By Sakari Suoninen
FRANKFURT, June 23 (Reuters) – Central banks are searching for tools to carry out new responsibilities for tackling asset bubbles at an early stage and are looking at regulatory measures to prevent future financial crises.
Dynamic provisioning of loan losses could become the next buzz phrase while money supply and lending data look set to get more scrutiny. But one weapon missing from the armoury is interest-rate policy, which central bankers think is best reserved for combating any threat of inflation.
Central banks want to use their new regulatory powers to safeguard financial stability and will be especially mindful of the risks posed to this by spiralling asset prices, above all when financed with debt.
“The instrument best suited to maintain financial stability is macroprudential regulation,” Vittorio Corbo, a former Governor of the Central Bank of Chile, said in a research paper.
“(It) should have a dual purpose: Reduce the incentives for financial institutions to increase leverage during a boom, and make the financial system more robust during a bust.”