Tag Archives: Financial System Inquiry

APRA warns: cut now, pay later

The financial regulator has warned that continued Government cost-cutting could “ultimately compromise” the safety of the financial system.
In its submission to the Financial System Inquiry, released today, the Australian Prudential Regulation Authority (APRA) unsurprisingly expressed satisfaction with its performance.
But, as the Federal Government talks up the prospect of a slash-and-burn Budget next month, the regulator warned that cuts to resources can come at a heavy cost.
APRA said that in recent years the previous Government’s so-called “efficiency dividend” demands had made things increasingly difficult for the agency, which had to compete with a strong private sector to retain talented and experienced staff.
“The mechanism of efficiency dividends is not well-suited to an industry-funded agency,” APRA said. “Continued efficiency dividends will ultimately compromise financial safety but make no contribution to the Government’s budgetary objectives.”
In its, submission, also released today, Treasury warned of the threat to effective financial market supervision from a blurring of the lines of responsibility among the key regulators.
Treasury said the current regulatory framework was sound, with only improvement “at the margin” needed.
In a swipe at those in the finance industry chafing under more stringent international standards, like Basel III’s highly prescriptive rules, Treasury said Australia, as a significant capital importer, had little scope to ignore such developments.
In fact, the department said, many such reforms would bring regulatory standards in other jurisdictions closer to those in Australia.
But it also acknowledged problems in current arrangements, including the distortions caused by the Commonwealth’s guarantee for bank deposits, which not only create moral hazard, but give the major lenders a clear competitive advantage.
And Treasury warned of the danger that the clear demarcations that had existed between APRA and the Australian Security and Investment Commission (ASIC) were becoming blurred, undermining the effectiveness of the regulatory framework.
“Recent proposals for ASIC to take on quasi-prudential functions following the collapse of Banksia illustrate the difficulties in maintaining clear demarcations in the fact of changing products and market structures,” Treasury said.
In a fillip for SMSFs, the department endorsed the current policy approach of relatively low levels of regulation and oversight by the Tax Office to ensure compliance with taxation law.

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The case for regulation

Taking unfashionable positions seems to be part of the job description for central bankers.
And the Reserve Bank of Australia was at it again yesterday.
The Abbott Government has been trying to endear itself to the business community by talking up its campaign to slash red tape, headlined by its so-called Repeal Day on March 26, when 10,000 pieces of legislation and regulation were put on the chopping block.
Few would quibble with the move to get the Dried Fruits Export Charges Act 1927, which set a levy of one-eighth of a penny for each pound of dried fruits exported, off the books.
But, as the RBA pointed out in its submission to Financial System Inquiry, the mania to be rid of regulation must have its limits.
Reflecting on the nation’s ability to endure the global financial crisis in much better shape than most other major developed economies, the Reserve Bank said Australia’s “sound prudential framework” had served it well, and saw no need for major change to current arrangements.
Many in the finance sector chafe under what they see as the unfair regulatory burden and capital requirements placed on Australian banks in complying with the terms of the international Basel III rules.
The rules were developed to help reduce the vulnerability of the global financial system to future credit shocks, including by increasing capital adequacy requirements for banks.
While the RBA and APRA are among those who successfully argued for some leeway in applying the new standards to take account of different business models and operating environments, Australian banks have nonetheless – like their overseas counterparts – had to increase the amount of capital on hand to help offset liabilities.
Often, regulation is seen as a dead-weight cost without any perceptible redeeming benefit.
In this it is like investing in education with the aim of boosting national productivity – the upfront cost is all-too apparent, while the pay-off is distant and rather nebulous: you know that a better educated and higher skilled workforce will be more productive, but credibly quantifying the effect is difficult.
That is why there was some benefit out of the gloom caused by the GFC. As the RBA said in its submission, it showed “that the costs imposed by effective regulation and supervision are more than outweighed by the costs of financial instability, even if that differential only usually becomes apparent after prolonged periods”.
That is, financial crises only happen every now and then, but when they do, the insurance of a robust financial system is worth the regular but relatively small cost of regulation.
In keeping with this “nothing good comes for free” theme, the RBA also backs the idea that the banks be charged a fee for the protection to depositors provided under the Financial Claims Scheme.
One of the key lessons the central bank draws from the GFC is that “the financial cycle is still with us”, meaning that risks have to be managed.
In its submission to the inquiry, the RBA made a number of other noteworthy observations and recommendations.
While much attention in recent years has been on competition in the mortgage market, the central bank said competition in small business lending was much weaker and deserved greater attention.
It also warned politicians off the idea of forcing superannuation funds to invest in certain sectors or asset classes, and questioned whether or not the fees and costs charged in managing retirement savings were reasonable.

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