Moreover, restricting domestic credit expansion will not serve if the cross-border activities of banks result in their most vulnerable exposures originating overseas. That, of course, was the case in the present crisis, where the main losses to UK and European banks arose from holdings of securities linked to the behaviour of the US housing market. On top of that, a unilateral increase in interest rates may well end up having a perverse effect on credit growth, because it sucks in capital flows from abroad to take advantage of the interest differential, so boosting the real exchange rate and adding to the supply of funding to the banking sector. The obvious conclusion is that one needs to look to other instruments – so-called macroprudential regulation – which act directly against the expansion in credit during the upswing and limit the contraction in any bust; in other words they stabilise the supply of intermediation schedule, XS. Given our earlier discussion, an obvious way to do this is by raising capital requirements on banks, thus improving their resilience, during the upswing of the credit cycle and reducing them during the subsequent downswing, allowing banks to maintain the supply of financial services. The new Basel III agreement on capital and liquidity regulation makes specific provision for such a countercyclical capital buffer of up to 2.5% of risk-weighted assets on top of the increased base Core Tier 1 capital ratio of 7%, i.e. a potential increase in capital requirements of more than a third.
Charles Bean: Central banking then and now Speech by Mr Charles Bean, Deputy Governor for Monetary Policy of the Bank of England, at the Sir Leslie Melville Lecture, Australian National University, Canberra, 12 July 2011. *  *  *  Good evening! It is a great honour to be invited here to give the tenth annual lecture dedicated to the memory of Sir Leslie Melville. As you will all know, Sir Leslie had a most distinguished career, both in academia and as a public servant. Much of his working life was spent as Chief Economic Adviser to the Commonwealth Bank, the ancestor of the Reserve Bank of Australia, where he provided advice to the Board on monetary and exchange rate policy, and also to Prime Ministers and Treasurers on economic matters more generally. In passing, I should record that Sir Leslie’s appointment was in part the result of one of the Directors of the Bank of England, Otto Niemeyer, pressurising the Commonwealth Bank to break with tradition by recruiting a professional economist! Sir Leslie also played a key role in the founding of the post-war economic order, leading the Australian delegation to the Bretton Woods conference, where he earned the fulsome praise of Maynard Keynes, followed by a stint as Australia’s Executive Director at the new international institutions. And, of course, he spent almost a decade as the second Vice-Chancellor of this University. I think you can say that was a professional life lived to the full.