Need for Australian Prudential Regulatory Framework, Its Basic Functions - Case Study Example

EXECUTIVE SUMMARY This report focuses on the need for Australian Prudential Regulatory Framework and explains the basic functions of APRA (Australian Prudential Regulatory Authority). The report highlights that in order to ensure financial stability and keep a check on various financial institutions, it is important to frame laws, standards, regulations and practices. Australian Prudential Regulation Framework ensures that financial promises made by financial institutions are made in a stable, efficient and competitive manner under all circumstances. Further it looks to create a financial balance and ensure financial stability and competitive neutrality in the Australian Economic scenario. The report then moves to show how Reserve Bank of Australia helped the country to fight against the Great Financial Crisis during 2008. RBA through a proper mix of both monetary and fiscal policies like cut in the interest rates, large stimulus packages, bank guarantees and other stabilizing agents helped Australian banks and financial institutions to absorb financial shocks and avoid liquidity crunch with proper mitigation of risks like failure of financial institutions and bankruptcy. RBA also through the help of Rodd’s government facilitated bank guarantees and wholesale funding for Australian banks. Thus, the report highlight a complete role of RBA in helping Australia fight against the Global Financial Crisis and develop strategies accordingly to ensure future growth and development of Australia. TABLE OF CONTENTS 1.0 Introduction 3 2.0 The Australian Prudential Regulation Framework 3 3.0 Need for Australian Prudential Regulation Framework 5 4.0 Role of Reserve Bank of Australia during Global Financial Crisis 7 5.0 Conclusion 9 6.0 References 10 1.0 INTRODUCTION This report focuses on Australian scenario framework. The report highlights and explains the Australian Prudential Regulation Framework and the reason for developing such a framework with regards to Australian economic scenario. The report highlights the major needs or requirement for development of Australian Prudential Regulation Authority (APRA) and further the report highlights the steps taken by Reserve Bank of Australia to fight against the 2008 Global Financial Crisis to ensure minimal damage to the Australian Economic environment both during the face of Global Financial Crisis and the aftermath which such a Global crisis worldwide. Finally the report is concluded to throw light and provide a complete understanding on both the theoretical and practical approach of the report under study. 2.0 THE AUSTRALIAN PRUDENTIAL REGULATION FRAMEWORK Prudential regulation frameworks are developed to supervise and lower the risk of community tolerance and ensure mitigating the risk of financial institution insolvency. It is to be noted that insolvency is a perfectly normal occurrence in today’s competitive environment. However, when insolvency is related to a financial institution the same is a concern for a country’s economic scenario and it is important to ensure that the failure does not transmit to other financial participants and the same is resolved at a quicker pace and lower cost (Gruen, 2009). Australia’s prudential regulation framework is developed to ensure fair dealings in distinct industries which include deposit-taking institutions, life insurance companies, general insurance companies and superannuation funds all of which are established under different legislations. In order to ensure the same Australian Prudential Regulation Authority has been developed which establishes and enforce various prudential norms, regulations, standards and practices and ensure that financial promises made by financial institutions are made in a stable, efficient and competitive manner under all circumstances. The Australian Prudential Regulation Authority is one among the four independent agencies of Australian Financial System which supervises the individual financial institutions and develops standards and norms to ensure financial stability in the Australian Economic environment. APRA is funded by levies paid by the various financial institutions which it supervises and has its head office located in Sydney with offices in various other cities of Australia (Gruen, 2009). The authority collects data to act as a National Statistical Agency for various financial institutions and plays a major role in ensuring Integrity of Australia’s retirement policy. Ensure that superannuation funds of Australian people are released in a fair and correct manner with limited problems. It administers the financial claims schemes to ensure depositors access their deposit funds on a timely manner and in consequences of failure of general insurer claims are met in an organized manner (Davis, 2009). It helps in accessing new licensing applications. Keep a track and eye on the soundness of the financial position of various financial institutions. It establishes various prudential norms, standards, practices and regulations which is required to be strictly abided by its various supervised financial institutions (Kearns, 2009). APRA through its regular monitoring and cross checks identifies crisis situation and carries out remediation, crisis response and enforcement of the same. It is to be noted that APRA follows a risk based approach where institutions facing higher degree of risk receives closer supervision. It manages, controls and design policies accordingly to ensure mitigation of such risk and maintain an optimum level of capital requirement to withstand unexpected losses (Stevens, 2009). Thus, APRA looks to enhance public confidence in Australia’s financial institution framework by designing prudential norms and regulations to maintain a balance of financial safety along with efficiency, competition and competitive neutrality in a synchronized manner. 