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Monday, 23 November 2009
Page: 8613

Senator BUSHBY (8:31 PM) —by leave—I move:

That the Senate take note of the document.

On 20 November 2009, APRA released its annual report. The report highlights the activities of APRA over the 12 months that it covers and shows that we have a well resourced, competent and active prudential regulator. Of particular interest, however, are the comments made in the report, primarily by the chairman, Dr John Laker, but also throughout the report.

The comments that interested me in particular are twofold. The first comments that I would like to speak briefly to are the extent to which the report highlights the challenges that the Australian financial sector faced over the past two years. Dr Laker stated:

A prolonged downturn and rising unemployment would have put strong pressure on asset quality, profitability and capital and, inevitably, would have invited harsh market sanctions against financial institutions with poorer risk profiles. Acknowledging these possibilities, APRA’s supervisory intensity was dialled to its highest level.

However, as also noted by Dr Laker, events that have transpired since that time have proven that the situation was otherwise. Why is this the case? Why have the events not transpired as thought possible by Treasury, the Reserve Bank and APRA, as noted in their report? There is at least one obvious and primary reason for this: because the financial sector reforms put into place in Australia by the then Treasurer, Peter Costello, set Australia up very well to survive this crisis.

In response to the recommendations of the Wallis inquiry, the coalition put in place a new regulatory regime for financial services in Australia a little over 10 years ago. These reforms involved major changes to the regulatory structure, basing them on four agencies: the Reserve Bank of Australia, the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and the Australian Competition and Consumer Commission. Prudential regulation was focused on a twin-peaks model, under which the already established ASIC regulated the markets and a new APRA supervised the banks and insurance companies.

As part of the coalition reforms, responsibility for prudential supervision of approved deposit-taking institutions was taken away from the Reserve Bank of Australia and given to APRA. The RBA retained responsibility for achieving overall financial stability. The simple fact is—and this has been proven by its performance through what presented as a very real challenge— that the coalition-developed structure for regulating the banking and financial industry, combined with strong and effective links between the regulators, have achieved an extremely innovative and stable financial system for Australia. The role that APRA played, through its activities in prudentially regulating the financial sector prior to and during the worse of the crisis, laid a strong basis for ensuring the solvency and, with the RBA, the stability of our main financial institutions. This has been a key factor in delivering the strength of Australia’s financial sector performance over the past two years.

This report that we are looking at today highlights how the twin-peaks model of prudential regulation has served Australia well throughout this period. Again, I quote Dr Laker from the report:

In a number of the major industrial economies, the global financial crisis has shone an unflattering spotlight on the regulatory architecture, coordination arrangements and the performance of the prudential regulator itself. Australia’s ‘twin peaks’ model, in contrast, has stood up well to scrutiny. Having a single and clear mandate—namely, to promote prudent behaviour on the part of financial institutions—has kept APRA free of the distractions and the resourcing and other conflicts that can arise in attempting to pursue multiple objectives.

The second issue raised in this report is what I would call not throwing the baby out with the bathwater. Clearly, the regulatory framework the coalition implemented for prudential regulation in Australia has worked well in protecting Australians from the financial problems suffered in most comparable countries. For this reason it is vital that regulatory changes being discussed and implemented in jurisdictions where they did suffer a failure of regulation are not implemented here unless a demonstrable need is evident. In other words, we should not be implementing solutions to problems that we do not have, particularly if they add complexity, restrict innovation and add to the cost of doing business in Australia.

Reassuringly, this was acknowledged by Dr Laker in his comments in the report. He said:

Australia’s prudential framework has performed well during the global financial crisis and a ‘root and branch’ review is neither necessary nor contemplated. Nonetheless, global reform initiatives will have implications for this framework.

The recent involvement of APRA in the Basel committee is also reassuring as it will allow our voice to be heard to minimise the risk that international agreements will impose restrictive regulation on us in a way that Australians do not need. My confidence in APRA’s ability to recognise threats and to work against them is high. Unfortunately, my confidence in the government’s ability to do so is not so high, particularly given comments by the Prime Minister and other ministers railing against the lack of regulation in Australia and the failure of existing frameworks to address the problems that led to this crisis.

Question agreed to.