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Macro-prudential tools may bolster financial system

Macro-prudential instruments may help bolster financial system resilience and possibly moderate credit cycles, but expectations need to be realistic about what can be achieved, Reserve Bank Governor Alan Bollard told a conference on Basel 3 in Sydney today.

Dr Bollard said a strong micro-prudential framework – focused on ensuring the balance sheets of individual institutions are robust to shocks – is still essential for a robust financial system, and remains at the heart of New Zealand's efforts to maintain stability in the financial system.

"However, the Global Financial Crisis showed that a micro-prudential approach may on its own not guarantee system-wide financial stability," he said. "Policymakers are increasingly looking at macro-prudential instruments – policy tools that might be used to promote a more stable and resilient financial system and help smooth the credit cycle, reducing the risk of boom-and-bust cycles."

Dr Bollard said there has not been a pressing need for the use of such tools given recent weakness in the credit cycle. "However, we do need to keep preparing for how we might deal with credit and asset price booms when they recur in the future."

Dr Bollard said the Reserve Bank has undertaken a review of macro-prudential tools and identified several that it would contemplate using in appropriate circumstances, while keeping expectations realistic. These include credit-based measures, accounting tools, liquidity instruments and capital buffers.

"While none would be a silver bullet in terms of moderating the credit cycle, we believe some could make a useful contribution," he said.

Moreover, the Bank considered that macro-prudential tools could be employed more effectively to influence the credit cycle by adopting a multi-pronged approach where several tools are employed in tandem. "For example, faced with evidence of excessive credit growth, counter-cyclical capital requirements could be used alongside increases in the Bank's own Core Funding Ratio, and this might represent a more even-handed approach than focussing on either one alone".

The Bank would expect to use such tools infrequently.  "The Basel Committee has suggested that some countries might only use the counter-cyclical capital buffer once every 10 to 20 years when faced with exceptionally strong credit growth.  We think this is a useful perspective," Dr Bollard commented.

"The world has little practical experience with some of the macro-prudential tools currently under consideration. There will be an important learning period ahead as countries start to use these instruments and develop their implementation frameworks. We can expect our understanding of this broad area to have evolved significantly in five or 10 years' time."

Media contact:
Mike Hannah
Head of Communications
Ph 04 4713671, 021 497418, [email protected]