ZURICH, June 10 (Reuters) - Appropriate monetary and fiscal policies are needed in addition to solid macroprudential regulation to foster financial system stability, the head of the Bank for International Settlements said. Jaime Caruana, General Manager of the Basel-based institution, said expectations for what macroprudential rules alone could accomplish should be modest: They could make banks more resilient in the event of a crisis but they would not necessarily contain the bubble building up.
"At a minimum, both fiscal and monetary policies need to play a more active role than they have in the past," he said in the text of a speech prepared for a conference in Kerala, India. "Given the uncertainties involved at this stage, it would be wise to avoid overly ambitious objectives."
Last year, global regulators and central bankers agreed on new capital standards and other policies -- known as Basel III -- to prevent a repeat of the global financial crisis when bank failures dragged down entire economies, a set of tools often referred to as macroprudential regulation.
Under Basel III, which comes into force from 2013, banks will have to set aside more capital as a buffer against future shocks.
Caruana said the Greek debt crisis proved that governments needed to manage finances carefully, building up surpluses during good times, and that central banks would have to adapt their approach too: simply pursuing price stability over a two-year horizon was no longer be appropriate.
"Monetary policymakers will also need to keep an eye on longer-term trends, if they are to take into account the gradual build-up and unwinding of financial imbalances and their economic and inflationary effect," he said.
Moreover, concerns that there could be conflicts between macroprudential and monetary actions were overblown, he said.
Instead, the two types of policy were generally complementary, though good coordination was still needed. "Financial stability is a shared responsibility that requires clear cooperation arrangements," he said.
A single institution, such as a central bank, could be the one deciding on what sort of policy -- whether regulatory or monetary -- to enact. Or the job could be divided among separate bodies, he said.
Concerning central banks that were wading into ever-deeper regulatory water, Caruana said: "They will need to be careful not to undermine price stability mandates and hard-won credibility. And they will need to preserve their operational autonomy, including financial independence."
Source: www.reuters.com
"At a minimum, both fiscal and monetary policies need to play a more active role than they have in the past," he said in the text of a speech prepared for a conference in Kerala, India. "Given the uncertainties involved at this stage, it would be wise to avoid overly ambitious objectives."
Last year, global regulators and central bankers agreed on new capital standards and other policies -- known as Basel III -- to prevent a repeat of the global financial crisis when bank failures dragged down entire economies, a set of tools often referred to as macroprudential regulation.
Under Basel III, which comes into force from 2013, banks will have to set aside more capital as a buffer against future shocks.
Caruana said the Greek debt crisis proved that governments needed to manage finances carefully, building up surpluses during good times, and that central banks would have to adapt their approach too: simply pursuing price stability over a two-year horizon was no longer be appropriate.
"Monetary policymakers will also need to keep an eye on longer-term trends, if they are to take into account the gradual build-up and unwinding of financial imbalances and their economic and inflationary effect," he said.
Moreover, concerns that there could be conflicts between macroprudential and monetary actions were overblown, he said.
Instead, the two types of policy were generally complementary, though good coordination was still needed. "Financial stability is a shared responsibility that requires clear cooperation arrangements," he said.
A single institution, such as a central bank, could be the one deciding on what sort of policy -- whether regulatory or monetary -- to enact. Or the job could be divided among separate bodies, he said.
Concerning central banks that were wading into ever-deeper regulatory water, Caruana said: "They will need to be careful not to undermine price stability mandates and hard-won credibility. And they will need to preserve their operational autonomy, including financial independence."
Source: www.reuters.com
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