macroprudential

Chris Giles

I always enjoy reading speeches by Paul Fisher, executive director for markets at the Bank of England. They clearly set out his views and appear to come straight from the central propaganda unit of the BoE.  If you want to know the official line on the new Financial Policy Committee or macroprudential policy, read Paul’s speech from last night, for example.

The speech blames the lack of powers available to the BoE for officials’ inability to control the crisis, but reassures us that the new FPC is now seeing its recommendations implemented.

The logic of the speech is that the BoE’s voice could not work before the crisis so the BoE cannot be blamed. Yet voice is succeeding now, so the BoE must get the credit.

What is remarkable is that Mr Fischer seems to forget that the powers available to the BoE now are precisely the same as those available to the BoE in the crisis. New powers will come only when legislation is passed and certainly not until 2013.

Read the speech to feel the full righteousness of the BoE official line.  Or you can read the best quotes below. 

Claire Jones

The Bank of England’s Financial Policy Committee statement, out today, has left a lot of people scratching their heads.

The first of two recommendations calls on banks to “take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy”. The second warns that “some actions taken to raise capital or liquidity ratios could potentially worsen the feedback loop between the financial sector and the wider economy, and so should be avoided”.

At first glance, the recommendations appear contradictory. They are not. But they are conflicting.   

Claire Jones

External MPC member David Miles said last week he was a lot more concerned about getting capital requirements right than liquidity buffers.

This is odd. Few would deny that banks needed more and better quality capital. But, as Andy Haldane, the Bank of England’s executive director for financial stability, said on Monday, liquidity droughts were perhaps the defining feature of the crisis during 2007 and 2008.

Maybe Mr Miles was reluctant to address what has become one of the most controversial aspects of the Basel III regulatory framework.

But not Mr Haldane. He has suggested haircuts on collateral as a means to avoid systemic liquidity crises.

 

Claire Jones

Nobody is quite sure yet what does and doesn’t count as macroprudential policy. But, given it’s seen as a force for good, central bankers are keen to pin the tag on as much of what they do as possible. Once the hype fades, though, it is unlikely to displace interest rates as their most important tool.

A key, perhaps even the question for policymakers, then, is how monetary policy and macroprudential policy can best interact.

According to research from Standard Chartered’s Natalia Lechmanova, which looks at the lessons that can be learnt from how Asian policymakers have used macroprudential tools such as loan-to-value ratios, the two policy strands are most effective when they are combined. 

Claire Jones

Macroprudential is the buzzword of the moment (as this post notes, policymakers are keen to slap the label on anything they can). But do macroprudential measures actually work?

Of course, that depends on defining what “work” means, which – given that there are no precise indicators of financial stability – is no easy task.

Around the cusp of the year, Brazil introduced its own macroprudential measures, which included higher capital and reserve requirements, and limits on vehicle financing. Their stated aim: “to allow the continuity of sustainable credit market developments” following rampant credit growth of 22% last year.

So have they fared? 

Chris Giles

In a characteristically combative speech today, Adam Posen, an external member of the Bank of England’s Monetary Policy Committee, insists interest rates are a blunt tool for combating asset price bubbles. He suggests property taxes instead, writes Chris Giles of the Financial Times, but fails to analyse whether these would work any better than interest rates