International Capital Flows in the Post-crisis World, September 2019 CENTRAL BANK OF CHILE  The Chilean banking industry  Main changes in the Chilean banking industry Change  Concept  Characteristics  Advantages  Challenges  New GBL  New solvency requirements (B3)  Reduces gaps with international standards  Bank’s capacity to comply with new standards  Regulatory environment  Revision of Compendium of Accounting Regulations  Changes if financial statement reporting requirements  Greater importance to the financial statement; reduces asymmetries in financial statement reporting  Maintaining the quality and timelines of financial information; measures for mitigating operational risk  Emerging risks  Cybersecurity events  Vulnerability of digital platforms; temporaray suspensión of services  Mitigation strategies at the industry level  Greater investment cybersecurity  Integration of retail financing  Parent banks absorb nonbank card issuers  Wider coverage of consolidated debtor information  Incorporation of new debtors in credit risk models  Oversear bank subsidies  Acquisition of Banks overseas  Diversification of business models  Different regulatory framework; large overseas investment by local parent banks  Expansion into new business areas  Source: Financial Stability Report, first half 2019, Central Bank of Chile. Let me add one more thing regarding the use of CBM by several EMEs, which have targeted the banking system, rather than the general resident-non-resident relationship, as is usually done by capital controls. The Figure below, for example, based on De Crescenzio et al.

Among others: (i) a gradual path to reduce structural deficit by 0.2% of GDP per year, to 2022, (ii) first step above target: structural deficit reduced 0.5% of GDP, (iii) a Debt/GDP ratio currently at 24% should level off in the next two years, (iv) Fiscal Council given independent status, (v) preferential regime for defense spending in course of reform, and (vi) fiscal sustainability a central concern in discussion of tax and pension reforms. Not all emerging economies are equally prepared to react, and Chile is relatively well positioned when compared to other emerging economies. In order to deal with the undesired effects of volatile capital inflows, several EMEs have implemented different policies to deal with the appreciation/depreciation cycle and credit booms (e.g reserve requirements, FX intervention, capital controls). There is substantial evidence that capital flows to EMEs are volatile and that in part depend on “push” factors that are unrelated to the marginal productivity of the host economy. Volatile (boom-bust-cycle) capital inflows are a significant concern for policymakers. The surge of capital flows is usually associated with booms in asset prices, appreciation, credit booms, and increasing current account deficits. While the sudden stop is associated with asset prices adjustment and financial distress. In Chile, free floating and FX volatility has helped reduce incentives for arbitrage and carry trade. Besides, the exchange rate flexibility facilitates asset price adjustment. Providing the right incentives for resident investors (pension funds and the government) to counteract the non-residents behavior, smoothing net capital flows!