The Australian Prudential Regulation Framework - Example

Running Head: THЕ АUSTRАLIАN PRUDENTIAL RЕGULАTIОN FRАMЕWОRK Thе Аustrаliаn Prudential Rеgulаtiоn Frаmеwоrk Name Course Institution Date Introduction Global financial crises like the sub-prime credit crisis left many economies across the world dented with grave effects that are still being felt to date. Following the onset of the financial crisis in 2008, major economies in the developed world bore the greatest brunt. The impact of this financial crisis was also felt by emerging economies and the developing world. This financial crisis can be considered as a lesson for financial institutions and countries as a whole across the world. As a result of financial crises like the sub-prime credit crisis, many countries and financial institutions instituted structure policies and regulations to cushion their economies or finances from the shock and negative impact of potential financial crises (United Nations, 2009; Beckett, 2012). A number of countries such as Australia have introduced different frameworks on which preparedness mechanisms can be adapted in the event of another reoccurrence of financial crisis in future. In Australia, the “Australian Prudential Framework” was instituted in a bid cushion the economy from the shocks and negative impacts of financial crises like the sub-prime credit crisis (Black, 2005; Thangaraj &Chan, 2012). This essay seeks to critically examine the Australian prudential regulation framework. Foremost, it will provide an overview of this regulation. Secondly, it will discuss the need for this framework. Subsequently, this essay will explain how the Reserve Bank of Australia addressed the 2008 Global Financial Crisis. Overview of the Australian Prudential Framework Generally, the Australian prudential regulation framework is very broad since it incorporates distinct regulations for various markets or industries. Due to the limited scope of this essay, this section will focus some of the key aspects of this regulation framework. Prudential regulation framework in Australia centers of financial systems such as general insurance companies, life insurance companies, superannuation funds and deposit-taking institutions. This regulation is enforced by the Australian Prudential Regulation Authority (APRA) which focuses on ensuring that under all rational circumstances the financial promises that regulated bodies make are met in competitive, efficient and stable financial markets. The Australian prudential regulation framework revolves around different industries, with the requirements for general insurance companies, life insurance companies, superannuation funds and deposit-taking institutions provided under different legislation. Nevertheless, some legislation particularly those regarding share holding in financial institutions except superannuation funds and those underpinning the regulator, the (APRA) apply across all financial sectors. In essence, one of the underlying principle of the Australian prudential regulation framework is that regulatory intensity should be different in every market and should be based on the kind of market failure and risk involved in that particular market. Moreover, this regulation framework conveys that regulatory intensity should take into account the historical development of the regulation in order to suit the previously sole markets which have turned to convergent markets for financial products (Australian Government :The Treasury , 2013; IMF, 2006). The prudential regulation framework in Australia is risk-based and is founded on consultative dialogue between regulated bodies and supervisors. The risk-based approach of this framework upholds that the board and management of supervised financial bodies are largely responsible for implementing financially sound practices in their respective institutions. In case difficulties arise, the regulator is to provide intervention proportionate to the weight or nature of the problem and the level that the problem poses risk to the industry and policyholders(IMF, 2006). Under the Australian Prudential Regulation Authority Act 1998 (Cth), APRA has the responsibility of prudential supervision. Generally, this regulation provides that the key role of the APRA is to ensure soundness and safety in business practices and risk management among the financial institutions that it supervises. Its key roles include the establishment of prudential standards, assessing the application of new licenses, assessing the soundness of financial practices used in supervised institutions and implanting crisis response where necessary(RBA, 2012; APRA, 2012). Commonwealth Consolidated Acts, 1998). APRA has a wide range of supervisory powers which range from failure management to corrective and preventative powers. Its failure management powers entail the ability to institute the transfer of a business entity experiencing financial distress to a strong institution. APRA also has the power to initiate external administration of a business and a wind-up. APRA’s corrective powers entail instituting legally enforceable undertakings such as directives and agreements between market participants and APRA. In some serious circumstances APRA poses the power of seeking court injunctions. Its corrective powers include propriety, testing the fitness of financial institution and authorizing framework (IMF, 2006; APRA, 2012). The prudential framework for deposit taking institution is provided under the Banking Act 1959. This framework provides two important standards for liquidity requirements and capital adequacy. These standards include; ADI Prudential Standards 110(APS110) and ADI Prudential Standards 210. ADI Prudential Standards 110 touches on authorised deposit taking institutions (ADI’s) such as building societies, credit unions and banks that are incorporated locally. Under these standards, ADI’s are expected to hold capital as a buffer to cushion unanticipated losses that come as a result of its business activities and market fluctuations. This in turn enables ADIA’s to operate in a smooth and viable even in the course of difficult financial times. Under APS110, APRA has the responsibility of ensuring that ADI’s have a minimum risk –based capital adequacy ratio of 8% at the consolidated and stand-alone level. Half of this capital should qualify at Tier1 capital (Australian Government: The Treasury, 2013). On the other hand, APS 210 touches on the liquidity requirements of ADIs. This standard focuses on ensuring that all ADIs have adequate liquidity in order to meet obligations as they come in different operation circumstances. Under APS 210 APRA has the responsibility of ensuring that ADI’s implement appropriate liquidity management practices and