Reserve Bank Assistant Governor John McDermott has delivered a speech on behalf of Governor Alan Bollard that looks how central banks such as New Zealand are changing the way they monitor the economy and the financial system in the wake of the financial crisis.
McDermott told an audience in Singapore that monitoring the equilibrium value of asset prices would be a new challenge for central banks, similar to the challenge of measuring the output gap or the NAIRU (Non Accelerating Inflation Rate of Unemployment) was in previous decades.
"Identifying bubbles will require new empirical tools ... but as with assessing disequilibrium in the goods or labour markets, we will still probably need to rely on information from a wide range of qualitative and quantitative sources to help identify the presence of a bubble and understand the nature of it," McDermott said.
"How successful we will be remains an open question," he said.
The crisis had also prompted a revival of interest by central banks in money and credit, whereas in previous decades central banks had paid less attention to monetary and credit aggregates, he said.
"Several factors have contributed to this revival. First, the impairment of the flow of credit as a result of the financial crisis has led to fears of a creditless recovery, or at least a recovery held back by less plentiful credit. Second, there has been a significant change in money flows during the crisis (with depositors favouring the banks over the non-banks)," he said.
"Overall, there has also been a recognition that credit growth over the past decade was excessive and a potential risk to financial stability given the build-up in leverage and rising asset prices that accompanied it. We are continuing to build our understanding of money and credit at the RBNZ, and its inter-relationship with both sectoral financial decision making and potential risks for the banking sector."
Prudential supervisors were also focusing more on the funding markets and balance sheets of the main banks, including their debt maturity and risk management policies.
"This follows the closure of international funding markets in late 2008 and the increased fragility of markets generally," McDermott said.
"At the RBNZ, our focus is particularly on the four systemically important banks in New Zealand, which are all subsidiaries of Australian owned parent banks. During the Global Financial Crisis we learned that much of the mandated disclosure of public information from the banks was available with too long a lag and was too general to be much use in predicting stress vulnerability. Consequently we have reduced the information we require to be made public but are requiring more real time private information about funding, bad debt, deposits, loans etc. These receive very close attention from the regulator."
McDermott also said traditional policy tools needed to be augmented with macro-prudential instruments targeting financial stability goals.
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