Wallis Reforms of the 1990s - Essay Example

Wallis Reforms of the 1990s Name Institution 4. It has been argued that poor prudential regulation in both the US and UK led to the global financial crisis. Evaluate the importance of the Wallis reforms of the 1990s, and discuss to what degree, if any, these reforms shielded Australia from the worst of banking "excesses". Recent experience in the United States and the United Kingdom has established that financial crisis is destructive to the economy, the government budget as well as living started of people (Brownbridge, Kirkpatrick and Maimbo, 2002). This has increased the interest of the government to improve the financial sector regulation and supervision. The emerging markets have been working on guarding the stability of the financial system. Australia among other developing countries has implemented a number of reforms in order to strengthen the prudential regulation system (Brownbridge, Kirkpatrick and Maimbo, 2002). However, these reforms were poorly implemented. They were not effective in preventing banking crisis and excesses. The banking industry experienced the worst crisis in 190s. It was approximated that the total losses incurred in 1990, 1991 and 1992 was more than $9 billion. One of the main reasons for the crisis as the deregulation that intensified competition in the banking sector that forced banking institutions to grow their balance sheet quickly (Brownbridge, Kirkpatrick and Maimbo, 2002). This led to high interest rates, poor credit quality and overvalued commercial property. In order to improve the financial system and strengthen the prudential regulation system, the Wallis reform was announced in 1997 (Pearce, 2007). This reform recommended a major rearrangement in the prudential regulation system. The major objectives of the Wallis Reform was to promote the efficiency of financial system through enhanced competition and to maintain confidence and stability while enhancing the ability of the financial system to respond to market developments and creativity (Brownbridge, Kirkpatrick and Maimbo, 2002). The Australian Government acknowledged most of the recommendations offered by the Wallis Reform. One major recommendation implemented by Australia was a new framework for regulating financial system (Pearce, 2007). The model of regulation recommended by Wallis was based on functional objectives comprising of three peaks including a prudential regulator, conduct and disclosure regulator and regulator responsible for systemic stability and payments. Before Wallis reform, the Australian financial system was based on sectoral approach which gave different regulatory institutions power over specific industries in the financial sector. Reserve Bank of Australia, Australian Prudential Regulation Authority and Australian Securities and Investments Commission have been established as the key regulatory agencies in Australia (Comely, Antony and Ferguson, 2002). The Wallis reforms made RBA responsible for monetary policy, systemic stability of the financial system and payment system regulation. The change to the RBA functions as a result of the Wallis reforms was the elimination of the responsibility for supervision of banks as well as depositor protection. As a result of this change, there was clarification for the accountabilities for regulatory task (Comely, Antony and Ferguson, 2002). The responsibility for prudential regulation of life and general insurance and deposit-taking organisation was given to the APRA. As a result all the prudentially regulated entities are brought to the Commonwealth jurisdiction. This was beneficial as it ensured the removal of artificial and anti-competitive distinctions and helped in the regulation of financial service corporations (Pearce, 2007). In addition, the Wallis Reforms gave the regulators operational independence. They were able to administer legislation without any interference from the government (Gizycki and Lowe, 2000). And as such, regulators have clear approved objectives set out in their legislation functions. Another benefit of the Wallis Reform is increased competition. The reforms have promoted competitive pressure in the Australia financial sector. For instance, home and personal lending has increased due to competition in markets (Gizycki and Lowe, 2000). Enhanced competition is partly due to entry of foreign bank in Australia as well as institution of providers in the lending market. The Wallis reforms offered alternative opportunity for non-banks competitors to finance their lending through securitization (Gizycki and Lowe, 2000). Wallis reforms have also led to efficiency benefits. The increase in competitive pressures has contributed to enhanced efficiency in the financial system (Reverse Bank of Australia, 2002). In the banking sector, before the reforms, the interest rate led to a prising structure that ensured retail payments as well as transaction services were free. Due to this, the banking system carried out cross-subsidisation of customer group which distorted the pricing signals. The reforms led to the introduction of charges on retail transaction and payments which improved the allocative efficiency (Gizycki and Lowe, 2000). Additionally, the increased competition