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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Australian Prudential Regulation Authority in its series Working Papers with number
wp2001-03.
Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation K29 - Law and Economics - - Regulation and Business Law - - - Other
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)