Macro-prudential rules must be reciprocated – Shafik

The effectiveness of macro-prudential policies could be undermined if countries do not reciprocate actions by regulators overseas, Bank of England (BoE) deputy governor Minouche Shafik said on October 24.

"There is mounting evidence that the effectiveness of macro-prudential policies may be affected by leakages across borders," Shafik told a conference jointly hosted by the BoE and Hong Kong Monetary Authority. She cited papers that find cross-border borrowing may increase when domestic policy is tightened.

By acting together, countries can reduce the probability of a crisis more than if they were acting alone, the deputy governor said.

"Reciprocity also helps address the old problem of asymmetric adjustment of global imbalances," Shafik added. If a surplus country whose banks are lending to a deficit country reciprocates a higher capital buffer, that should encourage banks to lend more to the domestic economy, helping to boost domestic demand and reducing the imbalances, she said.