many financial firms. the deleveraging of some global financial institutions with a significant presence in latin america and the potential effect on economic performance serves as a stark reminder of the interlinkages of financial institutions and economies. the deleveraging of these institutions also highlights the need to coordinate across regulators and acts as a catalyst to spur greater action and information sharing. latin american central banks : crisis response and challenges earlier i mentioned how central banks around the world, including those in latin america, lowered policy rates in response to the global financial crisis. although the crisis developed in advanced economies, latin american central banks, such as those in brazil, chile, colombia, and mexico, cut policy rates in 2009 as their economies were being hit hard through trade and financial linkages with advanced economies as well as through commodity price channels. their capacity to follow countercyclical policies was in striking contrast to many previous times of stress, when policy rates could not be lowered for fear of frightening off international investors. the fact that these latin american economies were able to respond by lowering policy rates and also by boosting fiscal support is a testament to the decisive steps taken to strengthen macroeconomic policies and financial systems, including improvements in the monetary frameworks under which their central banks operate. many latin american economies staged quick and strong recoveries from the global recession and subsequently started to raise policy rates to try to ward off overheating pressures. conversely, many advanced economies, with their prolonged soft recoveries, needed to continue to follow expansionary monetary policies. accordingly, as was also the case in emerging asia, the monetary policy stance of several central banks in latin america, such as brazil and chile, diverged from those of advanced economies. the resulting rise in interest rate differentials, on top of the generally stronger growth in latin america, helped to fuel capital inflows, which, at times, have proved challenging for the policymakers of these economies to manage. of course, more recently, with intensification of the crisis in europe, some latin american countries, most notably brazil, have again lowered their policy rates in response to concerns about slowing growth. even within latin america, however, the experience of economies has not been uniform. in particular, mexico, with its stronger ties to the united states, was hit earlier and harder than many other economies in the region. even though mexico ’ s recovery in the second half of 2009 was strong, it had less momentum and considerable economic slack remained in the bis central bankers ’ speeches

sector have, and they have contributed significantly to the earnings of the banking system, providing it with the ability to absorb losses elsewhere, to maintain loss reserves, and still to show significant profits. those banks with relatively large exposures to the business sector and insufficient offsets from other earning flows were able to avoid stresses because they entered the period with both substantial capital and reserves. these positions reflected not just diligent supervision and the basel i capital reforms but also a marketplace that increasingly demands strength in financial institutions that serve as counterparties in frontier financial risk - management transactions. and bank managers who lived through the late 1980s and early 1990s found capital buffers comforting as well as useful. that banks had impressive earnings and balance sheets going into the current period of stress is of key significance. the strong balance sheets lowered funding costs and provided needed buffers. some banks also benefited from the increased diversification and scale of their operations that had resulted from previous consolidations. the larger banks were better able not only to spread their portfolio risks across a wider range of customers but also to broaden their funding sources. an analysis of the resiliency of the u. s. banking system would be far from complete without a recognition of the new techniques in risk management that have been applied in banking during the past few years. to be sure, at most banks the application of these practices has just begun, and even the most advanced banks still have significant strides to make. nonetheless, the efforts to quantify risk have provided management with a far more disciplined and structured process for evaluating credits, pricing risk, and deciding which credits to retain. in the process, banks are becoming much less dependent on the analysis and subjective judgments of lending officers. although such judgments in the end are indispensable to the lending process, a methodical, systematic, and quantitative review of facts - - including the effects of material new exposures on the lender ’ s consolidated risk - - provides a greater depth to risk management than we have had in decades past. improved risk management and technology have also facilitated, of course, the growth of markets for securitized assets and the emergence of entirely new financial instruments - - such as credit default swaps and collateralized debt obligations. these instruments have been used to disperse risk to those willing, and presumably able, to bear it. indeed, credit decisions as a result are often made contingent on the ability to lay off significant parts of the risk. such dispersal of risk has contributed greatly to the ability