to the current international environment. on the other hand, it would increase chile ’ s international liquidity position to levels around 17 percent of gdp. indeed, evidence shows that having a high level of reserves makes economies more resilient to financial turbulences, even though they are generally not massively used. reserves act as a deterrent against sharp capital flow reversals. 1 in addition, reserves allow central banks to credibly establish foreign currency liquidity facilities. these played an important role in normalizing both domestic currency and foreign currency short term debt markets in many emes during the recent global crisis. after an initial sizable depreciation, the peso has strengthened, for some days even reaching levels similar to those prevailing before the intervention announcement. this contrasts sharply with the experience of the previous period of reserve accumulation initiated in april 2008 ( figure 1 ). in that episode and with the global financial crisis intensifying it was deemed appropriate to accumulate about 4 percent of gdp over a period of 8 months. this process was suspended after the collapse of lehman brothers that triggered a sharp depreciation of most currencies in emes. during that episode, the currency depreciated almost continuously by about 18 percent between early april and late august. two very important issues help explain to a large extent the difference between the two episodes. in 2008, the dollar strengthened and the price of copper fell. today, the dollar has remained weak and the copper price has reached all - time highs ( figure 2 ). this example shows how the effects of the intervention are confounded by other macroeconomic developments. overall, available estimations indicate that, without the intervention, the peso would be between 3 and 5 percent stronger than it is today. a key uncertainty for policymakers in emes is how long the period of decoupling and “ exchange rate tensions ” will last. part of the tensions will be persistent, as many emes have proven very resilient in the current crisis – validating their policy frameworks. this resilience should be factored into a lower risk premia for the assets issued by these economies. however, some of the tensions will prove transitory and will subside once activity in for further discussion, see “ international reserve holdings in emerging markets ” by jose de gregorio, central bank of chile economic policy paper no. 40, january 2011. bis central bankers ’ speeches advanced economies recovers more strongly. therefore, over time some tensions should alleviate, and

structure. for example, if external funding has not been readily available in the past for certain intermediaries, awareness of currency mismatches can be weak for these institutions or for their customers, and may not be properly addressed in the regulatory framework. similarly, the availability of new funding may cause credit to rise at a faster pace than that of the supervisory capacity required to monitor its quality. these three sources of risk call for different policy actions. the first approach for dealing with asset price misalignments is for authorities to communicate their views on the extent of potential asset price distortions and their consequences for financial stability. these “ verbal interventions ” are relatively common regarding the exchange rate. i see no reason why we should not use them also for other assets such as bonds and equity, since they are relevant variables from the point of view of macroeconomic and financial stability. indeed, recent experience has shown that central banks need to be more assertive and communicative about the conduct of financial systems. in our last financial stability report we indicated that evidence pointed to some overvaluation of stock prices in chile, but we also indicated that financial stability was not threatened by potential corrections, even sharp corrections, in these prices. of course, making this assessment is not a trivial task – as modeling asset prices is complex – and it is not the role of central banks to communicate continuous assessments of asset prices. for this reason, this kind of communication must be done exceptionally, and in the context of discussing the potential implications of these price developments on current and future bis central bankers ’ speeches financial stability. in addition, communication must be done in a timely manner, before vulnerabilities build up. in addition, central banks may choose to participate in distorted financial markets where there may be threats to financial stability, as is sometimes done with reserve accumulation and exchange rate intervention in emes, or as has been the case of some interventions in debt and other asset markets in advanced economies. however, interventions beyond currency markets must be truly exceptional and only on the grounds of preserving financial stability or complementing monetary policy. another way to control the vulnerability of the system to the reversals of asset prices is to limit the amount of debt that finances the purchase of those assets with higher prices or increase capital buffers for such debt. in terms of macro prudential policies there are a series of options for this. higher capital requirements for intermediaries participating in the business of making leveraged purchases of financial assets are one option