Speaking last night at the Central Bank of Ireland Conference Lord Adair Turner, chairman of the Financial Services Authority, said there were some areas of financial policy where a high degree of national autonomy, subject to some appropriate central coordination, is essential.
He said: “We need macro-prudential levers and need to be able to pull them at national rather than eurozone level.”
Turner said credit and property price booms can create enormous economic volatility and harm and cannot be contained by interest rate policy alone – in boom times the interest rate elasticity of credit demand is too low.
He warned that putting up interest rates a few percentage points will not deter borrowers who expect property price rises of say 10% or more while putting them up many percentage points could seriously harm other sectors of the economy long before the property credit boom slows down.
He said: “We therefore need new policy tools, other than the interest rate, to take away the punch bowl before the party gets out of hand.
“Tools such as countercyclical capital requirements, capital risk weights which can be varied by broad sector, or maximum loan to value or loan to income ratio limits imposed on borrowers.”
Turner said even in non-euro area countries such as the UK, which still sets its own interest rate, these tools are essential.
Indeed the Interim Financial Policy Committee of the UK recently gave advice to government on what directive powers should be included in forthcoming legislation.
Turner added: “But for countries within the eurozone unable to vary their own interest rate the need is still greater and the tools need to be deployable at national rather than eurozone level.”
Turner said small countries with large banking systems, such as Ireland, need to be free to impose higher capital requirements on banks than required by the Basel III/CRD IV since that may be essential to reassure bank counterparties.
He added that since past credit and real estate booms have been concentrated in specific countries of the eurozone – massive in Ireland from 2004 to 08 but almost entirely absent in Germany – countercyclical tools such as variants in capital requirements or risk weights must be available to be pulled at a national specific level.
Turner said: “It is therefore essential, as the European Systemic Risk Board has recently made clear, that the forthcoming CRD4 directive and regulation leaves appropriate discretion at national level.”