Central banks may monitor asset prices

Central banks in the Gulf and other countries could alter a long-standing policy and expand their powers to control asset prices as part of post-crisis changes in the monetary and banking practices, the Arab World's monetary chief said.

The global financial distress, which has jolted major industrial powers and other nations, could also prompt those powers to end turmoil they triggered about the role of sovereign wealth funds (SWFs) before the eruption of the crisis, said Jassim Al Manai, Chairman of the Arab Monetary Fund (AMF).

In a study published in the Arabic-language newspaper Al Hayat, Manai said he anticipates post-crisis radical changes in the worldwide economic, financial, banking and monetary system, adding that reforms in the banking sector could be the quickest and most serious.

"As part of those changes, I believe there could be a revision of the role of the Central Banks in determining asset prices, mainly real estate and stocks… before the eruption of the crisis, their role was confined to achieving price stability by controlling inflation and did not include any intervention in the fluctuations in real estate and stock prices," he said.

"Following the crisis and the serious bubble it caused in the stocks and real estate sector, I think the situation will be different after the crisis and any revisions in the banking sector will include central banks' role in asset prices," he said.

Manai, a Bahraini, said he also expected a revision in central bank policies towards capital adequacy of banks on the grounds international adequacy standards enforced before the crisis proved ineffective.

He said world central bank governors had discussed such a problem but had not yet reached agreement on any new adequacy criteria.

"I believe there is a pressing need to tackle the phenomenon of procyclicality in a way that will ensure an increase in capital adequacy requirements during an economic boom and a decline during a downturn," he said.

"In such a situation, any solution must be enforced on a selective basis, which means that the same adequacy requirements should not be applied to all banks" Manai said.

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