##olvent. under these conditions, the government engineered a massive rescue operation through the central bank where several of the most important banks became nationalized and others disappeared, after their assets were absorbed by other institutions. this intervention prevented an even larger collapse of activity than the one we ended up experiencing. the manner in which it was implemented, where shareholder equity was fully diluted and institutions assumed a subordinated debt to the central bank that took a long time to repay, helped maintain the rescue ’ s moral hazard concerns at bay. this, together with new regulation, resulted in a healthier financial system. however, an important cost of this intervention is that the balance sheet of the central bank of chile was severely stressed, leading us to operate with negative capital until today. this negative capital is also a consequence of the central bank ’ s balance sheet composition, with international reserves in foreign currency earning a much lower return than the interest we pay on our domestic currency liabilities. in addition, an appreciation of our currency makes our capital more negative, as we mark to market our international reserves. the lesson from our country ’ s experience in this regard is that we have been quite able to operate with negative capital for the last several years, maintaining inflation under control and preserving the working of the financial system. thus, while operating with negative capital is far from ideal, at the levels at which we have been operating, it is not cause for undue alarm. it is possible to conduct monetary policy under these conditions, especially when accompanied by an environment of good institutions and fiscal strength. other well respected central banks have been operating under similar conditions. i cannot finish this presentation without thanking sofia bauducco, lawrence christiano, and claudio raddatz for putting together the program of what promises to be an exciting conference, and all of you for coming to participate and share in the discussion. thank you. references cespedes, l., javier garcia - cicco and diego saravia. 2012. “ monetary policy responses to the global financial crisis : the chilean experience ”. mimeo. compendio de normas financieras. banco central http : / / www. bcentral. cl / normativa / normas - financieras / index. htm bis central bankers ’ speeches de chile. available at

to establish credibility and accountability for achieving it. on a more pragmatic front, there are good reasons to have banking supervision conducted outside the central bank ( which i will not address now ), and many countries follow this institutional arrangement. this should be considered when thinking about the involvement of the central bank in financial stability because it is desirable that micro and macro aspects of financial regulation be well coordinated to avoid sending conflicting messages to regulated entities. for these reasons, the institutional setting for monitoring and preserving financial stability will likely vary across countries. but the natural interest of central banks in financial stability and their advantages in providing a systemic view of the financial sector and the economy suggest that they should be involved at some level. whatever the institutional setting for pursuing financial stability, it is important that it guarantees that the systemic aspects of financial decisions are properly taken into consideration, that the institutions involved have the necessary tools to prevent the formation of excessive risks in the financial system and quickly act when they materialize, and that it ensures that these tools are used with a unified view of the micro and macro aspects of financial regulation. whether this is achieved by having a single entity in charge of regulation or by having instances that facilitate the coordination between the different entities in charge of it may be of second order importance if such coordination works well. in chile, the central bank is expected to act as a lender of last resort to commercial banks facing liquidity problems. we are also in charge of some aspects of financial regulation such as retail payments ; bank liquidity and market risk regulation, aggregate limits for pension funds, and others. 1 furthermore, preserving an appropriate functioning of the payment system is a goal established in our charter that is clearly related to the stability of the financial sector. so, we naturally care about financial stability, and accordingly we monitor systemic aspects of the functioning of all participants in the financial sector, conduct regular surveys of market participants, run an annual survey of the financial position of households, and produce a twice - yearly financial stability report that is widely read by other regulators and market participants, among other activities. source : central bank of chile, compendio de normas financieras. bis central bankers ’ speeches however, in chile the supervision of different groups of financial institutions, and the legal power and tools to enforce regulation are spread across several entities. for instance, the banking sector is under the supervision of the superintendence of banks and financial institutions ( sbif ), mutual funds and insurance companies are regulated