Bubbles, Regulation, and macroprudential policy

Question 1

What are Mishkin’s 3 reasons for regulation? Who are 3 bodies who performs these functions in Australia? (5 marks)

Answer 1

increase information to investors
ensure soundness of financial system
improve control of MP)

Question 2

What is the objective of macro prudential policy in Australia and around the world (2 marks) What are some of the macro prudential instruments and regulators utilise to meet this objective (3 marks)

Answer 2

Aimed at strengthening the stability of the financial system as a whole. Concerned with the interconnectedness of financial institutions and markets

variable: - countercyclical capital buffers, LTV ratios, forward looking provisioning, with flexible parameters Macroprudential, fixed: - gross leverage ratios, core funding ratios,

Question 3

How can financial regulators reduce the “too big or too interconnected to fail” problems associated with globally systemically important financial institutions (G-SIFIs) (5 marks)

Answer 3

1. structural measures : size or activity restrictions 2. Reduce the incentives to become too big 3. enhance supervision 4. enhance transparency and disclosure requirement 5. increase bail-in powers. Reduce the cost of bailout if one is needed 6. bank contribution to resolution funds

Question 4

How might an investor tell if there is an asset bubble

Answer 4

excessive leverage
excessive asset price growth
Irrational exuberance
Physical over-build (excess units built without the demand from renters/buyers behind it)