But the liquidity of other assets is less assured, and banks can suffer problems if the liquidity of their assets dries up. That could cause financial instability. The Bank of England can provide liquidity insurance to individual, creditworthy institutions and to the banking system as a whole, by accepting those less liquid assets as collateral, for a fee, in exchange for more liquid assets, including reserves.9 But such liquidity insurance must be provided in a way that takes account of the potential for “moral hazard” – the incentive for individual banks to undertake riskier activities because of the presence of a central bank backstop. The Bank’s operations must not undermine the incentives of private sector firms to manage their liquidity needs safely in the market, rather than turn to the Bank routinely. Moreover, although the Bank’s operations are collateralised, the value of the securities delivered to the Bank is always uncertain. We would never be able to protect ourselves perfectly against credit risk. 8  “The Bank’s money market framework”, Bank of England Quarterly Bulletin, 2010 Q4. 9  The Bank also stands ready to provide gilts via its permanent Discount Window Facility, introduced in October 2008. This facility is available to provide bilateral liquidity support to solvent and viable institutions, against a wide pool of collateral. BIS central bankers’ speeches  5  As well as implementing the policy rate, the SMF is also used to provide that liquidity insurance.
We believe these policy actions, as well as those announced by the Minister of Finance in order to promote Chile as a Regional Financial Center, should greatly contribute to a more resilient financial sector, wider cross-border use of the Chilean Peso and a greater participation of non-residents in our FX market.   The Strategic Planning 2018-2022 of the CBC includes a thorough review of its FX regulation. Current FX regulations require most FX transactions to be executed through the “Formal Exchange Market” —which is comprised by banks and some stockbrokers— and to be reported to the CBC. These two elements have remained largely unchanged since the capital account was opened 20 years ago. Back then, re-imposing capital controls could not be ruled out, and that rationale underlies the somewhat cumbersome structure of the FX regulation. Currently, while capital controls are still part of the regulatory toolbox, re-imposing them could only be considered during an exceptional situation. Therefore, the CBC has decided to streamline its FX regulations and reduce the burden of compliance to the private sector, whenever possible, without affecting the quality of the statistical information or the capacity to act in an extreme scenario. The first part of this process, eliminating some of the existing reporting requirements, is about to be put out for public consultation. Page 13 of 20  Central Bank of Chile September 2019    Modernizing FX transactions goes beyond a review of existing reporting requirements and the structure of the regulation.