Murray has endorsed macroprudential

From Callam Pickering:

The one glaring problem with the Financial System Inquiry is that it didn’t push hard for the introduction of macroprudential policies. That takes the heat off both the RBA and APRA.

The truth is that higher capital requirements — combined with higher risk weighting on mortgages and tax reform — would have a similar (potentially larger) effect as macroprudential policies. In the long term financial system and tax reform is clearly the better approach to creating an efficient and sustainable housing and financial sector, but these reforms will take longer to implement.

That’s right. Murray’s principle recommendations are macroprudential. APRA is now free (and is being urged) to implement higher capital requirements. They do not require anything from government to go ahead. This is basically the model of MP invisaged by Prof Ross Garnaut.

A more interesting question is whether or not APRA will still act on specific areas of risk such as interest-only loans. These are a menace, as the US bust showed, and are surging. Murray did not mention them, being too granular, but said the following on MP more particularly:

The global financial crisis (GFC) prompted policy makers and regulators around the world to reconsider their approach to maintaining financial stability. Some countries at the epicentre of the crisis have since expanded their prudential perimeters and adopted more formal and centralised institutional arrangements. This includes establishing single entities with responsibility for macro-prudential regulation. Australia has long adopted what could be called a ‘macro-prudential’ approach to supervision under the rubric of financial stability. Yet, Australia’s institutional structure is relatively informal and decentralised. The Reserve Bank of Australia (RBA) and APRA each have responsibility for financial stability. However, most macro-prudential tools can only be deployed by APRA. This places a strong premium on cooperation between the two agencies.

Against the background of developments overseas, the Inquiry has considered whether Australia should change its institutional arrangements for making and implementing financial stability policy.

However, the Inquiry does not see a strong case for change in this area. Although approach has advantages and disadvantages, alternative institutional approaches are yet to be tested — as indeed is the effectiveness of many macro-prudential tools. For this reason, the Inquiry recommends no fundamental change to the current institutional arrangements for financial stability policy and no change to the prudential perimeter at this time.

That is neither here nor there and APRA will still be free to raise capital requirements for specific loans if it sees fit.

David Llewellyn-Smith
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  1. Despite all the talk I can see nothing that would suggest there is any appetite in the mainstream for any policy, including Macroprudential, that may have negative impact on house prices.

    What would we have if we didn’t have the ‘good’ news of the wealth effect…

      • It’s words, talk. Still see no mainstream appetite. Discussion, debate, possibly, but I’ll believe the implementation when I see it.

      • We will see more of the same – IPCC report (thanks, we will certainly do our “bit”), FIRB – (thanks, we will certainly do our “bit”), Tax – (thanks, we will certainly do our “bit”), Banking- (thanks, we will certainly do our “bit”), Health – (thanks, we will certainly do our “bit”), Gonski – (thanks, we will certainly do our “bit”), NDIS – (thanks, we will certainly do our “bit”)…Banking (thanks, we will certainly do our “bit”)

        Do you SERIOUSLY expect anything pro-active to happen ? Honestly ?

        Something will happen after it has collapsed, Pyramid style we will all have a “levity” – however the notion that intelligent foreward thinking actions will be taken which require hard decisions to be made which will impact on the punter is – I personally feel – borderline delusional.

        There is absolutely no option based on the evidence to come to any other conclusion – it is a 100% fact based set in stone reality – they will do nothing of any consequence.


        These people are ENTIRELY beholden to the highest bidder – or anyone with pockets.

        No – we will get the correction, we will get the crash. All we are debating right now is how this is going to be dealt with – by the people, the taxpayers who are left to fork out – or the wealthy who have lost their investments.


      • Lev: +1000000000

        Until there is actually reform, the last decade’s experience indicates they will prevaricate but do precisely nothing that will make any material difference.

        How are those Henry reforms going?

        At some stage in the past, I would probably have said that I would like to be proved wrong. However, having now moved my family and all of my assets out of Australia, that is probably a lie. Now I would truthfully like Australians to lie in the bed that they have made, and so far, they have continued to make that bed.

  2. Sorry i dont have any confidence that anything is going to be implemented. Not this nor any of the recommendations from the Murray inquiry.
    There does not seem to be any appetite from any relevant authority to want to actually do anything. I suspect a big part of it is simply not wanting to be blamed if something unpalatable happens, like house prices moderating.
    So going forward i guess we can expect the relevant authorities to be like FIRB, who either got a nod and a wink from Krudd and co to not do anything or realized no one noticed they did nothing and where content to collect their pay cheques without attracting any attention from anyone.

    Maybe 10 years from now a senate inquiry will condemn them for their inaction like firb. But only after they drop the ball for a good decade or so.

    • No action will be taken and we will feel the consequences within 24 months (12 months in my book – it is going to hit us faster than we like to believe).

  3. Yep, it’ll be like the Henry review. Just a good thing for economic journalists and ourselves to talk about.

  4. Murray could have endorsed the second coming in the report, it doesn’t matter; I agree with the comments made above, very little (if anything) will be put into motion.

    Many will view this as a case of the drugs being worse than the disease.

    No matter that the disease is terminal.

  5. I like it when I start a vein of comments so positive and uplifting…

    If it wasn’t true, it would be funny.

  6. Yep, nothing is going to happen. You cannot make changes if it changes property going up up up up!
    We in oz are sooooo special that property goes up up up. Actually what else do we do? (That’s not a sarc question).