3.0 NEED FOR AUSTRALIAN PRUDENTIAL REGUALTION FRAMEWORK In a fast changing technological environment, innovations and risks had been on the higher side. With a number of financial crisis and global recessions along with bankruptcy and failure of various financial institutions on account of poor management, market failures, economic slowdown, dishonest and unfair means etc there is always a high risk pounding on the investors and common public which suffers a lot in case of failure of the financial institutions. Thus in order to ensure that the work is carried out in a fair manner, prudential norms and regulations play an important role (Davis, 2009). Apart for the same there are various other reasons which demands for development of an Australian Prudential Regulation Framework. The same has been illustrated as under. To regulate various financial sectors in accordance with various other laws and regulations so as to maintain international standards and ensure that the administrative practices and procedures are applied in a prudent manner in every financial field (Kearns, 2009). To create a financial balance and ensure financial stability and competitive neutrality in the Australian Economic scenario. To create a body to examine and understand the current market situation in order to mitigate financial crisis before they occur and in cases where a financial crisis does occur to enforce policies and standards so as to mitigate the long lasting effects of the same and means to overcome the same at a quicker pace with limited destruction (D’Aloisio, 2009). To ensure that a body keeps a vigilant eye on the performance of financial institutions and take strict measures against any variances of the rules and regulations formulated to ensure financial soundness in the economic environment. To develop standards and policies to ensure minimal failure of financial institutions however ultimately the survival and failure lies in the hands of individual institutions, as when a prudential regulatory body is under consideration the risk of failure is mitigated to a considerable extent due to its stringent rules, policies and regulations (D’Aloisio, 2009). To ensure a healthy risk management culture and provide financial institutions with guidance material which acts as standards and general principles through which prudential outcomes can be achieved by various institutions in a different and unique manner. Thus, we see there are a lot number of reasons for the need or requirement to develop and further enlarge the Australian Prudential Regulation Framework primarily to ensure financial soundness, fight against crisis situations and further ensure a true and fair dealing by all financial institutions towards every investor’s. 4.0 ROLE OF RESERVE BANK OF AUSTRALIA DURING 2008 GLOBAL FINANCIAL CRISIS The Global Financial Crisis of 2008 was a nightmare for the entire world which had a long lasting effect on the global economic condition. Major developed nations had a huge economic collapse with frozen credit markets, deep cuts in financial stability, large debts piling, global meltdown, huge unemployment and an overall financial crisis (Brown and Davis, 2008). Most governments clamored for designing and developing policies and interventions aimed to prevent the global meltdown and mitigate the financial losses. However it is to be noted that the Australian Economy was relatively much less affected than the major advanced economies owing to some great measures and policies enacted by the Reserve Bank of Australia during the Global Financial Crisis due to which it avoided recession to a considerable extent in spite of being directly experiencing the same with only a modest increase in the rates of unemployment. A combination of monetary and fiscal policies enacted by the Reserve Bank of Australia helped in mitigating the financial crisis which included policies related to significant cuts in the interest rates, bank guarantees, large stimulus packages and other stabilizing measures. There was an unexpected cut of 1% in the interest rates by the Reserve Bank of Australia to control the financial instability in the Australian market (Brown and Davis, 2008). Further it is to be noted that when the Lehman bankruptcy occurred, Reserve Bank of Australia to enhance liquidity in the global market strengthen its dollar largely thus giving an economic and financial stability to the country to fight against the crisis. RBA necessarily less intervened in the credit and money market of Australia as was done by other nations during the Global Financial Crisis. Further, RBA along with support from Rudd’s government guaranteed bank deposits and wholesale funding for Australian banks which helped the financial institutions to absorb the financial shock in a better manner. Realizing the failure of global investment banks RBA decided to immediately increase the cash rates from 5.25% to 7.25% which helped National banks to achieve financial stability and mitigate the risk of liquidity crunch which was later dropped from 7% in September 2008 to 3.25 percent in the first quarter of 2009 which stimulated demand to a considerable extent and provided secured jobs of over 5 million employees. Thus, we see a set of monetary and fiscal policies were designed by the RBA to fight against the Global Financial Crisis of which policies like cuts in interest rates to 1%, large stimulus packages played a major role. Fiscal policies designed by RBA helped to sustain short term demand and empowered the private sector to ensure maximum efficiency and build a sound financial stability with greater means to absorb financial shocks 5.0 CONCLUSION This reports highlights on the major reasons for development of Australian Prudential Regulatory Framework which is specifically aimed to maintain financial stability in the economic environment by developing norms, regulations, standards and practices as per current market scenario. The report also focuses on how the Reserve Bank of Australia through a combination of both monetary and fiscal policies helped the economy to fight against the Global Financial Crisis which included large stimulus packages, interest cuts, bank guarantees among others and helped Australia emerge strong even after a global meltdown and build a platform for future growth and success. 6.0 REFERENCES Brown, C. and Davis, K. (2008). The Sub-Prime Crisis Down Under. Journal of Applied Finance, Spring/Summer, 16-28. D’Aloisio, T. (2009). Regulatory issues arising from the financial crisis for ASIC and for market participants. Retrieved on Nov 8, 2013 from http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/sdia-speech-chairman-May-09.pdf/$file/sdia-speech-chairman-May-09.pdf Davis, K. (2009). Infrastructure Trust Financial Management. JASSA: The Finsia Journal of Applied Finance, March 2009, 43-47. Gruen, D. (2009). Reflections on the Global Financial Crisis. Retrieved on Nov 8, 2013 from http://www.treasury.gov.au/documents/1574/PDF/05_Reflections_on_the_Global_Financial_Crisis.pdf Kearns, J. (2009). The Australian Money Market in a Global Crisis. Reserve Bank of Australia Bulletin, June, 15-25. Retrieved on Nov 8, 2013 from http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-2.pdf Stevens, G. (2009). Australia and Canada – Comparing Notes on Recent Experience. Reserve Bank of Australia Bulletin, June, 36-44. Retrieved on Nov 8, 2013 from http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_jun09/Pdf/bu-0609-4.pdf Read More