Introducing a systemic approach

In its 2005 Annual Report, the Bank for International Settlements endorsed the reintroduction of macroprudential tools to implement monetary and regulatory policies. But their proposal falls short of what’s needed to reinstate effective countercyclical strategies because it would only apply to banks. In the market-based system that has emerged over the last four decades, what is required are monetary tools that can extend the central bank’s influence to all financial institutions. A form of asset-based reserve requirements that has been used by European countries for many years and proposed in the US suggests a model for a new system that would require all financial firms to hold reserve requirements, authorize the Fed to target assets when creating or extinguishing reserves and shift reserve holdings to the liability side of all financial institutions’ balance sheets.