The Australian Prudential Regulation Framework - Case Study Example

The Australian Prudential Regulation Framework Name Institution Introduction The Global Financial Crisis that was witnessed in 2008 was among the difficult global financial crises that had significant impacts of various economies including Australia (Gruen, 2009). This is because the 2008 financial crisis was the largest financial crisis after the Great Depression. This financial crisis reshaped the ways in which banks in various parts of the world invested in their funds. Additionally, financial crises such as the sub-prime credit crisis affected the ways in which assets were valued by different banks in the world (Mule, 2008). This implies that most of the time financial crises had an effect of disrupting the flow of funds by different banks in the world. Among the major effects of financial crises is the instability of banking institutions in various parts of the world. Different banks in various countries devise different ways of overcoming the effects of financial global crises (Laker, 2009). The 2008 financial global crises were among the financial crises that were survived by some of the Australian banks using various regulation frameworks. Among the regulation frameworks in Australia is the Australian prudential regulation framework (McDonald & Morling, 2011). This paper will assess the Australian prudential regulation framework and its importance in the Australian financial system and economy. In addition, the paper will focus on how the Reserve Bank of Australia dealt with the 2008 Global Financial Crisis. The Australian Prudential Regulation Framework This is a financial regulation framework, which was designed in order to guide banking customer tolerance for various financial institutions insolvency when operating in other economies. This means that this regulation framework aims at adding stability to the financial system of Australia (Laker, 2009). This is because some customers in financial institutions are not able to make sound judgements on the ability of a bank to meet their demands and requirements. The Australian Prudential Regulation Framework is a regulation framework that is designed in distinct industries in such requirements as deposit taking financial institutions, insurance companies that are established under different regulations. Therefore, the Australian Prudential Regulation Framework is meant to reduce the possibility and negative effects of failure of various regulated entities in Australian financial system. The prudential regulation framework comprises of different elements (Ahrend et al., 2009). Prudential Regulation: In this element, financial firms in Australia are required to conform to a certain set standards. This means that prudential regulation is responsible for standard setting, which guides firms into acceptable conduct that will promote sound management practices in order to minimise financial risks. Prudential Supervision: This is important in the facilitation of detection of financial problems during g their initial stages in firms that are regulated by the framework. This will help the framework to make the firm comply and conform to the regulations of the framework. Comprehensive interventions and strategies used in resolving financial crises: This element is responsible in handling the regulated institutions in times of financial difficulties. This include offering directions to companies and even advising companies to replace their management systems in order to attain sound financial management in regulated firms. Additionally, it can influence the merging of a failing company with a well performing one or transfer the company completely to the healthy and performing company. Powers to apply winding up: This means that the regulation framework has the ability to wind up a failing company and distribute all its assets in times of financial difficulties. This is done to prevent the losses of the company from become unbearable. However, there is a challenge in this element due to lengthiness and complex nature of the winding up process of failing companies in financial crises. The Need for the Аustrаliаn Рrudеntiаl Rеgulаtiоn Framework There is the need for the framework in order to ensure sound management system in different financial institutions in Australia. Some firms that are not regulated have poor management system that result in liquidation of these financial institutions. The prudential regulation framework ensures that companies that are regulated are not allowed to go into liquidation without any proper cause. This implies that the framework ensure that assets of a poorly performing firm are transferred to another firm before the assets can cause more losses. Without financial standards, there is a likelihood of financial firms engaging in unacceptable behaviours hence misleading customers. The confidence of customer in a financial system is guaranteed by the existence of the regulation framework. This is important in maintain a stable economic system in a country such that in times of financial crises, the banks in a country will not be affected too much (Ahrend et al., 2009). In addition, there is the need for response regulations in times of financial crises. This means that the prudential regulation framework is necessary since it acts as a response regulation that is able to respond to financial difficulties in regulated firms. This is crucial in ensuring that a country is able to survive financial difficulties. For example, the prudential regulation framework had the mandate to replace the management system of a regulated firm in cease it is poorly managed in terms of financial systems. The Australian prudential regulation framework is critical since it offers supervision to financial institutions in the country. This ensures that financial institutions in Australia are able to avoid any mismanagement and financial errors that may lead to financial instability. Through various monitoring and response mechanisms, the Australian prudential regulation framework help to stabilize the Australian financial system in case of financial crises as that observed in 2008 (D’Aloisio, 2009). Therefore, the Australian prudential regulation framework