Safer instability

Regulators are preparing to introduce a host of new regulations to improve the resilience of the financial system. But this should go hand in hand with the use of policy tools to prevent asset price bubbles, argues Ryozo Himino

Financial institutions across the globe face a deluge of new regulation in the wake of the financial crisis. Banks will be forced to hold a greater proportion of high-quality capital, so their solvency will not come into doubt if they suffer a big loss. They will also be required to maintain large liquidity buffers comprising highly rated liquid assets to avoid a future squeeze on funding, similar to the one that brought down UK mortgage lender Northern Rock in 2007. Meanwhile, regulators have