RBA’s Lowe Says Regulators Face Trade-Offs in Bid to Curb Risks

Reserve Bank of Australia Deputy Governor Philip Lowe said regulators face trade-offs as they set rules aimed at reducing risks in the financial system.

While banks are being encouraged to collateralize exposures in the form of covered bonds and other instruments, there is uncertainty over whether such measures will make the financial system safer, Lowe said in the text of a speech today in Sydney. Some regulators are encouraging banks to increase funding from deposits, whereas others advocate more wholesale debt, he said, noting the “limits of rules alone.”

“I suspect that it is simply not possible, or in fact desirable, to regulate a modern financial system to the point that we can say with absolute confidence that problems will not occur,” Lowe said. “What we can do, however, is to reduce the likelihood and severity of future problems.”

Global regulators have introduced policies to shore up the banking system after the collapse of Lehman Brothers Holdings Inc. in 2008 that triggered a crisis in the U.S. and Europe. In Australia, which escaped the worst of the credit crunch, local regulators have accelerated requirements to increase bank capital reserves ahead of a global timetable.

Lowe said the Australian Prudential Regulation Authority has done a better job than many global counterparts, combining “a sensible approach to rule-making with a focus on the big picture.” While noting unease with public bailouts, he also said it would be wrong to rule out government use of its balance sheet in times of crisis.

Lowe didn’t address monetary policy in the text of the speech.

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