APRA started signalling its concerns to bank executives during 2002 and in 2004 went on to increase the capital requirements on uninsured “Low Doc” loans. More generally, APRA seems to have been quite strict in ensuring that loan origination standards were maintained and banks made prudent provisions for losses. This robust regulatory response was complemented by a slightly tighter monetary stance and numerous “open-mouth operations” by the RBA highlighting the growing risks in the housing and credit markets. The effect of these actions was to take some of the steam out of the housing market and ensure that banks were in a better position to withstand the global financial crisis when it finally broke. (For a fuller discussion of the Australian experience, see Paul Bloxham, Christopher Kent and Michael Robson, 2011.) Other examples of macroprudential regulation in action include: successive increases in risk weights on commercial and residential property loans by the Reserve Bank of India during 2005–8; dynamic provisioning after 2000 in Spain; and quantitative constraints on mortgage lending in Hong Kong in 1994. There are several other instances. Like Molière’s M. Jourdain, some have been speaking prose all along; the rest of us just need to catch up. The evidence suggests the effectiveness of these tools is, though, variable and we should therefore not expect too much from them (see Committee on the Global Financial System, 2010).
BIS central bankers’ speeches  7  Capital requirements and leverage constraints both affect the overall size of banks’ balance sheets. But credit booms and busts are often associated with excessive lending to particular risky segments of the market. So instruments to affect the composition of balance sheets are also potentially useful, for instance through selective variation in the risk weights applied to the calculation of capital ratios. Quantitative controls applying to particular sorts of loans, such as maximum loan-to-value ratios on mortgages are another option, as are minimum haircuts on repo and similar financial transactions between intermediaries. Finally, since excessive maturity mismatch is an aggravating feature of financial crises, banks could be asked to increase their holdings of reliably liquid assets as the risk of instability builds, in an analogous fashion to the capital buffer. Macroprudential policies are sometimes described as the missing instrument, but in reality many of these tools are familiar to regulators and there is already international experience in their application, often from emerging economies (though in some cases their application has been aimed at restraining aggregate demand rather than reducing the risk of financial instability). Indeed, the Australian experience nearly a decade ago is a prime example. Over 2002 and 2003, house prices here rose nearly 40 per cent, stimulated in part by changes in the tax treatment of housing, increased competition in credit markets and the attainment of a low inflation macroeconomic environment; alongside this, there was a similarly rapid rate of expansion in mortgage lending (see Chart 3).