Banking sector debt amounting to nearly 2.7 billion US dollars is maturing in the last quarter of this year, that is, less even than the reserves accumulated from April to date. Meanwhile, the total external debt of the banking sector overall amounts to some 13 billion dollars, the equivalent to 60% of total reserves. The level of Central Bank reserves is sufficient to back the normal operation of the financial system, in particular its needs for foreign funding. The Chilean financial system must be capable of securing funds in international markets, a feature it has displayed for several years already. However, should access to foreign funds and liquidity complicate further, the Central Bank is well prepared and equipped to take decisive action. Precisely the levels of international reserves can do the job. International reserve management To administer international reserves, the Central Bank has separate responsibilities at various hierarchical levels, complying with international recommendations on the matter, and which have been evaluated by the IMF. In addition, internal and independent auditors perform periodical audits to review the Bank’s investment procedures. An internal middle office is in charge of monitoring compliance with the investment guidelines and parameters defined by the Board, on a daily basis. This year, the investment policy for internally managed reserves has been revised on two occasions, which resulted in updating the benchmark comparison, credit risk, and portfolio  2  BIS Review 123/2008  duration, to better safeguard the Bank’s assets and address international markets’ volatility.
José De Gregorio: The international financial crisis and its impact on the Chilean economy Speech by Mr José De Gregorio, Governor of the Central Bank of Chile, presented before the Honorable Senate of the Republic, Santiago de Chile, 8 October 2008. *  *  *  Mr. President of the Senate, In response to your invitation to participate in this special session of the Honorable Senate, I would like to share with this audience our vision on the severe financial crisis the world economy is enduring, as well as its implications on our country. The world financial crisis and international growth The financial crisis being experienced by developed countries is the outcome of a period of stability, with abundant liquidity, fast economic growth and an asset price bubble. This combination of aggregate factors yields, as it frequently happens, to a cycle of high credit growth. The problem is that this occurred during an extremely accelerated process of financial innovation in market segments that were poorly or ambiguously regulated – mainly in the US. Low interest rates prompted an intense search for higher returns. Individuals with little or no ability to repay were lent for housing and, to reduce risks, credits were securitized and often taken out of the banks’ balance sheets (i.e. Structured Investment Vehicles and conduits). Money was lent on the assumption that housing prices would continue on the rise, so the mortgage was all that was needed to relax lending standards.