In a paper published by the Bank, it argues that interest rate control alone cannot dampen credit markets and cannot stop the rise of excess lending and borrowing.
The paper states that to curb the last credit bubble interest rates would have had to have been raised to nearly 20 per cent. It says it must be given new powers that would allow it to control banks through credit tightening measures.
The paper says: “Macroprudential policy is a missing ingredient from the [Bank’s] current policy framework – If this kind of policy had been able to increase the resilience of the system and to moderate exuberance in the supply of credit to the economy, and especially to the financial system, the crisis would have been less costly.”
It says either a regime of capital surcharges on top of existing microprudential capital ratios or increased capital requirements would lower the probability of those institutions failing and so provide some extra systemic insurance. It would also provide incentives for those firms to alter their balance sheet structure to lower the systemic impact of their failure.
The paper also argues for the possible creation of ‘living wills’ for financial institutions in an attempt to understand and control the “spillover effects” of an institution going out of business. It says this would “lower potential costs to the financial system in the event of failure”.
The paper says: “There would be overlaps with both microprudential and monetary policy, their roles and objectives would be distinct. The goal of monetary policy is to stabilise the aggregate price of goods and services in the economy. The macroprudential objective of ensuring the resilience of the financial system as a whole in order to maintain a stable supply of financial intermediation services across the credit cycle is complementary to this objective, but not the same.”