Vittorio Corbo: Recent trends and perspectives for the Chilean economy Speech by Mr Vittorio Corbo, Governor of the Central Bank of Chile, at the Seminar “Business and Economic vision 2007-2008”, organized by Sofofa and Universidad del Desarrollo, Santiago, 17 October 2007. *  *  *  The insertion of the Chilean economy into global markets has implied that its economic cycle has been determined by a mix of domestic macroeconomic policies, world economic events and by idiosyncratic conditions, such as recent energy supply shocks. In recent years, the prominent external environment for the Chilean economy has been favorable. On the one hand, a rising demand and high prices of our exports, and on the other hand, low import prices of consumption and capital goods. In addition, firms have also faced favorable financing conditions. In this presentation I will start by discussing the outlook for the World Economy. Next, I will discuss recent trends in the Chilean economy and, finally, some reflections on the conduct of monetary policy and the main risks we currently face. Perspectives of the world economy The last five years have been the best five-year period in growth, inflation and financial conditions that the World Economy has experienced in over 30 years. However, this scenario has been changing in the recent months.
Third: Market functioning I have to mention first the assessment of the role of credit rating agencies, their small number, the transparency of their rating methodology, possible conflicts of interest in particular as regards structured finance instruments. Excessive exclusive reliance on credit ratings by investors without carrying out due diligence or conducting further own risk assessment is a problem as well. The road map also includes a reflection on the consequences of the originate and distribute model of banks for credit markets. Does it induce wrong incentives? A last item in this list relates to non-regulated debt markets and mortgage markets, which might deserve a hard look in the light of recent experience. Finally: The regulatory framework Above all, liquidity risk management relating to complex structured products needs to be investigated. We need a wider concept of concentration risk including wholesale and interbank markets as well as intragroup exposures. We have to look at warehousing and pipeline risk, deal with possible regulatory incentives to move risk off balance sheet into SPVs. We have to assess the links between the regulated and the non-regulated part of the system, including the optimal perimeter of supervision. Special purpose investment vehicles and conduits were used as off-balance sheet investment vehicles. These were prone to liquidity mismatches between their assets and liabilities, causing contingent credit and liquidity lines to be drawn on banks, and resulting in an increased demand for money market liquidity.