I hope our history will shed some light on those that view the undoing of large interventions as a cause for concern. Shortly after the collapse of Lehman Brothers, the Central Bank of Chile began reducing the policy rate from an initial level of 7.25 percent until it reached the effective lower bound of 50 basis points in July 2009. The rate remained at that level for one year until June 2010. During that period, the Central Bank also took unconventional measures aimed at providing liquidity to the financial markets. For instance, we offered financial institutions access to a term liquidity program (FLAP) at the monetary policy rate of 0.5 percent. During January 2010 we reached a peak of 6.5 billion dollars on the liquidity program, equivalent to 40% of the banking system’s capital and reserves.2 Our exit strategy from this expansionary policy was free from major difficulties. We started unwinding these special facilities in November 2009 by gradually shortening their term. As we finished dismantling our special programs we slowly began increasing the monetary policy rate to a neutral range. The withdrawal of the monetary stimulus at an appropriate pace allowed us to maintain inflation expectations at a two year horizon close to our target of 3 percent.
Before moving on to the next topic, let me close this discussion by stressing that, while central banks have been and will continue to be creative in using all available tools to achieve their mandate, we must recognize the limits of conventional monetary policy in circumstances of extreme financial distress. Conventional monetary policy alone is unlikely to be able to put back the economy on the right track and its combination with other policies certainly increases the chances of success. 4. Financial rescues and their Impact on a central bank’s balance sheet  Please allow me now to finish with another topic where Chile’s experience can contribute to the international debate: the implementation of a financial bailout and the risks it imposes on the operation of a central bank. In normal times, central banks conduct their operations maintaining only the safest assets on their balance sheets, typically government bonds or other low-risk assets. But in times of distress, acting as lender of last resort, central banks may also accept lower quality, more risky assets, as collateral for liquidity provision or in outright purchases aimed at rescuing banks, with the consequent risk to their balance sheets. This has been indeed the case in several countries during the recent financial crisis. The possibility that risk-taking by central banks may result in losses that affect their reputation and operations has recently preoccupied policymakers, especially when pondering about the possibility of a large rescue operation of troubled European banks by the ECB. The concerns are both financial and operational.