BRUSSELS (MNI) – Financial supervisors should consider a
rules-based approach to intervening in real estate bubbles, ECB
executive board member Peter Praet told mortgage lenders Thursday.
“There is a feeling among many people involved in this discussion,
to some extent myself included, that we need to have a more rules-based
system,” Praet told the European Mortgage Federation’s annual conference
here.
Simple but useful early warning indicators, such as the global
credit-to-GDP gap, do exist and need to be monitored, even if they are
still rudimentary, he said.
In the Eurozone, however, the national character of housing markets
makes monetary policy a very crude tool to intervene. Where housing
busts are local, a single interest rate policy is “probably not the best
way” to deal with bubbles, Praet suggested.
A number of different authorities with sometimes conflicting
objectives have responsibilities and tools to intervene in real estate
bubbles, Praet noted. Choosing the right tools, which could include
stricter lending requirements and other microprudential policies, is the
challenge, he said.
The fact that credit cycles tend to be longer and not perfectly
synchronized with business cycles, is another factor, said Praet.
The US subprime crisis has strengthened the case for authorities to
try to spot and intervene in real estate bubbles, which have proven to
be more costly than stock market crashes, the ECB executive board member
argued.
That crisis showed how securitization, which separates and
transfers lending risks, can complicate the impact of real estate busts
on the global economy, he said.
“Limiting credit risk exposure from borrowers and/or ensuring the
resilience of banks would help limit the potential costs of house price
collapses,” Praet said.
–Brussels bureau: +32495228374; pkoh@marketnews.com
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