is an additional external scrutiny to regulated financial institutions including the mandate to offer guidelines to financial institutions in times of financial difficulties (Pearson, 2009). How the Reserve Bank of Australia dealt with the 2008 Global Financial Crisis The 2008 Global Financial crisis was among the financial crisis that shook the economy of many countries in the world including United States and Australia. Although many countries in the world were severely affected by the 2008 Global Financial Crisis, Australia was able to manage this crisis with the help of monetary and financial policies in the banking sector. The Reserve bank of Australia developed and implemented various monetary policies that made it possible for the country to avoid the impacts of the financial crisis. This implies that the reserve bank of Australia was able to regulate and supervise the financial institutions in the country during g the financial crisis. This was evident since none of the Australia banks failed during the time of the 2008 global financial crisis (McDonald & Morling, 2011). Financial Policy Response The Reserve Bank of Australia was able to respond to the crisis by ensuring that there in continued liquidity in the Australian banking sector as well as in the foreign exchange markets. This is because during global financial crises, the lack of liquidity in the financial sector is a key factor which includes both long term debts and short term debts (Kearns, 2009). The Reserve Bank of Australia ensured that there was an expansion of the range of securities that were accepted by authorised deposit taking financial institutions, which acted as collateral for the reserve bank of Australia’s exchange settlement facility. This facilitated the Reserve Bank of Australia to enter into a swap with the United States of America Federal Reserve in a bid to elevate the pressure that was mounted on the United States dollar. Therefore, the role of the Reserve Bank of Australia was that it provided direction in terms of financial policy response in order to deal with the financial crisis (McDonald & Morling, 2011). Monetary Policy There are different monetary policies that are in place in different countries. During financial crises, banking systems in these countries are crucial in determining the ability of the country to control the crisis. This implies that banks need to adjust the monetary policies according to the changing financial circumstances (Henry, 2011). The Reserve Bank of Australia was able to use different monetary policies in order to respond to the 2008 global financial crisis. This was done through altering the lending rates in the Australian banking sector in order to control the liquidity ratio. In addition, the regulation on the lending rates also controlled the cash flow in the Australian economy. This enabled most individual in Australia to maintain their regular loan repayments plans. In maintaining customer confidence on the banking system, the Reserve Bank of Australia was quick at cutting the interest rates in order to maintain the customers. This ensured that there was stability in the banking sector in Australia despite the financial crisis that was proving difficult for most countries (McDonald & Morling, 2011). Conclusion The 208 Global financial crises were among the financial crisis in the world that was survived by the Australian banking system. In order to maintain a stable banking system, there is the need to engage a regulation framework that will ensure supervision of the financial system in times of financial difficulties. The Australian prudential regulation framework guides banking customer tolerance for various financial institutions insolvency when operating in other economies. This regulation ensured that the banking system is able to maintain stability and retain customer confidence. The reserve bank of Australia was able to manage the 2008 global financial crisis by maintaining a stable financial system through the use of financial response policies and monetary policies that maintain financial stability in the Australian banking sector. References Ahrend, R., Arnold, J., and Murtin, F. (2009 December 1). Prudential Regulation and Competition in Financial Markets. OECD Economics Department Working Papers, 735. Retrieved from http://www.oecdilibrary.org/docserver/download/5ks5q6ml96ls.pdf?expires=1373315172&id=id&accname=guest&checksum=E6A5FEE7DB051B0488139E91B36797EF D’Aloisio, T. (2009 May 29). Regulatory issues arising from the financial crisis for ASIC and for market participants. Australian Securities and Investment Commission. Retrieved http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/sdiaspeech-chairman-May-09.pdf/$file/sdia-speech-chairman-May-09.pdf. Gruen, D. (2009 June 16). Reflections on the Global Financial Crisis. The Sydney Institute. Retrieved from http://www.thesydneyinstitute.com.au/podcast/reflections-on-the-global-financial-crisis/ Henry, K. (2011December 15). The Australian Banking System — Challenges in the Post Global Financial Crisis Environment. Australasian Finance and Banking Conference. Retrieved from http://archive.treasury.gov.au/documents/1921/HTML/docshell.asp?URL=ken_henry_speech.htm Kearns, J. (2009 June). The Australian Money Market in a Global Crisis. Reserve Bank of Australia Bulletin, 15-25. Retrieved from http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-2.pdf McDonald, T., & Morling, S. (2011). The Australian economy and the global downturn Part 1: Reasons for resilience. Economic Roundup, 2. Retrieved from http://www.treasury.gov.au/PublicationsAndMedia/Publications/2011/Economic-Roundup-Issue-2/Report/The-Australian-economy-and-the-global-downturn-Part-1-Reasons-for-resilience. Mule, S. (2008 October 25). Australia and the Global Financial Crisis. Stubborn Mule. Retrieved from http://www.stubbornmule.net/2008/10/australia-and-the-gfc/ Laker, J. (2009 August 19). The Global Financial Crisis — Lessons for the Australian Financial System. Australian Economic Forum. Retrieved from http://www.apra.gov.au/Speeches/upload/03-Aust-Economic-Forum-Opening-Remarks-19-Aug-09.pdf. Pearson, G. (2009). Financial Services Law and Compliance in Australia. Cambridge: Cambridge University Press. Read More