King on regulation – Japan’s quantitative easing

Mervyn King, in a speech on Tuesday evening called for “simple and robust” regulation. Regulatory design, he said, “should be based on an explicit identification of the market failures that regulation can hope to correct”. He also highlighted the need to reduce the exposure of the financial system to domino effects – arising from the interconnectedness of banks – and the pro-cyclical behaviour of risk-taking in the financial system.

He said: “In particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs – liquidity and leverage.” He added: “Given what has happened there is now international support for developing a counter-cyclical toolkit for the prudential supervision of banks.”

King said concerted international action was needed to boost confidence and restore the flow of credit: “Most of us come from the generation that grew up believing that mass unemployment and world recession were things of the past, relevant to the history books but not the textbooks. That assumption is under threat. We must rise to the challenge.” The speech is here.

Also overnight, Japan moved back towards the 2001-6 policy of quantitative easing by stepping up bond purchases. More here.

Originally published at About David Smith’s and reproduced here with the author’s permission.