Time to lift the veil of secrecy around APRA

The Australian Prudential Regulatory Authority (APRA) is currently the single most important macroeconomic manager in the country. It is more important than the RBA. It is more influential than Treasury. Yet none of us even know what it does, nor what its mission is, nor how it interacts with the banks. APRA is an enigma, wrapped in a mystery, surrounded by smoke and it is time that it ended.

This is not APRA’s fault. It has not sought greatness, quite the opposite, but it has been thrust upon it regardless.

The government, RBA and Murray Inquiry have all refused, very mistakenly, to address Australia’s broken “twin peaks” financial regulatory structure as it has lost relevance in a post-GFC world of falling global interest rates and currency wars.

The first few years of this failure were disguised by the second coming of the mining boom which demanded higher interest rates and currency. Yet, even then it was obvious that the commodity price boom was massively over-inflated and part bubble, and that Australia needed fiscal and/or monetary reform to prevent its currency from overheating. That could have taken all kinds of forms – such as a mining tax and sovereign wealth fund, or capital controls such as APRA limiting bank’s offshore borrowing much more than they did – but nothing was done instead.

However, since the mining bust began in 2011, this failure has come completely into the open as Australia has fought a twin battle between an overly high currency on one hand and an insane property investor bubble on the other while the RBA was forced to cut interest rates. Five years on and here we are with the same problem, desperately in need of a lower currency, still cutting interest rates, and still held back by a wild specufestor class.

APRA has been offered no support during this process. The RBA stupidly campaigned against macroprudential tools for years while this problem grew up around it, offering APRA no institutional space in which to operate. Since macroprudential was launched it has largely washed its hands of the problem, palming it off to APRA and leaving it alone to handle it. Governments of the day have been even worse, offering zero rhetorical coverage to APRA and when covering the territory, such as in the Murray Inquiry, have actively shied away from the “twin peaks” failure.

Now APRA is operating in a wilderness of our own making, carrying the full load not only of having to police bank balance sheets, but to determine the appropriate levels of credit distribution in the economy and to control the value of the currency. That is not an exaggeration, I’m afraid.

Yet APRA has no constitution for any of this. It has no mandate for which metrics to focus on and what to counter-balance against them. Is its goal price stability? Does that include asset prices? Is it supposed to factor the currency into those calculations? Where do prudential rules fit that matrix? Should it be operating in secret or adopting a much more “forward guidance” role to sway market views?

During the GFC, the secrecy surrounding APRA was perhaps understandable.  Banks were under assault and a certain amount of secrecy was in the national interest if for no other reason than to prevent individual banks from suffering runs in a panicked environment.

But today that no longer holds. APRA is now making huge public policy judgments in a vacuum. Furthermore, we have no benchmarks against which to measure its decisions. It needs some more governance and accountability to answer to the Australian people, not just a council of pretty useless regulators that have failed to prepare their own institutions for this impasse.

APRA acted far too slowly on the wild investor bubble of 2012-15. But it did not have the space in which to move and did eventually install macroprudential rules that worked far better than most would have thought possible. Credit slowed dramatically right where it was supposed to without blowing up housing markets and it enabled the RBA to cut rates just five months later, preventing the currency from blasting through a rebalancing-destroying 80 cents and higher.

But it needs to tighten again now. APRA’s original investor lending limit was obviously too high. Banks are moving to fill it up again and there is no way to represent this as anything other than reckless, as Moody’s explicitly warned yesterday.

That nobody knows whether APRA is actually going to do anything is a major problem. The RBNZ has both prudential and interest rate responsibilities in its care and, as it openly signaled to markets yesterday, it is mulling the right mix to bring about a further slowing in investor credit using both.

New Zealand is managing a boom, Australia is managing a bust. So the importance of what APRA does next cannot be overstated nor over-explained. It ought to be tightening to prevent any risky upsurge in investor activity and enabling the RBA to cut interest rates repeatedly to address disinflation by lowering the currency. The efficacy of doing so can be radically boosted by doing it in a transparent manner. Instead we have Australia’s richest man visiting the regulator to tell them God only knows what to his advantage.

It’s time to rip the veil of secrecy from around APRA. APRA itself should lead this with its own series of forums and debates around how it will manage macroprudential in future. Waiting for politicians is hopeless. The diffusion of responsibility with the RBA ensures it will do nothing. Australia’s leading economists are busy taking silly pot-shots at the RBA or APRA within dated “twin peak” frameworks as if the latter has not already inherited the above burden.