in the financial sector has led to the reduction in interest rates margins production costs which translate into technical efficiency. Due to increased efficiency, it has been reported that the operating expenses of the banking sector has reduced from 3% of total assets in 1987 to 2.3% in 2002 (Gizycki and Lowe, 2000). From the evidence provided by Wallis Inquiry, the Australian direct cost of regulation was very high when compared to other countries (Reverse Bank of Australia, 2002). The higher costs of regulation were partly attributed to the Campbell Report. A report that was recently compiled on the direct costs of regulations in Australia showed that it has fallen when compered t other jurisdictions (Pearce, 2007). The improvement of these costs was highly attributed to the Wallis reforms. These reforms ensured that the regulatory framework of the financial sector was comprehensible and unique with minimal duplications and unnecessary imposts. Compared to other countries such as Canada, United States and United Kingdom, Australia has lower total direct costs of regulation of about 0.018 per cent of GDP. The UK has about 0.025 per cent, US has about 0.06 per cent and Canada has 0.05 per cent of GDP (Pearce, 2007). Although it is very hard to identify the benefits of individual reforms, the Wallis reforms led to the improvement in productivity as well as the income growth in Australia. After the implementation of the Wallis reforms in 1997, the Australian economy strengthened with about nine years of persistent growth (Pearce, 2007). In the 1990s, the productivity growth rate in the country was in the level not witnessed since 1960s. However, from 1995, the Australia’s average annual labour productivity grew double and exceeded the IECD level. At the same time, Australia experienced a growth in the multi-factor productivity. This was partly contributed to the improvement in management and work practices in the financial sector and effective resource allocation (Australian Financial Markets Association, 2000). Australia’s productivity growth was also as a result of sustained macroeconomics reforms. The OECD has reported that the Wallis reforms have acted as structural reforms and prudent macroeconomic policies that have made Australia to be one of the best performers when it comes to productivity of the financial sector (Australian Government, 2004). Recent Australian analysis has assisted in finding the reasons for the enhanced performance. Deregulation and increased competition led to the introduction of new work practices and encouraged the adoption of technologies that supported strong investment (Reverse Bank of Australia, 2002). Evidences show that effectively regulated financial system positively contributes to performance growth. Therefore, the Australian experience of the Wallis reforms led to the liberalization of the financial sector and introduced supportive macroeconomic policies that led to the sustained economic growth and reduced economic shock (Reverse Bank of Australia, 2002). The Wallis reforms have balanced prudential and competition goals in the financial sector (Williams, 2009). According to the Wallis Inquiry, the prudential regulation need to maintain safety while at the same time uphold flexibility in responding to any financial systems developments. What the Wallis reforms have done is to minimise the effects on competition and competitive neutrality. In order to do this, there was a recommendation to establish a single licencing as well as prudential regulation regime for Australian deposit-taking organisations (Williams, 2009). This achieved neutrality and maintained financial safety for all providers of identical deposit products. The reforms have also maintained protection of depositors. The effectiveness of depositor protection by the reforms has been strengthened by offering authority for early intervention in financial institutions facing financial issues (Harper, 2000). Moreover, the Wallis reforms made a number of recommendations meant to achieve better regulation of securities, overhaul of the regulation of financial advice, and effective disclosure and consumer protection (Harper, 2000). Therefore, to achieve these plans, a single consumer protection regulator will be instituted. The new regulator, ACFSC will be given consumer protection laws and will conduct integrity and consumer protection functions. This will be able to improve the financial services consumer protection legislation and eliminate inconsistency which is costly to the consumers. Willis reforms assisted in shielding Australia from the worst of banking "excesses after the 1990 crisis (Harper, 2000). Wallis reforms proposed that the liquidity assistance function in an event of financial distress should be given to the RBA and not the APRC. The argument however is that this arrangement may be disadvantageous due to slow response in times o financial distress (Reverse Bank of Australia, 2002). Nevertheless, placing RBA regulators in charge of emergency liquidity assistance reduces the danger of banking excesses. To date, the regulatory structure of the Wallis reforms is working well. There is an effective coordination between the regulatory authorities in Australia (Comely, Antony and