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….