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New tools needed for central banks post-crisis, says Bollard

Friday 6th May 2011

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Central banks must use new sources of information and better methods of analysing that information, Reserve Bank of New Zealand governor Alan Bollard said in a speech reflecting on the implication of the global financial crisis.

In the speech to the Sim Kee Boon Institute Conference on Financial Economics delivered on behalf of Bollard by assistant governor John McDermott, Bollard said having a full service central bank helped in New Zealand. The RBNZ regulates banks and oversees the payments system.

"In September 2008 we were seeing the lead up and likely consequences of the Lehman's crisis through our bank regulator reports, our traders' views of funding markets and our domestic markets analysis of overnight bank trading."

Information also came from some less typical sources.

"Our currency manager was also able to relay to us banks' requests for special deliveries of high denomination bank notes, which warned us about a growing nervousness among some members of the public during the heat of the crisis," Bollard said.

He said key issues for central banks everywhere included how to monitor high risk instruments, the relationship between traditional and shadow banking sectors and the transparency and accuracy of data.

The shift towards exchange-based trading of derivative products and away from over-the-counter markets may be a welcome move towards increased transparency, centralised data collection and better monitoring.

"However, just as important as information gathering is filtering, analysis, and transmission in forms suitable for economic interpretation and forecasting," Bollard said.

The financial crisis challenged traditional economic forecasting models and moved central banks to pay greater attention to financial market information when formulating monetary policy.

"Going forward, the aim is to set monetary and financial policy instruments to take account of the inter-relationship between the financial sector and the real economy. This will require a broader framework for economic surveillance," Bollard said.

Since the crisis the relations with treasuries and ministers of finance have become closer.

The Reserve Bank has also strengthened links with regulators in other countries, particularly Australia and Asian central banking partners, to help information sharing.



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