have adequate capacity to meet its obligations under normal or tumultuous financial circumstances (Australian Government :The Treasury , 2013). The need for Australian Prudential Framework Today’s market or business environment is characterised by increased competition, fluctuations in price structures and unprecedented changes. These factors heighten the risks of financial systems and may bring about instability that may various players in the market and the performance of other industries. The stability of financial systems is a very important factor in the performance of an economy therefore, governments have to put into place necessary measures in order to ensure the stability of financial systems. Prudential regulation framework plays a significant role in ensuring the stability of financial systems. Australia’s prudential framework particularly provides adequate legal provisions that aim at ensuring that under all rational circumstances the financial promises that regulated bodies make are met in competitive, efficient and stable financial markets. These standards focus on ensuring that financial systems have adequate liquidity and capital in order to meet obligations in normal and tumultuous market conditions. The standards set in prudential regulations focus on balancing objectives of financial efficiency, safety, competition, competitive neutrality and contestability in order to enhance financial stability in Australia. Thus prudential regulations are important in ensuring the stability of financial systems (Australian Government: The Treasury, 2013; Polizatto, 1990). Some financial systems have a large number of customers or stakeholders who may be unable to make sound and informed decisions regarding the capacity of an institution to keep its obligations and promises in future. The implications of unfulfilled promises by financial systems may bring about market failures and dent the finances stakeholders. Prudential regulations play a critical role in protecting the finances of stakeholders by ensuring that financial systems meet their obligations regardless of market conditions. For instance, under the Australian Prudential Regulation Authority Act 1998, APRA has the responsibility of prudential supervision by ensuring soundness and safety in business practices and risk management among the financial institutions that it supervises. Its key roles include the establishment of prudential standards, assessing the application of new licenses, assessing the soundness of financial practices used in supervised institutions and implanting crisis response where necessary. Hence, prudential regulations protect the interests of stakeholders (Australian Government: The Treasury, 2013). In the course of unprecedented market fluctuations, financial institutions face numerous challenges that may lead to insolvency. When dealing with insolvency, prudential framework seeks to provide feasible and convenient ways of managing a proper exit in order to prevent financial institutions from making additional loses (Australian Government: The Treasury, 2013). Reserve Bank of Australia and the 2008 Global Financial Crisis The Reserve Bank of Australia (RBA) main role is to ensure the stability of the Australian economy by setting rates in order to sustain a strong and efficient payment system. Following the emergence of the global financial crisis in mid 2007, central banks worldwide responded to this financial downturn by taking several unprecedented measures. The Reserve Bank of Australia (RBA) implemented the first considerable macroeconomic policy in response to the global financial crisis by reducing interest rates from 7.25% points to 6%. Moreover, as international money markets became dysfunctional, RBA provided timely liquidity to financial institutions so as to enhance their growth and financial stability (Cusbert & Rohling, 2013; RBA, 2013; Thangaraj &Chan, 2012). Conclusion Generally, this essay has critically examined the Australian prudential framework and discussed the needs of this framework. In addition to this, it has explained how the Reserve Bank of Australia addressed the 2008 Global Financial Crisis. The findings of this essay depict that, Australia’s prudential regulation framework is enforced by the APRA which focuses on ensuring that under all rational circumstances the financial promises that regulated bodies make are met in competitive, efficient and stable financial markets. This framework plays a significant role in ensuring the stability of financial systems, protecting the interest of stakeholders and providing feasible and convenient ways of preventing financial institutions from making additional loses. Additionally, this essay highlights that following the emergence of the global financial crisis in mid 2007, the Reserve Bank of Australia reduced interest rates from 7.25% points to 6%. Furthermore, it provided timely liquidity to financial institutions in order to improve their growth and financial stability. References Australian Government: The Treasury (2013). Appendix 3.1: Australia’s Prudential Framework. Retrieved on July 6 2013 Australian Prudential Regulation Authority (APRA) (2012). Australian Prudential Regulation Authority. Retrieved on July 6 2013 Beckett, I. (2012). “Financial regulation in Australia since the GFC”. JASSA: The Finsia Journal of Applied Finance 3: 20-24. Black, J.(2005). “Managing Regulatory Risks and Defining the Parameters of Blame: A Focus on the Australian Prudential Regulation Authority”. Law and Policy 28(1):1-30. Commonwealth Consolidated Acts (1998).Australian Prudential Regulation Authority Act 1998 - SECT 8. Retrieved on July 6 2013 Cusbert,T. & Rohling, T.(2013). Currency Demand during the Global Financial Crisis: Evidence from Australia. Research Discussion Paper 2013-01. Retrieved on July 6 International Monetary Fund(IMF)(2006). Australia: Financial Sector Assessment Program - Detailed Assessment of Observance of Standards and Codes (EPub). Washington DC:IMF. Polizatto, V.(1990). Prudential Regulation and Banking Supervision: Building an Institutional Framework for Banks. Washington: World Bank. Reserve Bank of Australia (RBA) (2012). Australia's Financial Regulatory Framework. Retrieved on July 6 2013< http://www.rba.gov.au/publications/annual- reports/cfr/1999/aus-fin-reg-frmwk.html> Reserve Bank of Australia (RBA) (2013). About the RBA. Retrieved on July 6 2013 Thangaraj, R. K. &Chan, T. K (2012). “The effects of the global financial crisis on the Australian building construction supply chain.” Australasian Journal of Construction Economics and Building, 12 (3):16-30 . United Nations (2009). The Global Economic and Financial Crisis: Regional Impacts, Responses and Solutions. Retrieved on July 6 2013 Read More