The best strategy for countries to shield themselves against external shocks is to strengthen economic fundamentals, while at the same time authorities remain on alert for factors that would put financial stability at risk. Finally, Mexico can potentially remain attractive to investors by assuring public debt sustainability, consolidating convergence of inflation to the target, and implementing ongoing structural reforms in a deep-seated, effective manner.
Conversely, banks should want to keep loans which their models say require more capital than does the Basle standard. And, guess what, banks have been doing just that. This so-called “regulatory arbitrage” may not be all bad, but it surely causes some serious problems as well.