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.