Auditing John Laker’s APRA

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Today is the last day in the job for the chairman the Australian Prudential Authority (APRA), John Laker. As chairman for 11 years, Laker oversaw the rebuilding of APRA after Peter Costello gutted it following the HIH Insurance collapse in 2001.

John Laker’s tenure at APRA is widely regarded as a success and prima facie that is true. After HIH, APRA needed a steady hand to rebuild its credibility and Laker’s APRA can claim to have guided Australia comfortably through a global financial crisis that left other comparable regulators around the world with epochal egg on their faces. Despite some jitters in Australia, and the wholesale collapse of non-banks in the crisis, Australia’s financial system proved more robust than elsewhere.

As well, in the period following the GFC, APRA positively shined. As the primary bank regulator it played a key role in reforming the bank vulnerabilities that were exposed by the crisis. It did this largely by insisting that banks lend dollar-for-dollar against deposits. Unquestionably, Laker leaves the financial system more stable now than it was in 2008, something of which he can be rightly proud.

But can we say the same for the full period of Laker’s tenure?

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In 2003, Australian banks were halfway through a foreign borrowing surge that extended right through 2008:

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When the GFC struck, these bank liabilities proved to be very vulnerable as external lenders refused to rollover loans. The result was a desperate scramble within Australian government circles to guarantee the loans. Dr Laker was central to that bailout, which was necessary lest a current account crisis overtake Australia, yet it was also his APRA that had failed to foresee the crisis and allowed the huge offshore expansion in the first place.

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As a former APRA insider confessed in October 2012 when questioning the RBA’s Luci Ellis:

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The failure to foresee the macro economic implications of the rise of external debt is the primary driver of the rise of Australia’s too-big-to-fail banking cartel.

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The resulting financial system is as deeply altered as it is unexamined in the wider debate. The major banks continue to trade on a government guarantee, recognised by ratings agencies in a two-notch upgrade to bank ratings, competition is structurally diminished, moral hazard rampant and the system unrecognisable from that invisaged by the last banking inquiry under Stan Wallis.

As John Laker retires today, it is arguable that that lesson has not been learned. Although the financial press likes to bleat about how tough APRA rules continue to be, most especially around the changes enshrined in Basel III reform, the truth is the opposite. For the most part, APRA is holding at bay the global push to bring clarity to core bank capital allocation practices like the risk-weighting of assets. As well, even Australia’s persistent housing bubble inflates again, APRA is ignoring global moves to apply macroprudential tools like those of New Zealand and the United Kingdom, and recommended by the IMF.

In sum, while nobody much has been hurt under John Laker’s APRA, the main reason why is that rules governing the system have been changed along the way. There appears no end to that in sight and that, plus too-big-to-fail will be John Laker’s most lasting legacy.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.