POWERS to control banks and stop bubbles wrecking the economy may be too slow or too weak to work, top European Central Bank official Vitor Constancio warned yesterday.
Regulators including the Bank of England and the ECB hope to use macroprudential policies to manage the economy, rather than relying on the interest rates alone.
They hope that by limiting banks’ lending to certain sectors, or by making them hold bigger capital buffers in a boom they can stop the economy overheating, without having to raise rates for everyone.
But Constancio fears this fine- tuning will have limitations.
The counter-cyclical capital buffer suffers from “relatively long lags”, meaning it “should be activated relatively early in the cycle,” he said. That means more “false alarms” as banks are limited from lending without good reason.
Limiting lending from banks will encourage borrowers to turn to shadow banks outside the system, possibly building risks in less regulated sectors instead, he added.