Our challenge in the coming years will be to consolidate this Board, in order to enhance our assessment of risks threatening the stability of the Chilean financial system. Lesson number two is that, in the face of threats to financial stability, preventive actions work best, seeking to anticipate the problems. The costs of a crisis of this nature are high and long-lasting, so even at the risk of being mistaken, we’ll rather be safe than sorry. Still, the interest rate as an instrument is neither sufficient nor necessarily effective in preventing financial imbalances to develop. More focused instruments are needed – ranging from financial regulation to given the market clear signals of the risks –, which permit to take direct action on the problem. Given the nature of the regulation and supervision framework of the Chilean financial system, every now and then this policy will call for close coordination between the Central Bank and the Superintendences. Lesson number three is that, during episodes of financial stress, the Central Bank also requires using a battery of instruments – aside from the short-term interest rate – to help stabilize the economy. During the crisis of 2008–2009, the Central Bank of Chile introduced new tools to inject liquidity into the economy and enhance the effectiveness of its monetary policy making. Also, in 2008 and 2011, we intervened in the forex market, obeying both to a prudential motivation (i.e., accumulating more international liquidity) and to a conjunctural one: the evolution of the real exchange rate.

However, its effects can be mitigated by monetary, fiscal and financial policy actions. Although the negative scenarios dominate, it is possible that Eurozone policy makers succeed in building a set of measures and reforms that soon restore market confidence. In any case, in such a scenario, given the required fiscal adjustments, the developed economies would continue to lag for a long period and would hold on to their loose monetary policies for some time. This would intensify the dichotomy between growth in advanced and emerging countries. In this context, a resurgence of capital inflows to emerging economies is a possibility. Domestically, one risk that cannot be ruled out are stronger effects from the higher external uncertainty, hitting harder the local financial markets, confidence, and consumption and investment decisions. Notwithstanding the capacity of economic policies to mitigate the effects of a more adverse external environment, it is important for the private sector to properly administer financial risks. Worth noting are the favorable financial indicators of the corporate sector (figure 10). In addition, currency mismatches continue to be stable and bounded, despite the increasing role of external debt as a source of funding. Still, it must be pointed out that financial intermediaries would be wise to keep a watchful eye on credit risk, considering its negative effects on external demand implied in the risk scenarios. 4  BIS central bankers’ speeches  As for households, on average the financial situation has not deteriorated. The recent increase in private consumption has evolved hand in hand with labor income.