generating moral hazard. such is the case of provisions for banks considered “ too big to fail. ” in addition, the tools may inhibit healthy innovation, and, as mentioned, they can boost the unregulated sector, amplifying and creating new avenues for shadow banking, at the expense of the regulated sector. finally, excessive regulation may hinder the development of the financial system, damaging long - term economic potential, something especially harmful for countries suffering from low financial penetration. mexico ’ s experience mexico has designed its financial policies on the basis of its experience with previous crises, which emerged from macroeconomic disequilibria and inadequate bank regulation. the focus has been on strengthening financial institutions, as well as helping to deepen markets. in general, measures have been based on a few rules that are transparent and predictable. much use of discretion has not proved necessary. mexico ’ s financial system is bank based, with high participation of foreign - owned institutions. foreign banks can only operate in mexico through the establishment of subsidiaries, which must comply with the same regulations on a stand - alone basis as domestic banks. strong capital and liquidity requirements were imposed even before basel iii rules became effective. specifically, as of today, mexico has been classified as compliant with those internationally enacted regulations, and certain features are even stricter. 12 in fact, in terms of bank prudential policies, mexico benefits from the following five measures. the first is capitalization rules that incorporate high weights for maturity mismatches in market risks, including the banking book in addition to the trading book. second, for foreign currency, caps govern net liabilities and net open position, while a minimum liquidity ratio is required. a third distinctive measure relates to loan - loss provisioning, based on expected losses rather than realized ones. estimation of expected losses covers information from the system as a whole, such as the level of aggregate indebtedness and payment behavior of borrowers, while it also takes into account an institution ’ s individual performance. a fourth characteristic is ring - fencing in terms of bounds on related - party lending, made tighter in the wake of the most recent financial crisis, as well as requirements for transferring assets and liabilities to related entities. for the problems related to relaxing macroprudential policies, see calomiris, c. w. ( 2013 ), “ managing the risks of the new macro - prudential policy regime, ” borsa istanbul review, 13. basel committee on banking

policy announcement surprises on equity indexes of fifty countries. these studies find that, on average, a hypothetical 25 basis point rise in the federal funds rate is associated with a drop of about 1 percent in foreign equity indexes. equity indexes in countries with a less flexible exchange rate regime respond more to u. s. monetary policy surprises. has globalization affected the u. s. inflation process? other than through its influence on financial markets, globalization may also have affected the operation of monetary policy by changing the relative importance of the various factors that determine the domestic inflation rate. 3 as national markets become increasingly integrated and open, sellers of goods, services, and labor may face more competition and have less market power than in the past. in particular, prices and wages may depend on economic conditions abroad as well as on conditions in the local market. these linkages suggest that, at least in the short run, globalization and trade may affect the course of domestic inflation. international factors might affect domestic inflation through several related channels. first, the expansion of trade may cause domestic inflation to depend to a greater extent on the prices of imported goods – not only because imported goods enter the consumer basket or ( in the case of imported intermediate goods ) affect the costs of domestic production, but because competition with imports affects the pricing power of domestic producers. second, competitive pressures engendered by globalization could affect the inflation process by increasing productivity growth, thereby reducing costs, or by reducing markups. third, to the extent that some prices are set in internationally integrated markets, pressures on resource utilization in foreign economies could be relevant to domestic inflation. 4 some analysts might object to the proposition that globalization affects the inflation process at all on the grounds that the structural changes that globalization engenders can affect only the relative prices of goods and services ; in contrast, inflation – the rate of change of the overall price level – must ultimately be determined solely by monetary policy ( ball, 2006 ). certainly, monetary policy determines inflation in the long run, and the central bank must take responsibility for the inflation outcomes generated by its policies. for example, the opening of trade with emerging - market economies that have low labor costs may reduce the relative prices of imported manufactures, but if the long - run inflation objective of the central bank is held constant, then the ultimate effect of the lower import prices on inflation will be nil as changes in other prices offset the effect of import prices. however, the conclusion that inflation is determined only by monetary policy choices