Jaime Caruana: Asset price bubbles - implications for monetary, regulatory and international policies Speech by Mr Jaime Caruana, Governor of the Bank of Spain, at the Federal Reserve Bank of Chicago, Chicago, 24 April 2002. *  *  *  One of the central topics of debate among economists has traditionally been the reasons for economic cycles, the factors that may amplify or smooth them, whether the authorities should aim to iron them out and, if so, how this can be done. More recently, the role of the financial sector in the dynamics of economic cycles has emerged as a key question in this debate. I would like to focus today on some problems posed to regulators and policy-makers by asset price bubbles and the credit cycle, and to share with you some thoughts on a regulatory device we have recently introduced in Spain to deal with some of these problems: the so-called forward-looking provisioning, also referred to as the dynamic or statistical provision. The pro-cyclical behaviour of the banking sector, which is now generally accepted in the literature, is receiving increasing attention by academics, policymakers and market participants. There is a growing feeling that the financial sector contributes to the swings in real activity and may even intensify and accelerate them. Feedback effects between credit growth and rises in asset prices are increasingly evident, although not yet well understood. Transmission channels from the financial sector to the real sector are becoming more and more flexible, rapid and complex.

In relation to this, the association should leverage on its nationwide network to increase awareness among the public of their responsibility to deal only with authorised money services. Part of this should also include explaining the relevant regulatory requirements to the public, such as the need to produce identification documents for large transactions. Over the last 4 months, I am encouraged by the numerous initiatives undertaken by the Association and the fruitful engagements and consultations with the Bank. I understand that the Association has embarked on a series of nationwide training to help its members implement effective corporate governance practices, develop internal policies and procedures and put in place AML/CFT compliance programmes. It has also helped to resolve a number of industry issues, including assisting members to obtain business insurance coverage at reasonable rates, and liaising with system vendors to ensure the provision of suitable and reliable management information systems. These are admirable progress and demonstrate the tremendous value that the association can bring to its membership. On this note, let me take the opportunity to congratulate the Council members and the industry on this official launch. Bank Negara Malaysia fully supports the Malaysian Association of Money Services Business in its important endeavour, and we are confident of the significant impact that this Association can make in taking the money services business industry to the next level of development. It now gives me great pleasure to officiate the launch of the Malaysian Association of Money Services Business. BIS central bankers’ speeches  3