It’s too late for any of that. APRA is now front and square Australia’s leading macroeconomic manager. Let’s acknowledge it and lend it a Goddamned hand.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. There is no way like the Australian way.
    When the UK regulator was found to be ‘asleep at the wheel’ a few short years back, it was wound up and it’s regulatory structure revamped and split between a newly established regulator and the Bank of England.
    Following a recent senate enquiry here where APRA was castigated for its performance it was first starved of funds by the government before having cash thrown at it to try and kill off calls for a royal commission into the Australian financial services industry.

    Anything to avoid doing the right thing, with the same incompetent time servers in charge.

    Australia. Take it or leave it.

  2. Ronin8317MEMBER

    The analogy to the scene in ‘The Wizard of Oz’ is brilliant. When you open the curtain, you’ll just find the ‘Great Wizard’ is just a guy working at a circus.

  3. Excellent HnH,

    This is a very important debate and there is no better time than the election as the responses of the candidates to the issues raised are highly relevant to assessing their fitness for government.

    APRA has the powers but is ham strung by the widely held ideological obsession – that the government should leave lending decisions to the banks. As you have noted the RBA has been a prime offender in promoting the idea there is no real role for credit regulation – aka Macroprudential. But then RBA has plenty of support in this view from the neoliberal peanut gallery which constitutes our mainstream commentariat. Most of them are so unaware they don’t even know they are promoting a very specific and radical economic agenda.

    A preference for a limited role for government in the regulation of credit is not a problem – there is certainly no role for govt loan review officers- but it is a problem in a system where bank lending creates public money.

    If banks were merely intermediating real public money they might be allowed to make all the dumb loans they want because those decisions would not involve the creation and destruction of a public money equivalent.

    But they are not mere intermediaries and thus their credit creation is highly economically significant – as well as very profitable – and that is why we have APRA.

    So all those small govt types that reckon APRA should limit its interventions need to argue for less private fiat creation and more public fiat creation.

    An excellent read on the issue of the dynamics between controlling the target rate and controlling credit creation is “Princes of the Yen” by Werner especially the bit which covers the early 90s when the BOJ was fighting for power with the Ministry of Finance.

    At that time the Ministry controlled the target rate and BOJ controlled the shadowy world of credit creation (ironically a bit like APRA). A couple times when the ministry cut the target rate the BOJ screwed down credit control to neutralise the effect of the cut. Eventually BOJ won the war and took control of the target rate and built a moat of “independence” around its power.

    Sound familiar?

    Arguably we have a different problem with a compliant or RBA captured APRA turbo charging RBA target rate cuts by letting the banks go nuts borrowing off shore.

    What is prudential about letting the banks go nuts – a blank cheque swap line from the Fed may be the answer to that.

    RBA dismissal of MP is in a sense a dismissal of APRAs powers.

    Institutional power struggles may also be a factor. Giving the RBA APRAs powers when it is in the grip of neoliberal obsessions and worse – banking myths – might be a disaster.

    Best would be to roll APRA back into govt, reduce Pseudo fiat creation by private banks, narrow greatly the charter of the RBA to advising the govt on the fiscal deficit/surplus required to avoid deflation and inflation – and buy and sell 0% bonds from the govt to achieve the required deficit or surplus.

  4. Even StevenMEMBER

    What’s APRA’s annual budget? Do they have the resources to do what is being suggested?

    • Probably not – and that maybe no accident.

      Roll it back into Treasury where money should be no object.

      Let the RBA explain their objection to credit creation regulation (Macroprudential) to the Minister.

  5. fishbulbMEMBER

    “During the GFC, the secrecy surrounding APRA was perhaps understandable.”

    APRA is an institution funded by government (i.e. Australian citizens) it is never understandable.

    Fiat justitia ruat caelum – Let justice be done though the heavens fall.

    • I agree, but I think HnH means that if APRA was open about it more banks would have collapsed on the confidence fairy

  6. “”and did eventually install macroprudential rules that worked far better than most would have thought possible””

    Who is your dealer HnH ? I’d like some of what you’re smoking for the long weekend. It seems top shelf

    • HnH’s definition of MP working seems to be when we see “only” 10% YOY growth in house prices.

      • The drama is without a replacement the whole thingy goes quantum and trade shocks become a global event, hence the need for something like a JG to put a floor under it all whilst transition takes place.

        Disheveled Marsupial… its not really any different to GD where all sundry that made packet in the run up, then grew roots and were quite happy to let vast swaths of humans take the brunt of the blow back from their previous deeds, until the weird went pro and then went Hayeken strange, until one of their own showed them the horses head usually reserved for the troublemakers…