assure you that we will remain in compliance with regulatory requirements if, based on the ILAAP results, the regulator requires us to maintain greater amounts of HQLA. This could also lead us to acquire lower-margin financial instruments, which could have an adverse effect on results of operations and profitability. Changes in Credit Risk Methodologies As for credit risk matters, on July 6, 2018 the former SBIF published the final amendments to the provisioning rules for commercial loans evaluated on a group basis, which established standardized models for leasing loans, student loans and other commercial loans (not included in the former categories). In addition, the new set of rules also addressed other topics related to loan provisioning. The new provisioning criteria went into effect in July 2019 and had no material impact on our results of operations under both Chilean GAAP and IFRS. On April 27, 2021, to further align Chapter B-1 of the Compendium of Accounting Standards for Banks to the Basel III framework, the CMF published for comment some modifications to the Chapter B-1, such as those associated with loan provisioning guidelines for a more precise treatment for certain sub-segments of the group-based evaluated portfolio. The final rules were published on August 19, 2021 with no major changes in relation to the formerly proposed modifications. These modifications did not have a material impact on our results of operations or financial condition either under Chilean GAAP or IFRS. More recently, on November 22, 2022 the CMF published for comment a standardized methodology to compute expected credit losses for consumer loans (including contingent loans) while allowing the use of guarantees in order to determine both the probability of default ("PD") and the loss given default ("LGD"). Under the new method, the PD will depend on: (i) the borrowers' indebtedness, (ii) the debtors' borrowing trend in consumer loans, and (iii) the debtors' overdue loans in both the bank and across the industry. In the case of the LGD, the value will depend on the level of renegotiated loans held by the debtor in the consumer loan portfolio. Before this change, expected credit losses for consumer loans (including contingent loans) were computed by using internal models developed by banks in order to estimate both the PD and the LGD for this loan portfolio. According to the CMF, the proposed method pursues to be prudential floor for internal models not approved by the CMF, although banks could use internal models as long as they comply with technical and theoretical requirements set by the CMF. Since final rules have not been released as of the date of this Annual Report, we cannot assure you that this change will not have a material impact on our results under Chilean GAAP, although it will not have any impact on our results of operations or financial condition under IFRS. Likewise, we cannot be certain that future changes in the provisioning rules for other types of loans or related definitions will not affect our results under IFRS or Chilean GAAP, as applicable. New Legislation, Other Bills and Regulatory Guidelines affecting the Banking Business Additionally, the Chilean Government has focused on matters related to consumer protection in recent years. During the last decade, several legal and administrative regulations have been enacted and amended to strengthen consumer protection and the relationship between financial institutions and their customers. In May 2020, the Chilean Congress passed a law that increases liabilities of payment service providers (such as banks) in cases of fraudulent transactions in credit and debit cards, and in electronic funds transfers. This legislation has resulted in an increase in our liabilities towards customers due to digital fraud during recent years. Although we have implemented an array of measures and campaigns with our customers and have been able to adequately mitigate the impact of this legislation, we cannot assure you that we will not continue to see an increase in our liabilities as a result of this legislation. For further information on the obligations and liabilities imposed by, and characteristics of, this legislation, see "Item 4. Information on the Company-Regulation and Supervision-Consumer-Oriented Regulation" and "Item 5. Operating and Financial Review and Prospects-Results of Operations for the Years Ended December 31, 2020, 2021 and 2022-Operating Expenses". Law No. 21,314, which passed in 2021, among other matters, sets new rules on the application of interests and fees in relation to certain loan products. Some of the modifications introduced by this law include: (i) it states that no interests may be charged on the portion of credits that is already paid; (ii) it forbids charging simultaneously and jointly default interests with other kinds of interest over the same amount; and (iii) it establishes that, during the 12 months following the publication of this law, the CMF must enact specific regulations addressing the extent to which fees or and/or commissions may be charged on credit transactions. These ancillary regulations were issued in August 2022 but will enter into force in August 2023. Generally, these new regulations limit our ability to charge and earn certain fees or commissions on certain credits and loan products. We are reviewing and assessing how these limitations should affect the current fees or commissions charged on certain products, and determining which fees and commissions should be revised, or, if needed, eliminated. Therefore, we cannot yet determine the extent of the negative effect it will have on our results of operations. In December 2021, Law No. 21,398 was enacted. Among other measures to enhance consumer protection, this law introduced rules such as: (i) requiring a competent court to construe certain provisions in favor of the consumer in court procedures, (ii) imposing new obligations applicable to financial service providers in connection with certain products, and (iii) introducing new minimum requirements for pre-payments in credit transactions, among other measures. These new measures may increase our due diligence, operating and legal costs, affect the growth of our customer base and increase the costs associated with the management of our consumer loan portfolio. However, given that this law includes further ancillary regulation that is still pending to be implemented and/or issued, as of the date of this annual