Central banks must take a long-term view of the economy and craft appropriate policy responses.
We must have the latitude to raise interest rates when others want cheap credit and rein in risky financial practices when others want easy profits.
There has to be greater societal consensus on taking tough corrective actions.
While progress on macro and micro-prudential regulations will be the key for moving forward, some work is still needed from the regulators in providing guidance to the market in instituting a mechanism in the area of managing not only several “known unknowns” but also a number of “unknown unknowns.”
With the benefit of hindsight, low nominal interest rates, abundant liquidity and a favorable macroeconomic environment encouraged the private sector to take on ever-increasing risks.
Financial institutions provided loans with inadequate checks on borrowers’ ability to pay and developed new and highly complex financial products in an attempt to extract ever higher returns.
Meanwhile, many financial regulators and supervisors were lulled into complacency and did not respond to the building up of vulnerabilities.
We have to develop more sensitivity in our policy tools to capture and quickly correct our policy stance to control such covert signs of overheating.
Banks have to look beyond the way banking is traditionally defined in a narrow fashion; they need to look towards the vulnerable and other excluded sections of the population as bankable.
Stakeholders other than banking too need to involve themselves in the process of expanding the outreach of the financial services, and thus partner with banks in the process of inclusive economic growth.
That is the key challenge.
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