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RBA’s Ellis Says Regulators Need Flexibility to Manage Risk

Regulators should focus on preventing their economies from overheating and remain flexible to respond to emerging risks in the financial system, a Reserve Bank of Australia official said.

“Avoidance of damaging credit cycles starts with management of the business cycle,” Luci Ellis, head of financial stability at the RBA, said in prepared remarks in Sydney today. “The quickest way to create a damaging credit boom is to run your economy too hot.”

Recent examples, including Australia’s concern about some “synthetic” exchange-traded funds overseas, “show the value of having flexible, principles-based regulatory frameworks, not a legalistic set of rules that encourage a box-ticking frame of mind,” Ellis said.

Regulators focused solely on compliance with existing rules will always be “playing catch-up,” Ellis told the Paul Woolley Conference. “I’m glad to say that narrow, box-ticking cultures are not what we see in the Australian regulators.” Ellis, who didn’t directly address monetary policy or the state of the economy in her speech, also said a floating exchange rate like Australia’s plays a “positive role” in allowing officials to manage economic policy in the context of domestic circumstances.

Australian banks face slower credit growth and weaker asset quality than prior to the global credit crunch sparked by the collapse of Lehman Brothers Holdings Inc. in 2008, the RBA said last month in its financial stability review.

While the nation’s lenders are better placed to cope with market shocks than three years ago, the proportion of non-performing assets on their balance sheets remains close to its recent peak, the report said.

The RBA boosted its rate seven times from October 2009 to November 2010, tempering a rise in consumer debt, which more than tripled in the past 20 years to 153.7 percent of disposable income in the second quarter.

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