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Developing a Secured Money Market in Chile
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Summary
A secured money market in Chile would allow for the circulation of liquidity within the financial system’s core through interbank repo transactions. This would have several benefits, including:
Advantages of a Secured Money Market
- Reduces the need for central bank intervention during liquidity shocks
- Increases the use of locally-denominated assets instead of foreign currency debt
- Supports the transmission of monetary policy
- Fosters a more complete money market curve
Key Takeaways
High Flexibility in Asset Allocations
Chilean savers have high flexibility in their asset allocations, which can lead to massive portfolio shifts and significant effects on bond spreads and banks’ funding costs.
Need for Central Bank Intervention
This situation may require central bank intervention, leading to excessive risk-taking by the central bank and complicated trade-offs when considering exit from support measures.
Importance of a Secured Money Market
A secured money market would allow for the circulation of liquidity within the financial system’s core through interbank repo transactions, reducing the need for public intervention.
Development of a Non-Existent Market Segment
Fostering the development of a secured money market requires appropriate infrastructures and incentives, such as electronic trading platforms, securities settlement systems, and legal frameworks.
Action Items
Develop an Active Interbank Repo Market
- Support private backstops and reduce the need for public intervention
- Foster a more complete money market curve through the development of term money markets
Incentivize Locally-Denominated Assets
- Reduce dependence on foreign currency debt during liquidity shocks
Establish Appropriate Infrastructures and Incentives
- Develop electronic trading platforms, securities settlement systems, and legal frameworks to support the growth of a secured money market