economies the following years, with the mexican crisis of december 1994 being the first example. thereafter, a series of banking and balance of payments crisis followed in latin america and elsewhere3. the impact of the fed ’ s tightening cycle in the 1990s on emerging markets was not as widespread as the 1980s episode had been, and countries like chile and colombia were able to st 1 remarks at the 2017 iif latin america economic forum, asuncion, paraguay on saturday april 1, 2017. i acknowledge the support of diego gianelli and mauricio hitschfeld in the preparation of this speech. these remarks do not imply endorsement by the central bank of chile or any of its board members. 2 there is a third episode between june 1999 and june 2000. this process of 150 bp hikes can be understood as the final adjustment along the 1994 episode. 3 see, for example, the discussion in garcia ‐ herrero, a., 1997, banking crisis in latin america in the 1990s : lessons from argentina, paraguay and venezuela, imf working paper 97 / 140. see also sachs, j., a. tornell and a. velasco, 1996, financial crisis in emerging markets : the lessons from 1995, nber working paper 5576. weather this period relatively well and to keep high growth rates. 4 but there is ample evidence that, in a context of several macroeconomic imbalances in several emerging economies, the 1994 episode triggered a series of difficulties and crisis that configured the macroeconomic map in the developing world in the second half of the decade. in contrast, the monetary policy normalization process starting in 2004, did not have a negative effect on emerging economies. moreover, the 2004 ‐ 2007 period was one of prosperity and stability across the developing world. of course, the global financial crisis of 2008 derailed everything, but it is difficult to argue that it was the consequence of the hiking cycle of the mid 2000s. if anything, it might have been the consequence of the lack of a timely normalization. hence, although there are many common features in the 1994 and 2004 cycles, the consequences were very different. what i want to do in this talk is to identify a few features that help us reflect why this was the case. i think this is useful to extract some lessons for the current process of monetary policy normalization in the us. 1994 ‐ 2004 normalization cycles as a starting point, it is important to notice that the 1994 and 2004 episodes are comparable for

yet the basel committee ’ s report found that banks did not obtain sufficient financial information to assess the types and extent of risk assumed by large, highly leveraged institutions. in particular, banks did not obtain the information needed to assess leverage, risk concentrations in particular markets, or the liquidity risk profile of individual institutions. the basel committee report also concluded that banks should develop more effective measures of potential future exposure, which refers to the possibility that credit exposures can change over time as market conditions fluctuate. the ability to measure potential future exposure is critical when dealing with large trading counterparties such as highly leveraged institutions, especially in volatile market conditions. unfortunately, methods for measuring potential future exposure have not kept pace with the growth and composition of trading activity. the basel committee ’ s report also showed that banks must develop approaches that better account for credit risk under distressed market conditions. a key lesson of the ltcm episode is that credit and market risk cannot be seen as completely distinct, but are liable to interact and reinforce each other under highly stressful conditions. the use of more rigorous stress testing, therefore, could have given banks better warning of the types of exposures they faced. together with this january 1999 report, the basel committee issued a sound practices document setting forth guidance for banks and supervisors on these topics. for example, these sound practices called upon banks to : • establish clear policies governing their involvement with highly leveraged institutions ; • adopt credit standards addressing the specific risks associated with these institutions ; • establish meaningful measures of potential future exposure as well as credit limits incorporating the results of stress testing ; and • monitor exposure on a frequent basis. i am pleased to report that the basel committee ’ s recommendations on highly leveraged institutions have been reinforced by the recommendations of subsequent efforts, including reports by the president ’ s working group on financial markets and the counterparty risk management policy group. there is clearly widespread agreement among both the private sector and the official community about the steps that firms need to take to address the weaknesses in risk management identified in the ltcm episode. the key remaining issue is the strength of the private sector ’ s resolve to implement these measures. for its part, the supervisory community is carefully monitoring the efforts of banks to follow through with the implementation of improved risk management practices for highly leveraged institutions. the basel committee intends to prepare a follow - up report on the progress banks are making. in my view, the degree of improvement will signal whether the industry has truly absorbed the lessons of the