DOCUMENTOS DE POLÍTICA ECONÓMICA BANCO CENTRAL DE CHILE Macroprudential Regulation, Financial Stability and Capital Flows

In a post-crisis scenario, the global economy has entered into an episode of gradual recovery characterized, in part, by different growth velocities and capital flows to emerging market economies. This global environment has opened a debate relative to macroprudential regulation, financial stability and capital flows. In this paper I highlight the importance of this latest aspect, particularly in emerging economies where prudent macroeconomic and financial management have been crucial factors in promoting fiscal solvency and external equilibrium. Related to the banking system and financial stability, prudential regulation plays a central role. Gross capital flows are not exempt from funding and credit risks. Hence, the soundness of the banking system can be positively affected by a proper regulation focused on overall liquidity requirements and on avoiding currency mismatches. Therefore, authorities should focus financial regulation toward into this direction. In addition, the recent agreements of the Basel Committee on Banking Regulation are positive steps on strengthening the soundness of the banking system. However, there are still some risks to face, such as those imposed by institutions of systemic importance. Recent discussions on macro and financial policies have been dealing with the causes, consequences and implications of the financial crisis of late 2008 and early 2009, and the Great Recession that ensued. This panel has been persuasively entitled Where to from Here? I would like to focus on two issues: capital inflows, which is a very relevant issue for emerging market economies, and the recent agreement of the Basel Committee on Banking Regulation. For this purpose I will start with a brief review of some facts regarding capital inflows. Then I will discuss the policy toolkit to deal with them. I will take a look from a macro perspective and then from the point of view of financial  Presentation delivered at the Thirteen Annual International Banking Conference, Federal Reserve Bank of Chicago, September 23-24. I am very grateful to Gabriel Aparici, Herman Bennett, Kevin Cowan and Pablo Garcia for very useful discussions and comments.