APRA falls short on independence

ScreenHunter_1961 Apr. 04 16.03

By Martin North, cross-posted from the Digital Finance Analytics Blog

One interesting comment in APRA’s submission to the Financial Services Inquiry is found right in the summary. And its a biggy. APRA’s independence, a critical requirement as envisaged by Wallis, has been eroded.

“APRA has substantial independence from Government in most respects but, over time, constraints on its prudential, operational and financial flexibility have eroded its independence. As a consequence, Australia falls short of global standards in this area.”

“Over recent years, APRA has been subject to general ‘efficiency dividend’ requirements under which the Government has reduced agency funding with the objective of driving efficiency savings and improving its overall budget position. APRA acknowledges that it is for Government to determine the quantum of community resources it wishes to have devoted to prudential regulation. However, the mechanism of efficiency dividends is not well-suited to an industry funded regulatory agency. Continued efficiency dividends will ultimately compromise financial safety but make no contribution to the Government’s budgetary objectives.”

Is this more than a request for more funding by APRA, I think so!

They also recognise that many other factors, over and above differential capital rules between large and smaller players impact their relative performance.

“An overarching requirement to promote financial system stability in Australia was added in 2006. This is a clear mandate but one that requires a careful balancing act. With guidance provided by the February 2007 Statement of Expectations for APRA, the mandate remains appropriate in APRA’s view. The crisis has dispelled any simplistic notion that there is a ‘trade-off’ between financial safety and sustainable competition. Strong financial institutions make strong competitors. APRA’s prudential requirements may affect the relative position of competitors in particular regulated industries by imposing differential capital costs, but other factors – such as scale, business models and operating and funding costs – are likely to have larger impacts on the competitiveness of smaller institutions.”

Things could get interesting….

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. This is the right government at the right time for the banking sector. Commitment to light touch regulation, shrugging of the shoulders at international commitments, sympathetic to business. Who better to design the regulatory framework of banking system than commercial banks?

    Meanwhile, APRA would happily see banks generate a 10% return on equity while shareholders bank a measly 4% dividend yield, all in the name of satisfying an overwrought cohort of myopic European central banker policy wonks.

    This was the GFC (ex. Aust), after all. Why tie ourselves in knots over the excesses of a bunch of drunk Irish and inbred Icelanders ? APRA can go hang.

  2. Spleenblatt your comment is right out the IPA/LNP mantra songbook.
    Sinodinos shows exactly why regulation of any financial service industry is requires,{I can`t recall,I answered answers etc}
    So crooks will now again give investment advice to people to get ongoing commissions from those investments that serve the crooks best and the investors can go hang is your obvious point.
    Banks regulating themselves,c`mon that`s like allowing convicted child molesters to mind kindergartens.
    We are very close to the GFC ramping up into meltdown as nothing has changed and the CDO laden derivative trading is larger now than pre GFC only now it`s hyper HFT.
    This global banker caused financial crisis is now in it`s 7th year as the excreta hit the internal fan a year earlier that Wall Street.

    • I used to think the IPA was a venal clique of misanthropic conservative academic dullards too shiftless to get proper jobs with the tobacco, media and mining companies for whom they spruik, but I am increasingly of the view that they are in fact engaged in some kind of high concept performance art. They’re actually pretty funny !