What’s got our financial regulators spooked?


If I could go long regulator caution right now I’d be getting rich. And no, I do not mean caution as applied to the regulated. I mean caution as it applies to regulatory reform.  This week has seen reactionary speeches from senior RBA and APRA officials insisting that current financial regulations are more than adequate and indeed that regulatory reform is in danger of running out of control. Let’s ignore APRA’s terrible speech on the subject and refer instead to RBA chief Glenn Stevens yesterday:

Subject to all those constraints, I would simply observe that, in my opinion, by 2014 we will have reached a point in the financial regulatory sphere where the G20 should be looking for careful and sustained efforts at implementation of the regulatory reforms that have already been broadly agreed, but being wary of adding further reforms to the work program. Absent some major new development, which brings to light some major reform need not hitherto visible, to task the regulatory community and the financial industry with further wholesale changes from here would risk overload. Lest this be considered too weak a position, let us remember how much is being attempted. And since we are already seeing the need to ‘tweak’ some earlier agreed proposals, it is surely clear that the details of implementation should increasingly be our focus over the next few years. The G20 will need to remain open to the possibility – the likelihood even – that as experience is gained with implementation and we grapple with the inevitable difficulties, and as we learn more about how the financial system is likely to operate in a new world, we will want to make occasional adjustments to the rules.

There are four possible reasons why this is happening now. The first is that we take Capt’ Glenn at face value that regulatory reform is out of control or close to it and institutions are close to overload. Unintended consequences are a very real danger so I can accept a certain amount of caution is warranted, sure.

That brings us the second reason. There is little caution in the degree of policy innovation apparent in other Western financial systems right now. Quantitative easing policies are re-inflating the US bubble economy again with both stocks and house prices now on the march upwards. Australian regulators may be in part continuing their jawboning campaign against such policy innovation in Australia’s national interest, given it is artificially inflating the Australian dollar and making life difficult for our traditional macroeconomic management tools.

But facts are facts and like it or not, as Ben Bernanke said yesterday, the innovation is going to go on. As such, although whining about it should be a part of  a thought through response, so should countenancing counterbalancing policies such as those recommended by Bernanke: macroprudential tools, capital controls etc. Otherwise your objections rather start to resemble those of Don Quixote.

The third reason we might be seeing this new caution from our regulators is that they are more worried about the approaching mining investment cliff than they are letting on. I have been taken aback by the RBA’s sudden re-embrace of housing inflation policies in the past few weeks. They clearly do not see any other immediate source of growth to replace mining investment and hence do not want to see any extra financial regulations inhibit an increase in credit growth.

The last reason is something of a check on the third. With a looming election that is in the bag for the Opposition, the regulatory community will be facing a new legislative arm of government. The incoming Prime Minister has already declared his intention to cut public spending and return Australia to the private debt growth paradigm championed under the Howard government. The incoming Treasurer has declared his intention to begin anew the financial reform process via a “Son of Wallis” inquiry. I support such an inquiry but only if it looks at the full gamut of options for banks, not just at how banking should be liberated to fulfill the new Prime Minister’s vision of  ramping up household debt. Some of those known to advise the new Treasurer on financial reform have just this outcome in mind. It is not a long bow to suggest that regulators are getting off some warning shots in advance.

So, it is perhaps no wonder that our regulators are calling for calm. They’re besieged by foreign forces intent on stripping Australia of its production base. They’re besieged from within by yesteryear’s credit cavaliers seeking a return to the glory days. And their real care, the economy, is facing its greatest challenge since the GFC.

Status quo may not look so very bad to a steady hand on the tiller.

David Llewellyn-Smith


  1. For mind, I think all four reasons are being discussed quietly, thoroughly and openly behind closed doors in the halls of the regulators.

    With an eye upon the distance between Sept 2013 and their expected retirement dates.

    I dont think any of them want to be holding the bag in this next “era”.

  2. Good thoughts. My major concern is the answer to the question: “When is the best time to reform a system?” When it’s gone/going wrong, or when it’s all calm /again? I’d suggest that changes of course are best embraced when danger is at hand; courses are rarely changed after riding out a storm. (assuming the ship hasn’t sunk in the meantime, hence the “Aren’t we doing a good job” speeches)

    • IMO Janet, best time is when everything is going well, public and private finances in good condition, and where reforms would do little or nothing to change trajectory of economy in short/medium term

      i.e 2004-2007

      What did we do instead? Paid off a relatively small amount of public debt by selling cash spinning assets to fund a small cohort of public servants pensions, almost eliminiating a robust source of savings for private pensioners (and pushing that potential savings onto banks in the form of deposits to fuel private debt bubbles)

      Oh and gave everyone – not just the middle class – a built in entitlement culture, an aversion to public debt of ANY KIND, and encouraged unlimited build up of private debt for ANY purpose (“the consumer knows best”)

      In other words, we squandered probably the best opportunity for real, lasting economic, financial and taxation reform – we were lazy and indulgent.

      The question is: How(ard) much did this hubris Cost(ello) us in the long run?

      • Chris, very well put. This links well to UE’s posting on The Debt that’s Killing the UK Economy.
        A Coalition win – UK macroeconomics, GOP social policy.

      • Exactly! Nothing happens during the good times, that should ( your – squandered probably the best opportunity for real, lasting economic, financial and taxation reform) Hence we should have taken the opportunity do ‘do something’ when things were bad, starting in 2008. Now we have the worst of all worlds. We didn’t reform anything when times were good; didn’t when things got bad and won’t when things get better!

  3. So much of what passes as debate and governance in Australia just seems to be, as Inspector Grimm would say, “namby pamby wishy washy hoity toity fannying about”!

    • Agreed.

      “What’s got our financial regulators spooked?”

      Ans: A lack of real financial regulation since at least 2000 onwards when this ponzi party really took off and somebody spiked the private debt bowl with credit crank.

      It’s only taken them 13 years to realize that, gosh, private debt does matter after all (despite their exhortations to the contrary) and that, golly, mining booms run in cycles.

      Captain chrome dome and co are clueless and if you think Joe Crockey’s inquiry will bring any significant reform to the financial sector in their first or second term, think again. Crockey is on the record last year as promising to bring no harm (reform) to the poor banks in at least their first term.

      All this regulatory talk reminds me of that old joke…

      “The only stress-test the bank regulators created for the bankers was when the bank president was asked about a personal lap dance in front of rest of board members at the bank regulator’s strip club.”

      A bit like when that Cyprus bank just got ‘stress-tested’ and passed within flying colours in just the last year or so. How’s that working out now – does it inspire your CONfidence in eCONomist regulations?

      LOL 🙂

  4. The thing that alarmed me most upon returning to Australia is that labor productivity is in free-fall. By this I naturally mean real productivity total tradable goods produced divided by available labor.

    It is possible that recent mining “investments” will balance our CAD but that is hardly the point, because this activity only creates the illusion of labor productivity while the real world capabilities of Australian industry continue their precipitous decline.

    From my perspective Bank regulation will continue to be a major issue until such times as Australia’s industries achieve world class levels of productivity. Productivity is the real asset that underpins all currencies, so if productivity is in free-fall then logically the countries currency should be in free-fall. IMHO without real labor productivity improvements our banks and regulators are all engaged in a futile game of moving a fig-leaf.