By Chris Cermak

WASHINGTON (MNI) – Bank of England Governor Mervyn King Saturday
said the new macroprudential tools sought by central banks were still in
an experimental phase and acknowledged little was known about exactly
how many of the new tools were going to work in practice.

Speaking at a Federal Reserve conference in Washington, King also
said it remained an “open question” whether central banks should focus
primarily on their existing monetary policy tools or new macroprudential
regulation to control risk in the financial sector.

“This is an experiment,” King said. He noted central banks were
well informed on monetary policy, but “we know absolutely nothing about
how these (macroprudential) instruments are going to work.”

The BOE’s Financial Policy Committee Friday issued its advice to
the UK Treasury on what specific macroprudential tools the future
statutory FPC should be empowered to direct financial authorities to
deploy.

These tools comprised a countercyclical capital buffer, sectoral
capital requirements and a leverage ratio. King said the committee saw
the “potential attractiveness” of many other tools not included in the
recommendations, but stressed there remained “reservations” about the
effectiveness of many.

The FPC also advised the Treasury that it should be given powers to
direct a “time-varying liquidity tool” but the form of this would depend
on international agreement on liquidity standards. King said he attached
“a lot of importance to this to this tool.

King also noted the FPC left out of its recommendations a
loan-to-value and loan-to-income tool, which he said would require a
high degree of political and public support before it could be
considered. The measure would therefore require “further public debate.”

“We will have to keep under review the parameters of the regulated
sector and the instruments in the toolkit of the regulators,” King said.

King said another challenge for central banks remained maintaining
their independence and legitimacy in the aftermath of the crisis. The
means “winning the battle of hearts and minds” and could be helped by
increased transparency.

“It is pretty crucial to explain what we are doing and why,” King
said.

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

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

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