The Australian Prudential Regulation Framework - Assignment Example

Assignment 1 Name Grade Course Tutor’s Name Date The Australian Prudential Regulation Framework The Australian prudential regulation framework is designed to address different players in the financial industry, with a view of protecting consumers and the economy in general. The framework is complex and interlocking, consisting of governmental regulation and administrative or legal sanctions for non-compliance issued by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) (Hanrahan, 2008). In addition to APRA and ASIC, the Reserve Bank of Australia (RBA) is also part of the prudential regulation framework and is responsible for administering some legislations. The table below shows the legislations that APRA, ASIC and RBA administer APRA ASIC RBA Superannuation Industry (Supervision) Act 1993 Banking Act 1959 Financial Sector (Transfer of Business) Act 1999 Financial Sector (Shareholdings) Act 1998 Financial Sector (Collection of Data –consequential and transitional) Act 2001 Financial Sector (Collection of Data) Act 2001 Life Insurance Act 1995 Insurance Acquisitions and Takeovers Act 1991 Retirement Savings Accounts Act 1997 General Insurance Reform Act 2001 Insurance Contracts Act 1984 Legislation Amendment (Financial Claims Scheme and other Measures) 2008 Corporations Act 2001 Superannuation Industry(Supervision) Act 1993 Australian Securities and Investments Commission Act 2001 Superannuation (resolution of Complaints) Act 1993 Superannuation Industry (supervision)Act 1993 Life Insurance Act 1995 Retirement Savings Act 1997 Medical Indemnity (Prudential Supervision and Product Standards Act 2003 Corporations Acts 2001, with special emphasis to part 7.3 of the Act. Payment Systems and Netting Act 1998 Payment Systems (Regulation) Act 1998 Reserve Bank Act 1959 Information sourced from Hanrahan (2008): The five highlighted (in bold) legislations in the table above are deemed as the key laws related to the operations of Australian financial institutions. Notably, the primary legislation for prudential regulation in Australia is provided by parliament itself through Acts of Parliament. Subordinate legislations on the other hand (i.e. regulations) are made by relevant parliamentary secretaries or ministers (Hanraham, 2008). The Australian regulatory framework is described as a ‘twin peaks’ model because APRA is charged with prudential regulation while ASIC is charged with market integrity regulation and consumer protection (Cooper, 2006). APRA and ASIC operate alongside the RBA and the Australian Treasury (Treasury) in what is known as the Council of Financial Regulators (CFR) (International Monetary Fund (IMF), 2012). The CFR facilitates information exchange and coordination among the four agencies, and is chaired by the RBA governor (IMF, 2012). The need for the prevailing prudential regulatory framework in Australia One of the reasons cited as to why Australia was able to withstand the global financial crisis fairly well compared to other developed countries is its prudential regulatory framework, more specifically the ‘twin peaks’ model. With the prudential regulation mandate on APRA and corporate regulation mandate on ASIC, Bowen (2010) argues that Australia has been able to avoid the risk that would otherwise surface if one monolith regulator was in charge of both prudential and corporate regulations. Accordingly, each organisation concentrates on its core business and ensures that the relevant regulations are applied to the letter. Bowen (2010) further adds that the RBA has the mandate to oversee stability in Australia’s financial system. The need for the twin peaks model of prudential regulation is best appreciated when compared to other countries like the US or the UK. In the US, Hill (2013) notes that the prudential regulatory framework is fragmented and complex, and as such, failed to effectively regulate the financial sector, and /or oversee potential risks in the manner in which the financial sector operated at the time. Consequently, Hill (2013) argues that the blame for the 2008/09 financial crisis was to a great extent put on the US financial regulators. On its part, the UK at the time relied on one super-regulator. Hill (2013) notes that while Australia did not suffer major financial economic effects during the financial crisis, other comparatively developed countries – most notably the US and the UK – did. The financial crisis therefore prompted reconsideration of prudential regulations both in the US and in the UK. The UK has already taken up the twin peaks model, hence suggesting that Australia became an example of how prudential regulation can be effected successfully. More specifically however, Australia needs the twin peaks regulatory approach because as Fresh and Baily (2010) note, innovations and developments in the financial sector require flexibility by actors in finance, but such flexibility must also be exercised cautiously and within set regulations. Given the many actors in finance and the responsibility of prudential and corporate regulation, the two regulators work in coordination to handle the complexities involved in regulating the financial sector in Australia. APRA’s primary functions include promoting efficiency, competitiveness and stability in Australia’s financial markets through identifying and managing risks in the financial services sector (Fresh & Baily, 2010). Notably, APRA concentrates on principles and relies heavily on dialogues between the financial institutions. In other words, APRA works closely with the financial institutions, making it very easy for the regulator to detect breaches in regulation or to detect potential risk areas. ASIC on the other hand plays an oversight role over the financial service providers and the security markets (Fresh & Baily, 2010). Being the corporate regulator, ASIC has a mandate to protect consumers against deceptive or misleading conduct by players in the financial sector. Additionally, ASIC oversees financial reporting, takeovers, and capital raising bids among other issues in the corporate financial sector. Arguably, ASIC’s roles enhance consumers confidence in the financial sector, thus meaning that