This paper outlines the arguments in favour of using prudential regulation to influence asset price bubbles. We examine the costs and benefits of placing restrictions on portfolio composition, adjusting capital requirements, introducing a system of counter-cyclical provisioning, and more extensive use of stress testing and internal models, as possible options to influence the behaviour of the banking system and therefore asset prices. We argue against the use of portfolio restrictions and find that adjustments to capital requirements are difficult to implement in a systematic way. However, we suggest that a case exists for a counter-cyclical provisioning regime similar to that introduced by the Spanish banking regulators. We also argue that more extensive use of stress testing and internal models may have a role to play in minimising the risks of asset price bubbles as these become better integrated into the toolkit of financial regulators.
Asset Price Bubbles; Prudential Regulation; Australian Economic History
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.