UPDATE 1-Chile central bank calls for more oversight in cross-holdings

Tue Dec 3, 2013 7:26pm EST

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(Adds CorpBanca comment)

SANTIAGO Dec 3 (Reuters) - Chile's central bank said on Tuesday that better oversight is needed for companies that have both financial and non-financial operations, noting that worries over the situation at one bank's parent company had hit its securities and pushed up its borrowing cost.

Although it did not directly name the bank, the comments follow problems recently faced by CorpBanca and the bank's holding company, CorpGroup.

CorpGroup, owned by Chilean billionaire Alvaro Saieh, has been putting assets on the chopping block following millions of dollars in losses racked up by its retail unit SMU.

CorpBanca confirmed on Friday that it is studying a possible merger with a local or foreign bank, a deal that could reportedly be worth around $5 billion.

SMU has also been selling assets to raise cash after an accounting error led it to breach debt covenants earlier this year.

"Without conglomerate oversight, it is crucial to maintain and perfect a regulatory framework that keeps crossed exposures to a minimum," the central bank said in its semi-annual Financial Stability Report.

In response, CorpBanca said the central bank "values the efficiency of measures taken preventatively to minimize the impact of an unusual situation."

Its diversified income structure allowed it to weather the ups and downs of its businesses, it added.

The central bank said in its report that the bank in question had a solid position of solvency but had suffered interest rates misaligned with their historical pattern in the wholesale market.

This situation has started to normalize in the fourth quarter, it added.

CorpBanca's Santiago-listed shares hit an all-time low in August but have since risen around 40 percent, boosted in recent days by the merger reports.

In August, Moody's Investors Service placed CorpBanca's ratings on review for downgrade, citing "the growing uncertainties regarding the effects on the bank's institutional funding and earnings performance of developments at its sister company, SMU."

(Reporting by Anthony Esposito, Additional reporting by Rosalba O'Brien; Editing by Leslie Adler)

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