A group of highly influential financial executives have expressed support for giving their regulators new authority to take preemptive action against potential speculative bubbles.
In a statement coordinated by the World Economic Forum, the Swiss nonprofit that coordinates the annual meeting of business leaders and politicians at Davos, 15 CEOs and other executives of top financial firms such as HSBC and BlackRock called on regulators to embrace “macroprudential” regulations.
Such rules are aimed specifically at preventing asset prices from rising out of line with economic fundamentals and risking a market crash, as happened with the U.S. housing market in 2007 and 2008. Macroprudential regulations are thought of as distinct from rules and oversight that apply to specific banks or other firms.
While the proper use of macroprudential tools is a topic of ongoing consideration among U.S. regulators, the executives write that they have concluded that such tools are necessary “to help achieve the right balance between financial stability and economic growth.”
“Macroprudential policies could support financial market stability and thus long-term investors’ ability to provide risk capital to the real economy,” Swiss Reinsurance Company CEO Michel Liès wrote.
The authors also acknowledged that “it is important to continue to monitor the possible unintended consequences of these regulations.” The problem facing regulators is that it is difficult to distinguish bubbles from normal market movements, and that acting on the basis of limited information could harm innovation and growth.
U.S. regulators are looking at several options for expanding macroprudential policy. In a recent speech, Federal Reserve governor Daniel Tarullo identified firms’ reliance on short-term debt and the role of central counterparty clearinghouses as areas for potential added oversight.
Signatories to the statement published Monday include executives of Deutsche Bank, the Depository Trust & Clearing Corporation, BMO Financial Group, Zurich Insurance Group and UBS.
