Stability policy a state of mind: RBA

11 Oct 2012, 11:41 am   -   Source: AAP

The RBA's head of financial stability says good macroprudential policy is not so much a set of rules and regulations as a state of mind.

It's not a bunch of rules and regulations - it's a state of mind.

Macroprudential policy, that is.

It's all about managing risks posed by the way banks and other business behave.

They might be acting perfectly sensibly from their individual points of view.

But if enough of them do the same thing, the whole system can become unstable.

It might seem sensible for one person to rush to one side of the ferry to get out of the wind, but if everyone does it at once, the boat tips over and everyone drowns.

And that's what Luci Ellis, head of the Financial Stability Department at the Reserve Bank of Australia (RBA), spends her days worrying about.

Not that boats will capsize, that is, but that the financial system will, bringing the economy down with it.

Risks could build up because individual banks, or other institutions, are all making the same risky decision, or because a few are taking particular risks.

"Certainly, a more holistic, or system-wide, perspective could help supervisors see if risks are building up," Dr Ellis said in a speech in Sydney on Thursday.

"But that macro (large scale) perspective does not necessarily require a whole new institutional or policy framework for regulation.

"It possibly might not even require new policy tools.

"I would argue that macroprudential policy is, indeed, more a state of mind than a suite of tools," she said.

Dr Ellis said there was not much difference from macroprudential policy and supervision as it was currently practiced in many countries.

Accordingly, she said, she would warn against trying to come up with new, untested tools, especially tools intended to be tweaked through the business cycle like monetary policy.

In particular, she was sceptical about arguments that loan-to-valuation ratios (LVRs) for home loans should be capped.

For one thing, she said, it could not be applied to other types of loans, like lending to businesses or unsecured debt.

And, it could distract attention from whether the borrower could service the loan, as opposed to whether the bank could get its money back if the borrower defaulted.

Lower LVRs would allow a stressed borrower to sell rather than default.

"That's not a bad thing. But, in the end, our responsibility for financial stability is about protecting the real economy.

"Protecting the banks from the real economy is not the ultimate goal," Dr Ellis said.

Also, there was no need for a "system risk regulator" issuing directives to a financial system supervisor, she said.

"In Australia, we think that a culture of co-operation, dialogue and mutual respect is more important than formalised arrangements."

The Council of Financial regulators - the RBA; the Australian Prudential Regulation Authority (APRA); the Australian Securities and Investments Commission (ASIC); and Treasury - had proven to be a low-cost, effective mechanism, she said.

"In the end, what is needed is the wisdom to see the problems and the willingness to act in response.

"No elaborate set of institutional arrangements and rules can manufacture those two things," Dr Ellis said.

  • Follow us: 
  • Follow us on Facebook
  • Follow us on Twitter
  • Follow us on Youtube