jose de gregorio : what does society expect from the financial sector? panel discussion remarks by mr jose de gregorio, universidad de chile and former governor of the central bank of chile following the per jacobsson lecture by dr yv reddy, 24 june 2012, basel, switzerland. * * * i would like to thank the bis for the invitation to participate in this panel, which makes us look at financial markets from a new perspective. as policymakers, we are used to talking about how the financial system must operate in order to fulfill its goals without threatening financial stability or imposing costs at the aggregate level. in recent years, the discussion has focused on how to avoid excessive procyclicality, contagion, moral hazard, and other important policy concerns. as economists, we have been trying to explain the misbehavior of financial systems, and we are still searching for answers. although we may have some ideas, the policy implications are not straightforward, but the answers cannot wait. policy design needs answers as soon as possible, and delays may cause well intentioned policies to be poorly implemented. but what society really demands from financial systems is quite difficult to define. society is a collection of actors, with different interests and different needs. people want access to the financial system at fair conditions. therefore it is useful to think of society as everyone who is not related directly to the financial industry or policymaking. starting from here, we can say that society is demanding safer and fairer financial systems. the view that financial markets were big casinos, where the betting was done with other people ’ s money and gamblers walked away unpunished, is quite common around the world. public opinion has been dominated by that sentiment, which has also affected policymaking. on financial development let me start by stressing that financial intermediation is good, and with the backlash from the crisis it should be repeated that a well functioning financial system is key to prosperity. it promotes economic growth by channeling investment funds from savers to borrowers ( levine, 2006 ). it is central to promoting entrepreneurship and to facilitating investment, including human capital accumulation. it provides financing to households in order to smooth consumption, and provides insurance. it provides safe and cheap means of payment. the difficulties faced by households and firms in many emerging market economies due to underdeveloped financial institutions and markets should be a clear reminder of this positive role. but financial depth may also be a source of great problems. as in

is very complex, and teaches valuable lessons. on one hand, as to how imbalances that are not addressed on time end up creating enormous costs for the population. for those of us in charge of economic policy in our countries, it is absolutely essential that we strive to address these imbalances if they exist, and at the same time that we do not create them through our decisions. over - stimulating the economy when output gaps are narrow and inflationary pressures have risen could lead to imbalances. i trust that they are not as sizeable as those of the developed world, but in any case solving them is always costly. on the other hand, it has taught us the relevance of maintaining and improving a good macroeconomic framework. in chile, this framework rests on four pillars. first, monetary policy management is based on a flexible inflation - targeting regime, conducted by an autonomous central bank and supported by a floating exchange rate system. second, a fiscal policy that is accountable and predictable thanks to a structural balance rule. the significant amount of savings accumulated during the run - up of copper prices has been a crucial factor in bolstering the resilience of the chilean economy and in providing a countercyclical fiscal boost. third, a high degree of commercial and financial integration with the rest of the world. finally, a sound financial system, with globally integrated, well capitalized, and adequately - regulated banks. our countries have suffered decades as a result of mistaken economic policies. the great recession showed that our current state of preparation to confront and mitigate the impact of an adverse scenario is much better than in the past, and that it is the path that we must continue. undoubtedly, there are still many things to improve. attaining a level of development such that prosperity reaches the whole population is still far away, but at least we are on the right track. thank you. bis central bankers ’ speeches