Early intervention key to economic safety
(14 October 2011 – Australia) Reserve Bank of Australia (RBA) head of financial stability Luci Ellis told a conference on capital markets that policy makers seeking to head off financial crises need to look at the behaviour of key actors in the system.
Dr Ellis said it was also crucial for central banks to keep a rein on the overall economy.
'It will never be possible to eliminate the business cycle completely. But the quickest way to create a damaging credit boom is to run your economy too hot,' Dr Ellis told a conference on capital markets.
Avoiding damaging financial episodes also required regulators with the power, the mandate, the resources and the culture to respond to a threat.
'Even more important, they must be able and willing to intervene early,' said Dr Ellis. 'Not every regulator in the world would do so.'
For the RBA, this included early communication of its concerns - warning about something that was not a problem now but had the potential to become one.
'Those exercises in communication are designed to mould risk perceptions. We are frequently trying to strike a balance between sounding too alarmist and sounding too complacent.'
She said managing financial stability was about avoiding episodes that harmed the real economy and instead taking a system-wide view, not ‘‘shovel the risk somewhere else and hope for the best.’’
‘‘That was the rationale behind the originate-to-distribute model in securitisation markets in the United States,’’ Dr Ellis said. ‘‘Having rid themselves of some risk, US mortgage lenders felt free to create more.’’
'It will never be possible to eliminate the business cycle completely. But the quickest way to create a damaging credit boom is to run your economy too hot,' Dr Ellis told a conference on capital markets.
Avoiding damaging financial episodes also required regulators with the power, the mandate, the resources and the culture to respond to a threat.
'Even more important, they must be able and willing to intervene early,' said Dr Ellis. 'Not every regulator in the world would do so.'
For the RBA, this included early communication of its concerns - warning about something that was not a problem now but had the potential to become one.
'Those exercises in communication are designed to mould risk perceptions. We are frequently trying to strike a balance between sounding too alarmist and sounding too complacent.'
She said managing financial stability was about avoiding episodes that harmed the real economy and instead taking a system-wide view, not ‘‘shovel the risk somewhere else and hope for the best.’’
‘‘That was the rationale behind the originate-to-distribute model in securitisation markets in the United States,’’ Dr Ellis said. ‘‘Having rid themselves of some risk, US mortgage lenders felt free to create more.’’
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