Accordingly, the European Commission’s recent proposal, which introduces a new category of senior debt instruments, subordinate to deposits, is a step in the right direction. In any event, the most critical element of the MREL-setting policy is the determination of the minimum volume of eligible liabilities and own funds. Under the current regulations, within 6/10  the Banking Union, it is for the Single Resolution Board (SRB) to determine, case by case, this volume for all significant institutions (which are supervised directly by the SSM), as well as for non-significant institutions engaging in cross-border activity or whose supervision has been assumed by the SSM, following consultation with the prudential supervisor. For the moment, the SRB has publicly voiced its inclination for a stringent approach, ensuring an extensive availability of loss-absorbing instruments on bank balance sheets. Indeed, by way of indication, it has been advocated that the institution subject to resolution should have loss-absorbing capacity of a volume equivalent to its regulatory capital requirements (the so-called loss-absorption component) and the ability to restore immediately the minimum level required (or recapitalisation component). However, MREL requirements like those arising from the mechanistic formula indicated may entail very high needs in respect of the issuance of eligible instruments – such as subordinated debt or convertible bonds – for numerous banks, owing to the abovementioned reasons. Further, these issuance requirements would be concentrated in the same period of time for all the institutions concerned, hampering market take-up.

If there is no evidence of misalignment, and the issue is simply about hoarding reserves, the probability of the intervention having any effects on the exchange rate is smaller, while the possibility of incurring in quasi-fiscal costs increases. The Chilean experience last year was in line with the aforesaid principles. It was done in a moment where there was clear evidence of misalignment with respect to the levels consistent with long-term fundamentals. It was also totally consistent with the inflation objective, and started at a moment – April 2008 – in which there were rather benign inflation figures that revealed a smaller risk of unwanted inflationary propagation. Towards midyear it was even possible to raise the interest rate substantially to tackle an inflation rate that was much deviated from the target. This was thanks to the fact that the purchase of dollars was being carried out mechanically and despite a significantly depreciated exchange rate after the intervention. The purchase of foreign currency was concluded prematurely due to global tensions in global liquidity in dollars in September of last year. The capacity of the Chilean economy to subsequently deal with a significant exchange rate depreciation scenario, with monetary easing prospects and reduced inflationary pressures is proof that there was no inconsistency between the decision to intervene and the conduct of monetary policy (Figure 4). Intervention can occur only under special circumstances, because it is not easy to assess whether the prices of domestic assets are really in a bubble.