Oh boy, is the RBA confused


The RBA’s Head of Financial Stability, Luci Ellis, gave a speech yesterday that included reference to macroprudential tools and made absolutely no sense:

At this point I should probably mention macroprudential policy. By now it should be clear that the Australian authorities’ views on this supposedly new toolkit are a bit different from those in some other jurisdictions. We view macroprudential policy as something to be subsumed into the broader financial stability framework. We recognise that quantitative restrictions were already tried in the 1960s and 1970s – and didn’t always work so well. And we think that it is entirely acceptable for prudential measures, macro or otherwise, to be wielded by the prudential supervisor, where they have the appropriately formulated mandate.

Of course a successful financial stability policy framework needs to operate across more than one kind of policy response. And that means it must cross several public agencies. That is another way in which financial stability policy is a multifaceted effort. These agencies need to not only coordinate, but to achieve a much deeper level of engagement. If the Australian experience is a guide, achieving close and effective engagement comes down to consistent mandates and genuine respect among equals. The rationale for carving out particular bits of the prudential framework under separate governance – which is what people mean nowadays by ‘macroprudential tools’ – appears to be that supervisors cannot be relied on to discharge their duties with system-level concerns in mind. That might be true in some countries, but not in Australia and at least some other countries. And it does not strike me as being particularly respectful of the expertise of supervisors. The last thing we would want is the situation shown in this cartoon, where the central banker, on the left, is assuming that he or she knows better than the prudential supervisor on the right (Figure 3).


The division between ‘microprudential’ supervision, narrowly focused on individual institutions, and system-wide ‘macroprudential’ supervision, never made much sense to us in Australia. You can’t promote the safety of institutions without considering their environment, which includes the financial system as a whole. If the supervisory agency really is microprudential in outlook, fixing its mandate might be needed; fixing its mindset is surely equally important. As I have explained on a previous occasion, in Australia, the authorities consider macroprudential policy to be better described as a state of mind than a suite of tools (Ellis 2012). Another way of describing this is as ‘macro-prudence’ rather than macroprudential (Littrell 2013).

That state of mind informs the design of the overall prudential framework. It does not need to be restricted to periodic responses when emerging risks are detected. A good example of what this means for prudential regulation is the prudential practice guide on mortgage lending, which APRA released in draft form recently. Instead of setting out prescriptive rules, APRA’s approach has been to empower bank boards to demand prudent lending policies and practices at their banks.

The Bank had flagged the release of this document in the last Financial Stability Review. While it is APRA’s policy and document, naturally the Bank and APRA shared views about it during the drafting process, and we fully support what APRA is doing in this area. It is calibrating the overall framework with a view to market-wide concerns, rather than responding from time to time with specific interventions.

This is not to say that some countercyclical tightening of prudential policy settings is never warranted. But if monetary policy responds appropriately to domestic conditions, and the prudential framework is sufficiently tightand there are no leakages through public sector involvement in absorbing credit risk, the set of circumstances in which a countercyclical prudential response to a credit boom is needed is much narrower.

I’m trying hard to unravel the reasoning here but it is not easy. I think it runs like this:

  • MP tools didn’t work in the 60s and 70s
  • MP is intrinsically about carving out prudential management for a discrete agency
  • that impugns all regulators as inept and leads to inter-agency conflict
  • it’s better to co-operate across agencies to deliver MP as an intrinsic goal
  • the recent piece of paper flapped about by APRA being an outstanding example

For a start, using the 60s and 70s as a reason for why MP is not useful now is false analogy, a fallacy in other words, it says nothing about the needs of the economy now. Nobody is arguing for permanent MP, after all, we’re suggesting it be used temporarily during the the extraordinary circumstances of a global currency war and to prevent a clear household debt imbalance, that the RBA has regularly acknowledged, from getting worse by accident. No such conditions existed in the 60s and 70s.

Next, why is MP represented as some kind of absolute regulatory turf war? The RBNZ hasn’t carved off the responsibility for it, nor hurt the self-esteem of regulators. It simply done it. The end.

The false assumption of regulatory division, another fallacy, makes the subsequent discussion really odd. Australia already has divided agencies even though it has no MP. If they are going to co-ordinate on making nice pieces of paper for bank boards to burn then why can’t they co-operate on MP?


In short, MP is represented as divisive, even though throughout most of the world it is not, and the existing divisions between agencies are used as a reason to not use MP, even though bridging those divisions is Ellis’ preferred method of regulation. Perhaps I’m missing something, but if you can make head or tail of that reasoning you’re a better logician than I am.

My advice to Capt’ Glenn is to cut through this nonsense and get on the blower to John Laker. That’s pretty much all it takes to rescue the economy. If they can’t do it then the government should merge them.

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.