The RBA has stated its position on macroprudential controls thusly:
We also must, of course, heed the lesson that, whatever the framework, the practice of financial supervision matters a great deal. Speaking of supervisory tools, these days it is, of course, considered correct to mention that there are other means of ‘leaning against the wind’ of financial cycles, in the form of the grandly-labelled ‘macroprudential tools’. Such measures used to be more plainly labelled ‘regulation’.
…We need, however, to approach such measures with our eyes open. Macroprudential tools will have their place. But if the problem is fundamentally one of interest rates being too low for a protracted period, history suggests that the efforts of regulators to constrain balance-sheet growth will ultimately not work. If the incentive to borrow is powerful and persistent enough, people will find a way to do it, even if that means the associated activity migrating beyond the regulatory perimeter. So in the new-found, or perhaps re-learned, enthusiasm for such tools, let us be realists.
MB has of course been arguing that macroprudential tools could serve Australia very well in its current circumstances, enabling the lowering of interest rates to a level that would materially effect the dollar and preventing a borrowing binge in the process.
Sweden is adopting this very approach its similar situation. Canada already has such controls (though has other problems). China has used them to good effect in past year and is about to do so again. And now Norway joins the forward thinking central banks. From Bloomie:
Norway’s financial regulator is throwing its weight behind a government proposal to force banks to assign higher loss probabilities to mortgage assets as the nation looks for ways to cool its overheated property market.
The Financial Supervisory Authority in Oslo will add stricter risk-weight recommendations to a raft of measures, including curbs on covered bond issuance, all designed to prevent a repeat of the 1990s crisis that sent Norway’s real estate prices plunging 40 percent and left households with unsustainable debt loads.
“The FSA shares the ministry’s concern for household indebtedness and soaring house prices,” Morten Baltzersen, who heads the watchdog, said yesterday in a telephone interview. “We agree with the ministry that the risk weights on house loans need to be increased.”
The Finance Ministry in December proposed tripling risk weights to 35 percent, more than double the recommendation in neighboring Sweden, after Norwegian house prices and private debt burdens soared to records. The FSA’s response signals banks should start adjusting to the stricter requirements, now that the measures have won both government and regulatory backing.
House prices in Western Europe’s biggest oil exporter have doubled since 2002, and rose an annual 8.5 percent last month, according to the Norwegian Association of Real Estate Agents. At the same time, household debt will swell to more than 200 percent of disposable incomes this year, the central bank estimates. In the years leading up to the 1990s bubble, the debt ratio reached about 150 percent.
As central banks in the U.S., Japan and the euro area keep interest rates at unprecedented lows to aid growth, some of the world’s richest countries like Norway, Switzerland and Sweden are battling overheated housing markets fueled by cheap money. Norway’s central bank has kept its main rate at 1.5 percent since March last year as policy makers try to balance an overheated housing market against keeping krone gains in check.
Low interest rates have contributed to imbalances in the housing market that the FSA says can’t go unfettered any longer. Banks’ internal risk models have also failed to capture the threat of losses that the development has caused, according to the regulator.
…The FSA this week also endorsed the ministry’s plan to limit banks’ use of covered bonds to finance mortgages. The regulator said it evaluated “qualitative” rules on shifting loans to covered bonds and that oversight is best done on a bank-by-bank basis.
Norwegian banks’ reliance on offshore funding is another source of concern, Baltzersen said. At the end of October, about 77 percent of bank funding stemmed from foreign sources, amounting to 1.08 trillion kroner, Statistics Norway data show.
Banks “are to a large extent reliant on wholesale market funding in foreign markets. The experience from the last years’ turmoil in international money and capital markets underlines the importance of making the market funding more robust,” Baltzersen said. While “the market funding has become more resilient, Norwegian banks should continue their efforts to make their market funding even less vulnerable.”
Sounds familiar.
