Banking sector debt amounting to nearly 2.7 billion US dollars is maturing in the last quarter of this year, that is, less even than the reserves accumulated from April to date. Meanwhile, the total external debt of the banking sector overall amounts to some 13 billion dollars, the equivalent to 60% of total reserves. The level of Central Bank reserves is sufficient to back the normal operation of the financial system, in particular its needs for foreign funding. The Chilean financial system must be capable of securing funds in international markets, a feature it has displayed for several years already. However, should access to foreign funds and liquidity complicate further, the Central Bank is well prepared and equipped to take decisive action. Precisely the levels of international reserves can do the job. International reserve management To administer international reserves, the Central Bank has separate responsibilities at various hierarchical levels, complying with international recommendations on the matter, and which have been evaluated by the IMF. In addition, internal and independent auditors perform periodical audits to review the Bank’s investment procedures. An internal middle office is in charge of monitoring compliance with the investment guidelines and parameters defined by the Board, on a daily basis. This year, the investment policy for internally managed reserves has been revised on two occasions, which resulted in updating the benchmark comparison, credit risk, and portfolio  2  BIS Review 123/2008  duration, to better safeguard the Bank’s assets and address international markets’ volatility.

As elsewhere, a regulatory regime of constrained discretion has given way to one with too much unconstrained indiscretion. This calls for regulatory repair. Without change, the current regulatory system risks suffering, like the Chicago teachers and the LIBOR fixers, reputational damage. Fortunately, there are early signs that regulatory change is afoot to place tighter constraints on this (in)discretion. The emergence of self-regulation To understand how we ended up here, it is useful to explore the historical contours of the regulatory debate. This is a history in roughly four chapters. Chapter 1 covers the period prior to the agreement of the first Basel Accord in 1988. Until then, a patchwork of national regulatory frameworks for capital adequacy operated. Some countries set capital adequacy standards based on simple measures of bank equity to assets – a leverage ratio. Others, including in the US, used risk-based standards with risk weights set by regulators for a small set of asset categories. Chapter 2 begins with the introduction of the Basel Accord. This was a landmark agreement: the first-ever genuinely international banking accord, based around an 8% bank capital ratio, with internationally-set risk-weights applied to a small set of banks’ assets. The Accord was explicitly designed to lean against an international “race to the bottom” in capital adequacy standards (Goodhart (2011)). It also helped ensure a level international playing field. Chapter 3 commences with the Market Risk Amendment to Basel I in 1996 and continues through to the Basel II agreement of 2004.