WASHINGTON (Reuters) - The U.S.’s set of tools to limit asset bubbles is neither large nor “battle tested,” Federal Reserve vice chair Stanley Fischer said on Friday in a call for regulators to step up research on how to improve financial stability.
Fischer said that compared to other countries the complexity of the U.S. financial system and the diverse number of regulators may make it difficult to develop or deploy so-called “macroprudential” tools - policies that could be used to selectively cool overheated financial markets.
As head of the Bank of Israel, Fischer put such tools to work, for example, by hiking loan to value ratios on home mortgages to slow a run-up in real estate values.
He has said the U.S. should examine that and other policies before new financial risks emerge, though he acknowledged they may be tough to implement.
“I remain concerned that the U.S. macroprudential toolkit is not large and not yet battle tested,” Fischer said, and it may be difficult to expand because so many agencies have control over different parts of the financial system. In addition, he said, targeting policies at one sector, such as home mortgages, could simply push that sort of lending to less regulated companies.
There is concern that the Dodd-Frank regulations put in place after the crisis are already doing that, helping expand the influence of “shadow” banks not covered by the same rules as commercial lenders.
Some of those regulations have a macroprudential character, such as the stress testing of banks and the possible imposition of “countercyclical” capital buffers that could require the largest banks to hold more in reserve if markets overheat.
Ultimately Fischer said it may be left to monetary policy to bear responsibility for financial stability.
“The limited macroprudential toolkit...leads me to conclude that there may be times when adjustments to monetary policy should be discussed as a means to curb risks to financial stability,” Fischer said.
Even though the interest rate is a blunt tool, requiring a potential tradeoff of higher unemployment if it was hiked to control an asset bubble, “we need to consider the potential role of monetary policy in fostering financial stability,” he said. That could include using narrower policy tools, like bank reserve requirements, and not just the interest rate alone, he said.
Reporting by Howard Schneider; Editing by Chizu Nomiyama