This concept covers a significant number of possibilities, some of which are the direct decision of the central banks while others rely on other authorities. For example, the potential risks that could be generated in the real estate sector have driven some regulators and supervisors elsewhere to use a series of prudential instruments to safeguard the financial system and reduce the sector’s volatility. Worth mentioning are the limits to the loan to value ratio, the limits to the ratio between debt and income, changes in the credit risk weighting, and capital requirements. The particulars of these measures vary from country to country, but normally more than one of them applies and entails coordination of several authorities. Because of its short history, a full evaluation of the results is yet to be done. The Financial Stability Board, created one year ago in Chile, is a proper instance of coordination to analyze these issues. In any case, the Board follows closely the evolution of the external and domestic macroeconomic scenarios and their implications on inflation, and reiterates its commitment to conduct monetary policy in such a way that projected inflation stands at 3% over the policy horizon, as well as to continue to closely monitor any risk factors that could affect the financial stability of the country. Let me finish with some reflections. Final reflections The Chilean economy is in a good standing.
1  The circumstances in which financial markets can affect the real economy were covered in my speech: ‘Market finance and financial stability: will the stretch cause a strain?’ (February 2018). 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  So as we consider the bear of stretched valuations in credit markets and the bergs of leverage and liquidity that could affect the resilience of those markets, I’ll look at whether each is an issue just for market risks or also of relevance to the wider economy too. Let’s begin with the moonwalking bear in debt markets. Consider this:  The yield on a basket of dollar-denominated corporate bonds is now closer to the expected average short-term risk-free rate over the life of those bonds than at any time in the past twenty years (see slide 3). The premium investors earn for taking interest rate and credit risk is squeezed. On the face of it that suggests an unusual degree of investor confidence about the interest rate outlook and corporate prospects generally.2 This compression of the premium has meant that – unusually – dollar corporate bond yields haven’t risen, even as the US risk-free rate has. (slide 4)  Perhaps companies, globally, have become less risky? That seems to be the view in the market for credit default swaps at least. Two years ago, the average annual premium of insuring against investment-grade corporate default was 85bp of the amount insured. Today, it is 50bp.