There are arguments, however, that call for specialization of some functions. So far, we have seen in Chile a banking supervisory agency that takes into consideration the macro-systemic aspects and a central bank concerned about both price and financial stability, arrangement that has permitted the necessary coordination in dealing with situations of financial distress. The role of capital flows In what follows, I will deal with the issue of capital flows as a source of financial instability within the framework of inflation targeting and flexible exchange rate. In particular, I am concerned with the interaction between price and financial stability when a small open economy, like Chile, is exposed to volatile capital flows. I have to start by emphasizing that in the current surge of capital inflows, Chile was not subject to massive inflows as was the case in the past. However, we cannot rule out this possibility, as prospects for advanced economies are very gloomy, while emerging markets offer very healthy returns to investment. First, the long history of emerging markets booms and busts has shown us that frequently in this type of economies the building up of risks is associated with periods of capital bonanzas that fuel credit booms, asset bubbles, and exchange rate misalignments, and that frequently end in sudden stops and reversals of capital inflows that wreak havoc in the financial system and the real economy.
Pillar 2 recognises that national supervisors may have different ways of entering into such discussions and provides flexibility to accommodate those differences. At the same time, Pillar 2 will ensure that supervisors share insight  2  BIS Review 42/2003  into their approaches with others and will foster a better understanding among supervisors and bankers about the differences in national regulatory practices. Over time, discussions among supervisors will undoubtedly improve our understanding of each other’s processes and promote information sharing and cooperation among regulatory agencies. Consequently, Pillar 2 should help us to reduce the supervisory burden on globally active banking organisations and foster more consistent supervisory approaches and practices across national borders. This corresponds directly to the mandate of the Committee’s Accord Implementation Group, or “AIG”. The AIG was set up at the end of 2001 under the Chairmanship of Nick Le Pan of the Canadian Office of the Superintendent of Financial Institutions, and Vice-Chair of the Committee. The group comprises high-level supervisors from member countries, who share planned approaches to implementation. The intention is that this exchange of information should enhance the consistent application of the New Accord and thereby promote a level playing field - which we all agree is an important objective. In this sense, the AIG has a practical focus, while policy issues remain the responsibility of the Committee itself. Home / host implementation issues on a world-wide basis. This brings me to the second topic on my list, which is home/host implementation issues.