The regulatory framework should not be so onerous that it forms a high cost and a burden to businesses. Intrusive regulatory approaches on new products can become a disincentive. Tax structures can also be structured to support the innovation process. Within financial institutions, organisational structures can also create an environment for innovation by avoiding product-oriented structures and aligning instead to the organization’s processes as well as implementing appropriate performance incentives. Fifth, entering into strategic alliances with entities may bring new approaches, new technologies or specialisation in a new product. In addition, collaborative efforts amongst Islamic financial institutions would strengthen the ability to leverage on the industry’s expertise. The introduction of innovative Islamic financial products in a specific jurisdiction can be expanded to other jurisdictions, which in turn, will contribute to broaden and deepen Islamic financial markets and thus strengthen the overall development of the Islamic financial industry. To facilitate the achievement of this objective, the sharing of information can be made on the product features and the Shariah methodology adopted in ascertaining the permissibility of the products in the various jurisdictions. Strengthening risk management capabilities While financial liberalization and innovation have expanded the range of opportunities, it has also led to heightened uncertainties, greater volatility and increased potential of financial vulnerabilities. These  2  BIS Review 20/2004  developments require financial institutions to move to a higher standard of risk awareness and management.

In this respect, the Chilean financial system shows better performance than other Latin American and Emerging economies, in dimensions like market capitalization, number of branches per inhabitant, use of derivatives, and participation in domestic credit to the private sector, to name a few. Nonetheless, increased development and complexity of financial markets also means that risks may be higher, and that a stronger and more sophisticated regulatory framework is required. The New General Banking Law and future challenges The New General Banking Law, takes important steps in this direction, by embracing the recommendations of Basel III on banking capital and reserve requirements, as well as on corporate governance. Supervision is also improved under the new law, by merging SBIF into the new Financial Markets Commission (CMF) in order to have a system-wide oversight of risks and vulnerabilities in financial markets. Through the day, the different panels will discuss the role of macro prudential policies and the implementation challenges in adopting Basel III standards. The main goal of these standards is to increase the resilience of the banking sector, by increasing quantity and quality of capital requirements. This framework combines bank-specific measures with macro prudential actions to contain potential systemic risk. In this respect, one of the new tools is the countercyclical capital buffer: an additional capital requirement that could be activated and deactivated by the Central Bank depending on the state of the financial cycle, and whose main goal is to preclude the incubation of systemic risks and increase the resilience of the system as a whole.