The concern for financial stability is reflected not only on the regulations that the CBC is responsible for issuing, but also in a permanent monitoring and assessment of the Chilean financial system, its vulnerabilities and the risks it faces. This is done by analyzing many sources of information and the ongoing communications with the financial market’s players and supervisors. Whenever the view emanating from this analysis so warrants, it is verified with the respective institutions and communicated to the competent supervisors. Aside from the continuous monitoring by the CBC, the view of the Bank on the status and risks of the Chilean financial system is communicated twice a year in our Financial Stability Report (IEF), which is made available to the public and presented to Congress together with the Monetary Policy Report (IPoM). The Bank’s communication of risks in the Financial Stability Report seeks to inform financial system participants of the Bank’s vision regarding the main vulnerabilities and risks in the financial system from a forward-looking perspective and thus encourage them to take action to reduce those vulnerabilities. This scheme has proved effective. For example, after following the accelerated development of post-crisis housing prices, in the December 2012 Financial Stability Report the Central Bank expressed its concern about this trend and the risk that it implied in a context of high leverage in the origination of credits. After this warning, we saw a fall in the LTV of new loans, especially noticeable in the significant drop in loans carrying an LTV of 100%.

Among these, Loan-to-value and Debt-to-income are found by a large majority of studies to have a significant impact on reducing credit growth, banking leverage and growth of Real Estate prices. Similarly, but with a slightly smaller majority, Provisions – which includes Dynamic Provisions –, and Countercyclical Capital Buffers have a statistically significant impact on the aforementioned variables. Finally, Reserve Requirements and Caps on Credit (or its Growth) do not have the same empirical support as the other policies in attaining their intended goals. 3. Monetary policy and macroprudencial policy  Again, there is enough consensus that macroprudential policy is distinct from monetary policy, in the sense that they have different targets, methods and tools. Despite all the advances made, there is still valid debate ongoing about the connection between these two policies, focusing on whether monetary policy should be used for macroprudential purposes, and how the monetary authority should be involved in the implementation of macroprudential policy. With regard to the first question, at the Central Bank of Chile we are rather skeptical about using the monetary policy rate as a financial stability tool, for several reasons. Firstly, it is not clear that the interest rate is an effective tool for dealing with the overexpansion of the financial system during booms, nor for containing systemic events during busts. The interest rate is too broad an instrument to play this role, as it affects not only the financial system, but real businesses and households as well.