Policy Makers Need More Control of Bank Credit, Larosiere Says

Central bankers and International Monetary Fund policy makers need more control over bank lending to stabilize the global financial system, according to Jacques de Larosiere, a former governor of the Bank of France.

Monetary policy was “walking on one foot” before the financial crisis because while officials could change interest rates, they couldn’t influence the quantity of money being created through bank lending, de Larosiere said.

“The true source of money creation was through credit expansion,” de Larosiere said yesterday in a debate at the Financial Times in London, which was organized by the French Embassy. “You have to look into ways of moderating credit expansion when moderation is the order of the day.”

De Larosiere recommended the use of anti-cyclical provisions, higher capital ratios for different types of lending, reserve obligations and loan-to-value rules to help avoid credit bubbles. The IMF could coordinate policy internationally, said de Larosiere, who once headed the Washington-based organization.

Rachel Lomax, a former deputy governor of the Bank of England, said global agreement on such a proposal was unlikely.

“I don’t think there’s a chance in hell of getting there to be honest,” she said. “The geopolitical requirements are just simply beyond imagining at the moment. There just isn’t the trust.”

Lomax said policy makers were grappling with transitioning to a system where China and other large emerging economies have fully exchangeable currencies.

“We are really not much more than at the beginning of a very difficult and dangerous transition from a very ramshackle international monetary system, which is very much dominated by the dollar, to a multipolar world which is probably going to be based on several reserve currencies,” she said.

To contact the reporter on this story: Simon Clark in London at sclark4@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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