Third: Market functioning I have to mention first the assessment of the role of credit rating agencies, their small number, the transparency of their rating methodology, possible conflicts of interest in particular as regards structured finance instruments. Excessive exclusive reliance on credit ratings by investors without carrying out due diligence or conducting further own risk assessment is a problem as well. The road map also includes a reflection on the consequences of the originate and distribute model of banks for credit markets. Does it induce wrong incentives? A last item in this list relates to non-regulated debt markets and mortgage markets, which might deserve a hard look in the light of recent experience. Finally: The regulatory framework Above all, liquidity risk management relating to complex structured products needs to be investigated. We need a wider concept of concentration risk including wholesale and interbank markets as well as intragroup exposures. We have to look at warehousing and pipeline risk, deal with possible regulatory incentives to move risk off balance sheet into SPVs. We have to assess the links between the regulated and the non-regulated part of the system, including the optimal perimeter of supervision. Special purpose investment vehicles and conduits were used as off-balance sheet investment vehicles. These were prone to liquidity mismatches between their assets and liabilities, causing contingent credit and liquidity lines to be drawn on banks, and resulting in an increased demand for money market liquidity.

The reason is the combination of a higher risk premia and lower interest rates in industrial countries, as a result of flight to quality and expectations of lower monetary policy rates than previously expected so much for the US as for the Euro Zone. In this external setting, commodity prices have remained high and, particularly, crude oil prices are reaching record nominal levels in dollars. Besides, international prices of food are showing a rising trend. Accordingly, emerging economies have been more dynamic than previously expected, contributing to worldwide GDP growth. Thus, China, India and Russia as a group explain more than a half of the world GDP growth during the first semester of this year. The Chilean economy Chile’s current framework of macroeconomic and financial policies and institutions has insulated the economy from the turbulences in international financial markets. In particular, the fiscal solvency and the conduction of an inflation-targeting monetary policy under a floating exchange rate regime have increased the economy’s resilience to external shocks. Between July 19 and August 16 – the day before the Fed reduced its discounted rate in 50 basis points and authorized the use of bonds supported by mortgages and collaterals – the Chilean peso depreciated slightly, the 10-year bond rates decreased and the stock exchange experienced one of the lowest falls among industrial and emerging economies. The Chilean economy started a period of above-trend-growth in the third quarter of 2006. This growth has been supported by expansive domestic macroeconomic policies and favorable external conditions.