Moral Suasion

DEFINITION of 'Moral Suasion'

A persuasion tactic used by an authority (i.e. Federal Reserve Board) to influence and pressure, but not force, banks into adhering to policy. Tactics used are closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or vague threats. A good example of moral suasion is when the Fed Chairman speaks on the markets - his opinion on the overall economy can send financial markets falling or flying.

BREAKING DOWN 'Moral Suasion'

Often termed simply 'suasion', it has been used to persuade banks and other financial institutions to keep to official guidelines. The 'moral' aspect comes from the pressure for 'moral responsibility' to operate in a way that is consistent with furthering the good of the economy. In Australia, the Reserve Bank has show preference for this type of policy control. In Japan, it is known as 'window guidance' and in the U.S., it is known as 'jawboning' - exercising the persuasive power of talk rather than legislation.

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