Enrique Marshall: Central banks’ contribution to financial stability – the experience of Chile Speech by Mr Enrique Marshall, Board Member of the Central Bank of Chile, at the Central Bank of Bolivia’s First Financial Workshop “Macroregulation and Financial Stability”, La Paz, 29 September 2010. *  *  *  I am indebted to Kevin Cowan and Jorge Cayazzo for their valuable comments on an earlier version of this presentation but the opinions expressed here are the exclusive responsibility of the author. 1. Introduction  Financial stability has been a concern for central banks since their very origins. The functions for which they were created – to regulate money and credit markets and to serve as lenders of last resort – have a direct bearing on the objective of financial stability and this relationship has been further reinforced by the fact that many central banks have also undertaken a role in regulating and supervising the banking system. Both the economic literature and historical experience provide sound grounds for this concern for stability, clearly demonstrating that the functioning of the real economy requires an efficient and stable financial system. The hardest lesson of history, however, is that financial crises have occurred time and again, with a very high cost in terms of both their fiscal impact and the associated losses of output. 1 Financial stability has, as a result, emerged as a paramount objective of public policy.
Discussion as to the institutional arrangements that are most appropriate from the point of view of financial stability remains open. One key question is who should be responsible for the tasks of prudential regulation. Another, although perhaps slightly less important, is who should do the supervision. There are arguments in favor of different policy options, but any specific recommendation must take into account the experience and circumstances of each country. Until the crisis, the prevailing trend was for a body different from the central bank to be responsible for regulation and supervision whereas now the wind seems to be blowing in the opposite direction. In this context, one piece of practical advice is not to significantly change something that has worked well. In any case, the decisions that are taken may have significant implications for central banks’ institutional insertion, the scrutiny to which they are subject, and internal organization of their activities. These implications become particularly important if it is decided to give the central bank broad responsibility for financial stability. In this case, it may be advisable to adjust internal governance so as to ensure the necessary separation of the objectives of financial stability and price stability. Under any institutional model, coordination and communication between the different authorities with functions related to financial stability will always be very necessary.