Would adoption of macroprudential tools make central banks look serious?

Paul Tucker of Bank of England thinks so. In his recent speech :

The basic question is whether the authorities could lean against credit-fuelled booms by tightening capital or liquidity requirements for lenders or, as some economists have advocated, by raising the amount of collateral that borrowers have to put up.  In principle, this could be aimed at aggregate or sectoral credit conditions, and it could have a goal of making our banks more resilient. It would need to be pursued by executive agencies under clear mandates from legislators, and it would benefit greatly from  transparency.

A painful lesson for the Bank of England is that our warnings of ‘underpriced risk’ and system-wide fragilities in our Financial Stability Reports were perhaps admired by some but made no difference. And, alongside our domestic and international peers, we are not in this for plaudits! People – the markets, firms, households – take notice of our Inflation Report, MPC minutes and speeches on monetary policy not, essentially, because they might sometimes be interesting or well done, but for the simple reason that the MPC is the body that sets sterling interest rates in the real world. If the authorities were able to deploy credible macroprudential tools, their stability warnings would probably be taken more seriously in future, because they would be able to follow up words with actions.

Monetary policymakers would need to be attentive to the use of such instruments, as they would affect credit conditions. Such instruments would also help to underpin the consensus that monetary policy should focus on the path of nominal demand at the aggregate level, with macroprudential policy seeking to address over exuberance in particular sectors or in credit markets generally and the resilience of the banking system.

Hmm. that is a nice way of putting up the problem and solution. Macroprudential tools would act like a signalling device that C-Bank is serious about the fin stabilty reports.

2 Responses to “Would adoption of macroprudential tools make central banks look serious?”

  1. How different central banks look at financial stability « Mostly Economics Says:

    […] So just naming people is important but alone will not help (necessary but not sufficient). Like Tucker says adding more tools to the mandate will help public take c-banks more seriously on its financial […]

  2. Evaluating financial stability reports « Mostly Economics Says:

    […] had recently studied how different central banks look at financial stability. I was surprised to see so many central […]

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