I meant to write about this yesterday but didn’t get round to it. The Chinese have come up with another new tool of monetary policy (as an alternative to hiking interest rates, which might attract hot money flows). Aware that their lending quotas have not functioned as hard caps on bank lending, the PBoC is now going to impose variable reserve ratios for individual banks.

Across the world in Switzerland, the Basel Committee has come up with an analogous idea. A country that believes it has an asset bubble will say as much, and impose stricter capital requirements on its banks in an attempt to slow down lending. The authorities in other countries will raise capital requirements for their own banks to the same level (to the extent that each bank has exposure to the bubble country).

The latter idea will only work if regulators spot the bubble, of course, but it shows that the Basel Committee is still thinking about novel ways to prevent the next crisis.

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