But, like the SIB, the SROs operate indirectly under statute, and have a duty to regulate in the public interest. We therefore have no self-regulation in the strict sense, rather a variety of statutory and statute-backed bodies with practitioner involvement, each with different relationships with the industry and with Government. Effective regulation needs the input of all BIS Review 21/1997  -4-  participants in the market if it is to offer appropriate protection without stifling innovation. Regulators can benefit greatly from effective practitioner input but to retain the confidence of the investing public they must persuade them that regulation puts their interests, and not those of the firms and their shareholders, first. The system we now have is undoubtedly capable of achieving an appropriate balance between market sensitivity and consumer confidence; it has, in many respects, worked well. But it has been stress-tested in a number of difficult episodes: the Maxwell affair, the private pension mis-selling saga, the collapse of BCCI, Barings Bank and Sumitomo. These episodes have taught us something about the strengths and weaknesses of our system, just as the S&L crisis and the Daiwa New York problem have done in the US. Furthermore, markets themselves have moved on. The financial landscape of today is almost unrecognisable from the one which informed legislators’ views in the early 1980s, before the Banking and Financial Services Acts were put on the statute book.
This has not altered the liquidity available in the local money market, which has remained stable, aside from some transitory turbulence in early October that was addressed by the Central Bank through the implementation of new modalities in the provision of liquidity. Secondly, the meltdown of world output and trade is increasing credit risk globally. In turn, firms and households with a better financial situation tend naturally to postpone their spending and borrowing decisions, awaiting the normalization of the financial environment, thus shrinking the demand for credit. All of this results in increased average financing cost and tougher lending standards for those agents actually engaging in borrowing operations. We can see that the various risk and volatility indicators are substantially above their preSeptember figures (figure 2). As we wrote in our latest Monetary Policy Report, 1 the extra financial burden for the clients of Chilean banks has tended to reflect precisely the higher levels of global uncertainty and their impact on the Chilean economy. I must stress that these phenomena are occurring today in every economy in the world, sometimes with catastrophic implications on their levels of output and the solvency of their financial institutions. Because we prepared as a country for a long while to confront severe deteriorations of the international economic environment, Chile and our financial market have suffered limited effects, with no sudden stops but, on the contrary, with increases in credit supply and without a generalized process of insolvency.