By Chris Cermak

WASHINGTON (MNI) – Bank of England Deputy Governor Paul Tucker
Saturday said financial regulation should be aimed at improving the
resilience of the banking and shadow banking system during an economic
boom, rather than constricting the lending power of borrowers.

Speaking at a Federal Reserve conference of central bankers in
Washington, Tucker largely backed a paper that argued capital and margin
requirements were likely the best means of improving the resilience of
the entire system, without too greatly impairing credit availability.

“Policy works better if it constrains the balance sheet of lenders”
or financial intermediaries, Tucker said, “than if it constrains the
balance sheet of borrowers.”

Such a conclusion “has a bearing on even how one frames the macro
prudential objectives,” Tucker said. The aim, which he argued has become
the Bank of England’s primary goal, “should be to underpin the
resilience of the financial system.”

Tucker also suggested central banks could be drawn to using their
own balance sheet to mitigate risks, such as by raising reserve
requirements for banks in order to limit risk-taking in an economic
boom.

“I suspect that many of us would feel that we’re on safest ground
when we can use the parameters of our balance sheet … rather than
things that are equivalent to regulation in the more normal sense,”
Tucker said.

Tucker was responding to a paper presented by Professor Anil
Kashyap of the University of Chicago’s Booth School of Business,
offering an integrated model for rating various macro prudential
regulatory tools for their effects on the financial system and broader
economy.

Tucker said the paper suggested capital requirements on banks,
combined with margin requirements on shadow banks, offered a “better
trade-off between promoting resilience without impairing the provision
of financial services.”

He added that capital requirements ahead of a crisis were more
useful in improving resilience than waiting for a sectoral bubble to
collapse. Post-crisis tools were by their nature pro-cyclical and
“playing catch-up” in a manner than made them less effective.

Tucker acknowledged loan-to-value ratios that limit borrowers
ability to take out a loan could also have some benefits for making the
financial system “more resilient,” but was especially damaging to
first-time home buyers.

“The macro prudential debate hasn’t turned out to be (about) can we
find the perfect single instrument to complement interest rates. It’s a
search across a whole zone of instruments. This is a serious choice,”
Tucker said.

–Chris Cermak is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$$BE$,M$B$$$,MK$$$$]