Prudent regulatory measures and government economic policies are crucial in averting the damaging impacts of credit booms that largely crippled many economies during the global financial crisis in 2008.

This according to Reserve Bank of Australia (RBA) financial stability head Luci Ellis, who also stressed that a dead-serious regulatory framework will definitely cushion or even eliminate the ill-effects of a damaging credit boom.

"Regulators must have the powers, the mandate, the resources, and, importantly, the culture to make them able and willing to respond appropriately to a threat to financial stability," Ellis was reported by the Australian Associated Press (AAP) as saying during her Thursday address at the Paul Woolley centre for the Study of Capital Market Dysfunctionality.

She also underscored the importance of reacting quickly and decisively to any given financial issue, which she noted was not necessarily the case in many government regulatory bodies across the world.

Ellis added that if governments are looking for a quick fix that is tried and tested, avoiding an overheating during credit booms should do the trick.

In such a situation, the RBA official asserted that nations could very well appreciate the benefits attached with the floating of their currencies.

"If the exchange rate floats, the authorities can set macro-economic policy according to domestic circumstances, rather than having to defend a particular exchange rate." Ellis told her audience.

Putting her ideas into perspective, Ellis cited the economic struggles currently bogging down the United States and some European nations, which she pointed out clearly showed that financial instability can also endanger job security and long-term human conditions.

Events in those regions only highlighted the importance of adeptly handling financial stability issues that could put in effect risk-aversion measures over the long-term, Ellis said.

She also cited the Australian experience during the housing boom in the mid-2000s, in which the Australian Prudential Regulation Authority effectively intervened by raising the risk weights on mortgage loan products that were deemed riskier than the others.

"A system-wide stress test (at that time) revealed that mortgage insurers needed more capital to be resilient to a major downturn in the housing market, should one occur," which Ellis said APRA addressed by retaining tougher treatments on such loans while at the same time observing the Basel II standard."