Conduct Risk and Financial Stability [15]

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Bullet points include: “Macro-prudential policy is gaining ground every bit as quickly as central bank independence did in the 1990s. It has quite radical implications. Pre-crisis credit cycles were allowed to operate largely unconstrained. Macro-prudential policy overturns that orthodoxy, with policy instead leaning against the credit cycle to moderate its fluctuations, both during the upswing and the downswing.” He is hopeful that the financial system and economy may become less prone to the low-frequency, high-cost banking crises seen in the past. However, he thinks that the financial system could “exhibit a new strain of systemic risk – a greater number of higher-frequency, higher-amplitude cyclical fluctuations in asset prices and financial activity, now originating on the balance sheets of mutual funds, insurance companies and pension funds” which could in turn be transmitted to, and mirrored, in greater cyclical instabilities in the wider economy. He thinks it “… likely that regulatory policy would need to be in a constant state of alert for risks emerging in the financial shadows, which could trip up regulators and the financial system. In other words, regulatory fine-tuning could become the rule, not the exception”

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