In a talk delivered on 3 January, which the ever-so-slightly disorganised Andy Haldane has just got round to writing up, the Bank of England’s head of financial stability beautifully sets out the new central bank orthodoxy on the benefits of macro-prudential policy.
First, he clearly defines the term:
“In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends.”
Next, he looks back at the crisis and asks the correct question: what would have been different had macro-prudential policy been fashionable (it was invented) rather than deeply unfashionable in central banking circles. Read more
Today’s consultation document on financial regulation places the Bank of England at the heart of financial regulation and establishes an interim Financial Policy Committee to identify and reduce system-wide risks to the UK financial system, known in the jargon as macroprudential regulation.
The document is months late. That does not matter and it is clear that it has benefited from considerable thought about how the new Bank of England will work. The new Bank will maintain its objectives for monetary and financial stability, while adding banking supervision to its duties, and the new FPC will also have some, as yet undefined, powers to direct the PRA and the new Financial Conduct Authority (which we had known as the Consumer Protection and Markets Authority). These directions will aim to damp speculative credit bubbles when they emerge.
The FPC’s toolkit is broad and ranges from speeches and warnings to the possibility of higher bank capital ratios, higher risk weights for certain assets and direct limits on loan-to-value ratios or other collateral in lending.
But there are two significant problems with the new regulatory structure and the members of the FPC, much discussed outside the Bank, but not addressed in the consultation document at all. Read more
For most of the last 20 years, central banking was increasingly a soloist affair: one instrument (interest rates), one target (inflation). Since that didn’t prevent a series of asset price bubbles and gigantic leverage nearly destroying the world economy, fashions have shifted to employing a veritable orchestra of instruments including a “macroprudential controls” section – capital requirements, collateral rules, dynamic loan loss provisioning and so forth. The IMF released a paper today which confirms the intellectual shift.
All very well, but putting this new approach into operation is going to be highly complex, not least because of the potential for normal monetary policy and the new macroprudential roles to get mixed up – one of the reasons that monetary policy and financial supervision were separated in the first place. Central banks are going to have to learn how to be independent of themselves.
The US risks falling into another Great Depression if it removes regulatory oversight from the Fed. This from the newest regional Fed chief, Narayana R. Kocherlakota, who became Minneapolis Fed president in October 2009. Policies taken by the Fed during the crisis “eliminated the possibility of Depression 2.0,” he said. Removing regulatory oversight would needlessly put them “back on the menu”.
Chris Dodd‘s financial regulatory reform plan goes too far in my view in stripping away powers from the Fed. It makes sense to take away the Fed’s ability to bail out individual companies under 13.3 once there is a special resolution entity in place to manage financial failures. But taking away the Fed’s banking supervision role risks robbing it of an information flow vital to deal with financial stability threats. And giving systemic risk powers to a new agency is a recipe for confusion or worse.
Why? Because an economy with a systemic risk or macroprudential regulator and a separate central bank would be like a car with two drivers. Read more
Paul Tucker’s broadside against Mervyn King on the quesiton of bank regulation is little short of mutiny, writes Chris Giles of the Financial Times Read more
Mervyn King goes out on a limb, calling the current proposals for banking reform deluded, writes Chris Giles of the Financial Times Read more