consumers do not have to worry about the safety of their savings or investments. The confidence that consumers have in ASIC (and the larger prudential regulation as exercised in the country) probably prevented bank runs during the financial crisis, something that would otherwise have led Australians to make mass withdrawals from banks for fear that the banks would not survive the economic crisis. Notably, APRA is necessary in Australia since the country needs to secure its financial stability in addition to containing systemic risks by quickly resolving issues among important systemic financial institutions as indicated by Brown and Davis (2009). The role of ASIC cannot be gainsaid especially in relation to securing consumer protection, building market confidence, availing and promoting access to financial services, and providing buffers to shield the financial systems against financial crimes. How the RBA dealt with the 2008 Global Financial Crisis As indicated elsewhere, RBA’s mandate is to oversee financial stability in the Australian economy. During the 2008 global financial crisis, RBA played a proactive role in order to ensure that it met its mandate. As a behind-the-door operator however, RBA’s role passed unnoticed to many Australians. To financial analysts and other people interested in the financial sector, it was obvious that RBA played a critical role: backed by the government, RBA first took action meant to restore and/or enhance liquidity in Australia’s financial markets (Kearns, 2009). Specifically, and starting very early in the crisis, RBA lowered its cash rate from 7.0 percent to 6.0 percent. By 2009, the cash rate had been lowered to 3.0 percent (RBA, 2009). The cash rate in Australia is a monetary policy instrument, which has a strong influence on interest rates (RBA, 2013). In practice, a low cash rate affects the interest rates downwards, while a high cash rate has an incremental effect on the interest rates. By lowering the cash rate during the economic crisis, RBA was allowing the financial market to have less financial demands on the aggregate economy. In addition to the cash rate, RBA expanded the securities it would take as collateral. The foregoing meant that securities held by private sector players (e.g. residential mortgage backed securities, commercial paper, asset backed securities and commercial bonds) were accepted as collateral especially for deals involving repurchase agreements (Kearns, 2009). RBA also extended the repurchase agreements period to a full year. Overall, it is indicated that the RBA responded to the financial crisis by making modifications to its domestic operations, but within the existing framework (Kearns, 2009). The bank accepted more collateral in the form of private securities, extended repayment periods, and enhanced the supply of highly liquid deposits risk-free deposits from players in the financial market. Combined, RBA actions led to a narrower spread in the money market, thus reducing liquidity risks. As indicated by the Australian Bureau of Statistics (ABS) (2010), RBA’s intervention in Australia’s economy was similar to what many other central banks did around the world, albeit in a smaller measure. The bank intervened in the market in order to enhance liquidity at a time when foreign exchange markets were illiquid. Already, there was a great demand for bank notes in Australia (Cusbert & Rohling, 2013). The intervention by the RBA therefore forestalled a bank runs situation in Australia, which if left unchecked would have led to a liquidity problem and ultimately, to a solvency crisis (Reninhart & Rogoff, 2009). The intervention by the RBA meant that people did not lose trust in the financial sector and that the Australian dollar did not suffer as much as some of the foreign currencies did. ABS (2010) further notes that RBA’s interventions also helped the Australian dollar to recover fast, and by so doing, reflected the strength of Australia’s economy. References Australian Bureau of Statistics (ABS). (2010). The global financial crisis and its impact on Australia. 1301.0 – Year Book Australia, 2009-10. Retrieved November 07, 2013, from http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1301.0Chapter27092009%E2%80%9310 Boweb, C. (2010). Interview with CNBC Squawk Asia (Hong Kong). Australian Government- The Treasury. Retrieved November 06, 2013, from http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=transcripts/2010/005.htm&pageID=004&min=ceba&Year=&DocType=2 Brown, C. & Davis. K. (2009). Australia’s experience in the global financial crisis. Journal of Applied Finance, Spring/Summer, 1-7. Cooper, J. (2006). The integration of financial regulatory authorities – the Australian experience. Speech to Commisao de Valores Mobiliarios. 4-5 September. Brazil. Cusbert, T. & Rohling, T. (2013). Currency during the global financial crisis: evidence from Australia. Research Discussion Paper, 1-36. Fresh, A., & Baily, M.N. (2010). What does international experience tell us about regulatory consolidation? The PEW Economic Policy Department Briefing Paper, 6, 1-29. Hanrahan, P. (2008). Improving the process of change in Australian financial sector regulation. Paper presented at the ASIC/APRA/FICA Conference. 1-22. Hill, J.G. (2013). Why did Australia Fare so well in the global financial crisis? The Columbia Law School’s Blog on Corporations and the Capital Markets. Retrieved November 06, 2013, from http://clsbluesky.law.columbia.edu/2013/02/07/why-did-australia-fare-so-well-in-the-global-financial-crisis/ International Monetary Fund (IMF) (2012). Australia: Financial safety net and crisis management framework. Technical Note. November, 1-46. Kearns, J. (2009). The Australian money market in a global crisis. Reserve Bank of Australia Bulletin. June. Retrieved November 07, 2013, from http://www.rba.gov.au/publications/bulletin/2009/jun/2.html RBA. (2009). The RBA’s role in processing the fiscal stimulus payments. RBA Bulletin, August. 1-4. RBA. (2013). Monetary policy. Retrieved November 09, 2013, from http://www.rba.gov.au/education/monetary-policy.html Reinhart, C. & Rogoff, K.S. (2009). This time is different: eight centuries of financial folly. Princeton: Princeton University Press. Read More