In a recent Australian Treasury discussion paper (Sept 2012) it was suggested that the Australian Prudential Regulation Authority (APRA) should be given 'sweeping new powers to step in and take control of banks' to prevent them from collapse during a financial crisis - discuss.
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Role of Australian Prudential Regulation Authority in Preventing Banks from Collapsing During a Financial Crisis
Changes in Regulatory Environment
With downfall of corporate like Enron, WorldCom and HIH it is evident that the existing regulatory mechanisms have failed to perform. In recent years the regulatory environment has changed as a result of which countries have been forced to change their regulatory policy framework. This change has been there across all industries but we can get valuable economic regulatory insights from financial services sector given the high level of systemic risk.
The global financial crisis has challenged any of the ways in which banking sector used to operate. Before the crisis there was assumption that management had good understanding of their business, there were clear lines of authority and there were adequate risk management systems and other internal control, so despite fluctuations in the economy, organizations did not bother to re-strategize their systems (John, 2010). However, when there was crisis, it was clear that it was not necessarily so. Banking industry has been worst hit by the recession. Banks have failed to contain the risk. Banks have in fact frozen the industry's capital when they should have expedited the flow of it. A major concern for the government when banks of considerable size fail is that they contribute a lot to systemic risk by their size and interconnectedness (Arnold, Borio, Ellis & Moshirian, 2012).
According to The Economists' special report on international banking (Economist.com, 2009):
The costs of failure are massive. Frantic efforts by government to save their financial systems and buoy their economies will do long term damage to public finances. The IMF reckons that average government debt for the richer G20 countries will exceed 100% of GDP in 2014, up from 70% in 2000 and just 40% in 1980s.
As a result, banks lost their market capitalization leading to a worldwide decline in stock markets.
Governance of Financial Institutions
The financial regulatory system in the United States and United Kingdom was criticized over the world for its casual approach in maintaining their control. An international move for reforms in regulatory system forced stricter laws. In Australia, after HIH collapsed during financial crisis the Australian Prudential Regulation Authority (APRA) emerged as stronger system of regulation. A repercussion of financial crisis has been that role of governance and particularly corporate governance has come to limelight in financial institutions.
Australian Banking Industry
Financial system in Australia was regulated prior to 1960s. The process of reformation started in 1970s and in 1980s it had entered deregulation era. The purpose of reforms was to allow mergers of banks, allow new banks, including foreign banks to enter and changes in stock market. With changes in regulation, the market share of banking improved leading to competitiveness and increased efficiency. However, due to excessive expansion of credit, increase in debt volumes caused financial crisis in early 1990s. As a result, a committee, which was called Wallis Committee, was formed whose motives were (Ramsay, 2001):
• To analyze the effects of deregulation on Australian financial system
• To analyze forces behind change and technology
• To arrange a regulatory structure to promote competitive, efficient and flexible financial system (Chen & Lin, 2007)
With the recommendation from Wallis Committee, financial system was reorganized in September 1997. The financial system was now under the supervision of three independent statutory bodies:
• Corporations and Financial Services Commission (CFSC): responsible for customer protection, maintaining integrity of ...
An Australian Prudential regulation authority are given. The theoretical framework which is relevant to the discipline are discussed.