‘Banking policy could include limiting of balance sheets’

Macroprudential policy for the banking system in the future could include measures to prevent expansion of banks’ balance sheets beyond a certain scale, said the governor of the Central Bank, Patrick Honohan.

This would then “put the onus on authorities to determine what is the optimal size and structure of the country’s financial sector — not an enviable task”.

Mr Hohohan was speaking in Reykjavik at a conference organised by the Central Bank of Iceland. He noted that if a country has an underdeveloped banking system relative to the size of the economy, this situation will constrain economic growth. However, if a country’s banking system grows disproportionately to the size of GDP, then this can pose different and far greater challenges.