Ferguson, 2002). For instance, due to Wallis reforms, the RBA, APRA and ASIC have an effective communication which is facilitated by the Council of Financial Regulators. However, in spite of the arrangement created by the Wallis reforms, Pearce (2007) has reported that the ability of system to deal with a financial crisis and distress has not yet been tested. However, the effectiveness of the reforms will be an important factor as a future solution for banking crisis (Harper, 2000). The process of reforming financial system in Australia has shown the importance of making sure that the goals of regulation are well-defined and flexible enough to adjust to any developments that may come in future (Gizycki and Lowe, 2000). The recognition of the complexity of the financial system has resulted into the institution of regulatory arrangement in different jurisdictions. Nevertheless, it is noteworthy to note that regulating the financial market tend to impede the financial sector and makes it operate less effectively are distort competitive pressures and resources (Harper, 2000). And as such, crafting the financial regulation requires a balance between achieving stability and integrity and promoting competitive, efficient and innovative financial markets. The quid pro quo between stability and efficiency is apparent in the developments of the Australian financial regulation. Australian financial regulation in the 1980s was characterized by the restriction of market forces as a means of maintaining stability and security (Brownbridge, Kirkpatrick and Maimbo, 2002). Although this arrangement was successful in upholding security, it led to intensified competition, lack of responsiveness to consumers as well as reduced inefficiencies. The changes brought about by the Willis reforms have shifted the attention to less domineering techniques including disclosure requirements (Australian Government, 2004). This increased the efficiency and innovation in the financial sector and has established a more suitable balance between competition and stability. Willis reforms acted as a shield in preventing financial instability in Australia (Australian Financial Markets Association, 2000). Financial stresses brought about by globalization and technological innovation impact the financial system. Issues such as currency mismatch for instance affect the soundness of banks. Lack of hedging instruments leads to liquidity problems for the banking institutions. Also, greater capital flow due to liberalization leads to boom-bust cycle in assets prices (Harper, 2000). The condition for reducing these issues is through establishing well-managed as well as well-capitalized banking system. This was possible through Wallis reforms. These reforms restructured the banking system and ensured better management, capitalization and supervision (Pearce, 2007). In conclusion, many of the Willis reforms were implemented in Australia in order to reduce the impacts of 1990s financial distress. The reforms will ensure that the financial sector remain robust in the midst of future financial crisis (Pearce, 2007). Recently, Australian financial sector has been reported to be one of the most vibrant compared to other countries. This may be attributed to Willis reforms. Willis reforms have ensured financial stability, high productivity performance, reduced costs of regulation, increased competition and increased efficiency (Pearce, 2007). There is likely to be financial crisis in future that will affect the financial sectors in different countries. The decision to implement Wallis reforms will ensure that it shields the country from future financial distresses. References Australian Financial Markets Association (AFMA). (2000). ‘Credit Derivatives Set to Boom’. Available at www.afma.com.au/creditderivatives.html Australian Government. (2004). Globalization: The Role of Institution Building in the Financial Sector; Case study: An Australian Perspective. Retrieved https://archive.treasury.gov.au/documents/780/HTML/docshell.asp?URL=05_Case_Study.asp Brownbridge M., Kirkpatrick C., and Maimbo S. (2002). Prudential Regulation; Financial and Development Briefing Paper, Journal of Development Policy and Management, 3(2): 1-4. Comely, B, Anthony, S, and Ferguson B. (2002). 'The effectiveness of fiscal policy in Australia - selected issues', in The impact of fiscal policy, Bank of Italy Research Department Fiscal Policy Workshop, Essays presented at the Bank of Italy workshop 21-23 March 2002. Gizycki, M. and Lowe, P. (2000). 'The Australian Financial System in the 1990s', in The Australian Economy in the 1990s, Gruen, D. and Shresta, S. (Eds), Reserve Bank of Australia, 4(5): 180-215. Harper IR (2000). ‘Mergers in Financial Services: Why the Rush?’, The Australian Economic Review, 33(1): 67–72. Pearce, C. (2007). "Wallis 10 Years On: Protecting Aussie Wealth". Financial Services Institute of Australia. Retrieved from https://ministers.treasury.gov.au/DisplayDocs.aspx?doc=speeches/2007/010.htm&pageID=005&min=cjp&Year=&DocType=1 Reserve Bank of Australia. (2002). 'Innovations in the Provision of Investor Finance', Reserve Bank Bulletin, December 2002. Williams, R. (2009). The Window for Reform is closing. Sydney Morning Herald, September 15 2009. Read More