Deputy Governor of the RBA, Guy Debelle, gave a good speech last night that sensibly provided support for Australia to adopt the structures of global financial re-regulation:
The BIS Committee on Global Financial Stability, on which I sit, has published some work on that recently, but there is more to be done. This is just one example where we don’t really know the full implications of the many interacting reforms underway.
That said, what I am not saying is that we should delay implementing some of these reforms in Australia, or pick and choose the ones the financial sector likes. I do not agree with that. We do not have that luxury.
As the papers we are discussing today highlight, the Australian system is part of the global financial system. The capital inflows are sourced from the global financial system. Given that, we don’t have the option to opt out when we feel like it.
The second point I’d like to make gets right to the heart of the ACFS’ agenda: Funding Australia’s Future. It’s a good question to ask. But I suppose I’m not sure how much further we can go with it.
The Australian financial system has undergone a severe stress test over the past five or six years.
And it has come through that pretty well.
Are there some things that can be done to make it function better and be more resilient?
Yes, and some of them have already been put in train over the past few years, so that the system now is more resilient than it was in 2007. Some of them are the reforms that are being done at the global level.
The fact that the problems didn’t happen here is also not a good argument for not implementing them. The reforms have been developed with the aim of increasing the resiliency of the financial system, which would seem to make them worthwhile in their own right. I don’t see the logic in not learning from what happened elsewhere rather than waiting to learn the lesson painfully ourselves. Learning from others’ mistakes is a lot less painful approach to life.
All very good. But Debelle goes on with the line of reasoning that has marked all Australian regulator responses to the crisis to date, that we are somehow different:
As the past few years show, the financial system is just that, a system, as Rod Maddock and Peter Munckton’s paper highlights. It is also a set of markets where there is demand and supply and a market-clearing price. As the system evolves and is stressed in different parts, other parts of the system adjust. As supply and demand changes, the price adjusts.
Does this always happen seamlessly or painlessly?
No. But broadly speaking, the stress test of the past few years shows that it does happen. There were a lot of people worrying throughout that period about where the funding would come from. But in the event, the system broadly speaking coped. The system here didn’t fail, and that is an important point to keep in mind in this whole exercise.
Prices did adjust. The exchange rate in 2008 was one of them. Deposit pricing was another.
Do markets always get this right? No they don’t, but it’s not clear what the better alternative is.
Regulation is motivated at least in part to address some of those deficiencies of markets.
Is regulation always going to get it right? Clearly not.
So that’s why we need to keep on questioning the appropriateness of the structure of financial markets and their regulation. It’s good to be asking the question in an environment when the system hasn’t failed rather than when it has, as is the case in other countries. And that I see as the value of the work the ACFS is doing, namely asking the question, is the system working as well as it can? In particular, talking about the system, as Rod and Peter do. In terms of the way forward, Kevin Davis had a slide in his presentation which basically mapped the path out. What are the broad structural forces shaping the financial system in the years ahead. Do we want those structural forces to play out? Are they well founded or are they the result of some distortion in the system? So in a nutshell: think about the system, think about the broad structural forces.
Exactly. Let’s think about the system. But how can we do so when the base assumption is that the Australian financial system was immune to the effects of the GFC and didn’t change as a result of it? True, there were no large bank failures here. And the banking system itself did not collapse, obviously. But the system as it was designed – the post Wallis Inquiry banking architecture – did collapse, completely. It had promoted ‘efficient markets’ and ‘light touch’ regulation along side of bank and non-bank competition with absolutely no prospect of bailouts.
What we got in the GFC was the collapse of competition and the non-bank market, and the near total guaranteeing of the private banking system. Our financial system managed to continue to intermediate credit but only because the tax-payer stepped in when the banking architecture disintegrated.
Don’t get me wrong. Regulators did a bang-up job during the crisis and deserve credit for that. And perhaps their ongoing support for the Basel III process is our regulators way of ensuring that much needed reforms to stabilise the system, so that individual banks can fail, go ahead. In Australia’s toxic political economy, any attempt at open reform may well get hijacked by credit interests, and perhaps our regulators have this in mind when they outsource the job.
At the same time, however, the RBA has engaged in near non-stop war games on behalf of the Australian banks in global markets and APRA is as opaque as the CIA. It seems almost quaint to mention moral hazard these days.
The strategy seems to be to let global re-regulation take its course and push back where it threatens a funding crunch. It might argued too that reforming the system is not the regulator’s job. That is the role of government, god help us.
But it’s a lose, lose. By ducking a robust debate at home, regulators may be keeping the wolves at bay but they’re also promoting the very opacity that invites them into the flock.
