Central banks and international safety nets

Banco Central de Chile Governor Rosanna Costa on countering volatility

Central banks in emerging market economies need to improve the size and quality of international financial safety nets to take account of heightened uncertainty and economic volatility. That was a principal message from Rosanna Costa, governor of Banco Central de Chile, opening an asset and risk management conference with OMFIF and the World Bank in Santiago on 25 September.

‘Holding reserves is costly for emerging market economies and, in exceptional periods, action needs to be taken to restore and ensure the proper functioning of the foreign exchange market,’ Costa said. ‘This represents a challenge for our liquidity buffers.’

Chile has roughly $40bn of international reserves organised in liquidity and investment tranches. Costa listed ‘complementary sources of liquidity’ through instruments such as the International Monetary Fund’s flexible credit line of up to $18.5bn, the Latin America Reserve Fund for up to $1.25bn and a swap line with People’s Bank of China of up to $8bn.

Among other sources of foreign currency liquidity, Costa mentioned access to the Federal Reserve Bank of New York’s Foreign and International Monetary Authorities Repo Facility. This allows central banks to obtain temporary liquidity in dollars against US Treasury securities as collateral.

Find Governor Costa’s full speech from the conference here.

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