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Do we need an Everest above the Twin Peaks?

Do we need an Everest above the Twin Peaks?

July 9, 2014 4:08 PM | Posted by Ellicott, Thomas | Print this page

Our current Twin Peaks model relies heavily on the capacity of ASIC and APRA to manage systemic risks facing the financial sector, but is this approach sufficient? Indeed, one question that should be a central focus of the FSI is how we can best structure our regulatory framework to navigate macro-scale risks.

A recently released paper, 'Regulating the Australian Financial System' (Paper) (see here), prepared for the Australian Centre for Financial Studies raises some interesting possibilities. The Paper claims that the 'efficient markets' philosophy underpinning the Wallis approach to regulation showed significant failings during the GFC. Primary among them, the Paper claims, is its dependence on the unrealistic assumption that the risks of market failure are sufficient to incentivise banks to properly manage their risks. The GFC demonstrated that 'every prudentially regulated entity became too-big-to-fail, key borrowings were guaranteed by government, and deposits are now largely insured through the Financial Claims Scheme (FCS), all in contradiction to the Wallis Inquiry intellectual underpinnings.'

The Paper calls for our approach to prudential and macroprudential regulation to be reassessed in light of these concerns around systemic stability. The Paper's most significant recommendation for change in relates to the role of the Council of Financial Regulators (CFR), comprised of representatives from the RBA, Treasury, APRA, and ASIC. The Paper highlights the significant role the CFR played in co-ordinating our regulatory approach, and promoting relative financial stability in Australia through the GFC. However, the Paper points to the informality, and lack of regulatory functions separate to those of its members as weaknesses of the CFR that need to be addressed in order to harness its potential as regulatory overseer. The Paper proposes reforming the CFR by:

  • Giving the CFR a higher statutory profile;
  • Making the CFR responsible and accountable for macroprudential policy decisions (with implementation the responsibility of the appropriate agency);
  • Granting the ACCC all of the competition-related powers currently held by APRA and ASIC, and making it a member of the CFR; and
  • Appointing an independent non-executive chairperson.

It will be interesting to see whether the FSI will recognise the importance of the CFR in its Interim Report, due to be released on 15 July 2014.

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