Friday 25th March 2011
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Reserve Bank Governor Alan Bollard has told a conference on Basel 3 in Sydney that macro-prudential instruments may help boost financial system resilience, but expectations about what can be achieved need to be realistic.
Bollard said a strong micro-prudential framework - focused on ensuring the balance sheets of individual institutions are robust to shocks - remains essential for a robust financial system, and remains at the heart of New Zealand's efforts to maintain stability in the financial system.
"However, the Global Financial Crisis showed that a micro-prudential approach may on its own not guarantee system-wide financial stability," he said.
"Policymakers are increasingly looking at macro-prudential instruments - policy tools that might be used to promote a more stable and resilient financial system and help smooth the credit cycle, reducing the risk of boom-and-bust cycles."
He said there had not been a pressing need for the use of such tools given recent weakness in the credit cycle.
"However, we do need to keep preparing for how we might deal with credit and asset price booms when they recur in the future."
He said the Reserve Bank has undertaken a review of macro-prudential tools and identified several that it would contemplate using in appropriate circumstances, while keeping expectations realistic. These include credit-based measures, accounting tools, liquidity measures and capital buffers.
"While none would be a silver bullet in terms of moderating the credit cycle, we believe some could make a useful contribution," he said.
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