Chile central bank flags escalation of Middle East conflict as top financial risk

SANTIAGO, May 19 (Reuters) - Chile's central bank warned that an abrupt tightening of global financing conditions - potentially triggered by an escalation of the Middle East conflict - represents the main risk to local financial stability.

The institution also highlighted in its first-half 2026 financial stability report, published on Tuesday, that Chile's economy is equipped with adjustment mechanisms and buffers to mitigate the effects of severe shocks.

-- The main risk: an abrupt tightening of financing conditions that could stem from an escalation of the U.S.-Israel war on Iran, or from its impact on global inflation and growth, the central bank said.

-- The tightening could raise borrowing costs, depreciate emerging-market currencies and reduce capital flows to economies such as Chile.

-- "The materialization of these or similar risk scenarios could trigger capital outflows, interest rate hikes or exchange rate fluctuations," the monetary authority said.

-- Despite the institution's warnings, the report added that the profitability, capital and liquidity levels of Chilean banks would allow them to remain solvent in a severe stress scenario.

-- Furthermore, the central bank highlighted Chile's macroeconomic stability and robust financial regulation and supervision standards.

CONTEXT

-- On Monday, Chile's central bank board voted to increase capital requirements for risk assets to 1.0% of risk-weighted assets, from the current level of 0.5%, giving the banks 24 months to reach the new level.

(Reporting by Aida Pelaez-Fernandez and Natalia Ramos; Editing by Kylie Madry)