As a result, I suspect it would be difficult to get all the relevant regulators on board in a timely way to implement macroprudential tools successfully. In principle, the Financial Stability Oversight Council (FSOC) might be well placed to coordinate a response across different regulatory jurisdictions. But, I believe this is likely to prove difficult to do in practice. Each of the regulatory agencies guards its own authority and prerogatives, and may not always be responsive to pressure from other regulators or the U.S. Treasury. There is also the problem of responding to an emerging financial stability risk in a timely manner. First, the emerging problem needs to be identified. Then alternative policy responses need to be analyzed and debated. And, there is an understandable bias to start small and to escalate only as needed given the lack of understanding about how big an impact a particular tool may have on the economy. So, even if the FSOC could be effective in developing a consensus among the regulators, I wonder whether it could do this in a timely way. The housing boom in the U.S. that culminated in the financial crisis began in 2002 and 2003. By the time that it was broadly identified as an issue in 2005 and 2006, it might have been too late to do much to temper its effects, even with a sound macroprudential response by the regulatory community. In the remainder of my time, I will discuss two topics in more detail.
In general, I see some advantages with having rules that are hardwired in place so that adjustment of the parameters of the tool – say, limits on the loan-to-value ratio – happen automatically in response to sectoral developments. Automatic rules that are always in place have several advantages over discretionary measures that are implemented, ex post, only after some potential source of financial stability risk has been identified. First, they are transparent and will work more quickly. Second, they avoid some of the problems associated with announcing that a new measure is going to be put in place. When implementing a new measure there will always be some reluctance to overcome in terms of deciding whether it is necessary. Also, there may be political opposition to imposing a new measure. For example, during the housing boom, limits on subprime lending would undoubtedly have provoked the objection that the regulators’ actions would limit home ownership for low-and moderate-income families. Imposing automatic, countercyclical standards also has this difficulty to some degree. But I think it is much less severe because at the time such standards are put in place, they generally will not be binding and it will be unclear whether they will necessarily become either more stringent or more binding in the future. In other words, the rule’s potential impact will be highly speculative and uncertain at the time of implementation. This may lessen the political opposition to putting such a rule in place.