report, we cannot yet ascertain its impact, if any, on our results of operations in the future. In addition, there are several bills introduced in recent years that are being discussed in the Chilean Congress that would modify matters related to loans and credit products, such as interest rate ceilings, prepayment fees and the possibility of capitalizing interests and include an array of amendments from different political constituencies. Some of them also aim to ease the financial burden of certain banking borrowers, such as SMEs and individuals. These bills introduced during recent years, if enacted, may increase the costs of our consumer loan and mortgage products by setting higher mandatory protections for customers. Another pending bill introduces additional requirements to judicially exercise rights attained to mortgage loan collaterals; while others may limit our capacity to gather detailed information throughout our risk evaluation process by, for instance, setting higher privacy standards. Yet another bill related to insolvency law, would limit a bank's ability to deny providing certain banking products to personal banking customers (individuals) on the grounds that they have been debtors in an insolvency procedure in the past. Further, a bill introduced at the end of 2022 proposes to eliminate information on debtors' behavior that occurred before the last five years, thereby limiting the available information to properly assess and evaluate the credit risks of a broad customer base. In addition, a bill presented in congress by a group of members of the parliament at the end of March 2023 precludes certain service providers from charging and indexing installments and bills to UF (inflation indexed), which in the case of banks would relate to mortgage loans granted to personal and SME banking customers. If enacted, such laws may limit the effectiveness of our credit evaluation process and the due diligence we perform over potential customers, may generate mismatches between assets and liabilities denominated in UF, as well as our asset quality, and require us to increase provisions for expected credit losses. Another bill that is currently being discussed in Congress proposes a new framework for data privacy protection, raising the standards and obligations of an array of service providers, such as banks, on that matter. This could require changes in our current procedures in order to duly comply with these standards of data privacy protection, which, in turn, may affect our results of operations if enacted. Some of these bills are currently in the early or middle stages in the Chilean Congress, and some of them have been under discussion for several years, and there is no certainty whether any or all of them will be further discussed or not, and as to when or how these bills could change the current regulatory framework if approved. Therefore, we cannot determine or assure you whether they will materially affect our business and, in turn, our financial condition and results of operations in the future. Law No. 21,389, which creates an alimony debtor registry, came into effect in November 2022. This law requires banks and other financial service providers to retain amounts of credits granted to debtors that are registered in such registry, for the purpose of paying overdue alimonies. It further imposes fines on banks and financial institutions that do not consult the registry and do not withhold the amount specified. These fines amount to twice the money the bank should have withheld. Since the adoption of this law is recent, we still cannot determine or assure you whether they will affect our business due to several operational capabilities that this legislation requires from us. Law No. 21,365 was enacted in 2021, regulating interchange fees in the payment cards market in Chile. An autonomous and technical committee was created to determine, on a periodic basis, the fees or rates to be charged by payment card issuers such as banks ("Interchange Rates") to the operating companies (acquirers). The technical committee is comprised of four members, each one appointed by each of the following institutions: The Central Bank; the CMF; the Office of National Economic Prosecution (Fiscalía Nacional Económica); and the Ministry of Finance. This committee had six months to announce the first transitory limits and, afterwards, Interchange Rates will be reset every three years. On February 5, 2022, the committee announced new preliminary limits for interchange fees with a maximum fee of 0.6% for debit cards, 1.48% for credit cards and 1.04% for prepaid cards. On February 22, 2023 the technical committee determined the definitive scheme that will be applicable in Chile by defining a maximum interchange fee of 0.35% for debit cards and 0.80% for credit and prepaid cards. These new limits are to be in force in six months after their publishing in the Official Gazette, however the imposition of these new limits are still pending as the publication of the committee's resolution was contested in court by other financial market players, and from that date current limits will converge to the new ones during a phase-in period that will take 18 months. Although we believe the transitory limits published in February 2023 will not have a material impact on our results of operations, given the uncertainty regarding the limits on interchange rates that could be determined by this technical committee in the future, we cannot yet assure you whether this new regulation will have a negative impact on the banking industry and on our results of operations in the long term or not. Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some banking laws and regulations have been recently adopted, the way they are applied to the operations of financial institutions is still evolving. We cannot generally assure that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations. Lastly, we cannot assure you that regulators will not impose more restrictive limitations in the future on the activities of banks, including us, than those that are currently in effect. Any such change in terms of capital adequacy, liquidity, credit risk provisioning, consumer protection, bankruptcy and taxation, among other matters, could have a material adverse effect on our results of operations or financial condition in a fashion that we cannot determine in advance. For more information, see "Item 4. Information on the Company-Regulation and Supervision."