This implies that central banks (or whoever is responsible for systemic stability) must either have the regulatory tools at their disposal, or must have the adequate channels to convey these risks to the institutions that do have regulatory discretion. In Chile, for example, although there is a separate bank Superintendency (SBIF), the Central Bank has regulatory authority over several aspects that relate to systemic financial stability. For banks, these relate with the authorization to use derivatives, regulation regarding market and liquidity risk, and others. In other areas, the Central Bank also has a say in “systemic” regulation such as overall limits for Pension Funds. This scheme accommodates recent policy concerns, since it avoids the conflict of interests that arises from mixing the micro supervisor with the monetary authority, while preserving an institution that provides a broad look at the stability of the financial system. This being said, however, there is a need to continue strengthening coordination instances with other regulators. In this sense I think that the establishment of a Financial Stability Committee, very much in line with the one established here in the United States, is a promising avenue to take. “Basel III” and the Chilean banking system When discussing financial stability these days one cannot help thinking of the recent agreements of the Basel Committee on Banking Regulation, which are a positive step forward in strengthening the banking system. However, I would like to highlight that many emerging market economies already fulfill most of the requirements agreed upon for early 2019.

I will first refer to some stylized facts and factors behind the recent surge in capital inflows, and then on the policy challenges. Monetary policy in the developed world has had to take on the burden of cyclical stimulus. Hence, policy interest rates in the main high-income economic zones have been kept low for longer than expected at the end of last year, and several central banks have actually reinforced traditional monetary policy with further unconventional measures. The discussion about exit strategies has morphed into further balance-sheet stimulus, and markets are pricing-in that monetary accommodation will continue well into 2011. In contrast to the situation in the largest developed economies, emerging markets and some financially-stable developed countries have transited to a quick recovery phase, which in some cases is leading to above-trend growth and the fast closure of output slack. Macroeconomic policy has responded accordingly, first through the normalization of extraordinary liquidity and financial stability measures, then by moderating their fiscal and monetary impulses. Interest rates in emerging economies have, therefore, started to increase and are, according to most expectations, slated to continue increasing over the course of the next few years. These monetary policy trends have naturally led to discussions regarding their implications for capital flows, current accounts, economic growth, and real exchange rates. In particular, some concerns have been voiced about the risk of returning to a situation much like the one observed in the mid 2000s, when low interest rates in the developed world boosted capital flows into emerging economies.