Earlier episodes of balance of payments crises have typically been associated with high debt and liquidity and currency mismatches, which leave economies vulnerable to abrupt deterioration of international financial conditions. In Chile, the present current account deficit is being financed mainly by FDI flows, associated with reinvested earnings and new investments, thus providing more strength to the capital account. Despite these factors, we need to remain vigilant because an economic scenario like the present one can favor the incubation of future risks. Domestically, a scenario of very dynamic final sales and personal income, low unemployment and high utilization of installed capacity,  BIS central bankers’ speeches  1  can exacerbate the response of domestic demand and further expand the current account deficit. Abroad, the present abundance of international funding as a result of expansionary monetary policies in developed economies may facilitate the financing of the external deficit and push asset prices up, at the expense of incubating vulnerabilities for the future. All this means that we must be particularly alert to prevent financial vulnerabilities from incubating, since these situations can lead to higher leverage of households, firms and financial intermediaries, as well as currency and liquidity mismatches. In this regard, one reassuring element is that in recent months there has been a moderation in household indebtedness, which in any case has remained in line with the income trajectory. It is also important to continue to monitor the evolution of key financial prices and their interaction with lending.

Deleveraging by some international banks is leading to a pull-back into home markets. But some regulatory responses, not just market responses, may reinforce this pull-back, by restricting the flow of capital and liquidity outside home markets. Not only will this ring-fencing of national systems weaken international banking and trade, it may introduce new risks to financial stability when global banks are not able to deploy liquidity from one part of the banking group to other parts in need. Better international co-ordination in the implementation of rules is therefore needed to ensure that they serve their intended national objectives without weakening the global system as a whole and introducing new vulnerabilities. A sound financial system anchored by a core of strong local banks Just as we derive lessons from troubled banking systems, it is worth looking too at those that have not run into problems. It is notable that among the jurisdictions with systemically important financial centres, Canada, Australia, Hong Kong, and Singapore have held up well during the global financial crisis. A little remarkably, the top ten banks in Bloomberg’s latest annual ranking of the world’s strongest banks included four Canadian banks, the three Singapore local banks and two Hong Kong banks. There is no room for complacency – the financial crisis has shown how volatile financial markets can be and the speed with which contagion can spread. Banks have to be constantly vigilant against the build up of risks and maintain strong buffers against contingencies.