Government

Can Regulators Fight Bubbles?

Geyser water bubble.

hide captionBut is it a bubble?

Christine and David Schmitt/Flickr

Bank regulators from around the world say they're going to team up to fight credit bubbles, the FT reports. But it's unclear whether their plan will work.

Under the agreement — part of Basel III — a country's regulators can declare that its banks are lending out too much money, and the economy is overheating.

When that happens, the country's banks will be forced to hold more money in reserve. That means banks have will less money to lend out, which tends to slow economic growth, and may help rein in bubbles like the one we saw in U.S. housing.

Under the new, global agreement, foreign banks that do business in an over-heated country will also have to hold more money in reserve (how much a bank has to hold in reserve will depend on how much of its business is in the over-heated country).

But identifying credit bubbles is notoriously difficult. And, even if regulators correctly spot a bubble, they'll have to find the will to act to slow economic growth — often an unpopular move.

For more: Bill Dudley, the head of the New York Fed, told us last year that the Fed needs to do a better job of fighting bubbles.

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