Speaking at a Committee for Economic Development of Australia (CEDA) luncheon in Melbourne today, the Chairman of the Australian Prudential Regulation Authority (APRA), Dr Jeffrey Carmichael, said that beyond the criticisms, the Palmer Report raised a number of important issues which had been largely ignored by commentators.

"One of these is context and the question of what is reasonable to expect of a prudential regulator."

The report of John Palmer was commissioned by APRA last year to investigate its role into the collapse of HIH and tendered as evidence to the HIH Royal Commission earlier this month.

Dr Carmichael said that prudential regulation is about providing an extra layer of oversight over institutions that offer financial promises that are inherently difficult to keep and, because of the complexity of the institutions making the promises, are also inherently difficult to assess.

"Prudential regulation, however, is not a guarantee. To provide regulation to the point where it became a guarantee would not only be unreasonably costly, it would eliminate the risk spectrum that is fundamental to a healthy competitive financial system."

According to Dr Carmichael, another feature of the Palmer Report was the little understood distinction between the respective rehabilitative and enforcement roles of APRA and ASIC, drawing an analogy which likened the prudential regulator to a doctor and the conduct regulator to a policeman.

"The difficulty for a prudential regulator is that it is much easier for the community to identify when you are doing a poor job than it is for them to identify when you are doing a good job. Unlike a conduct regulator, which can at least count "heads on pikes", there is no ready metric for APRAs performance."

"To illustrate my point, at any point in time, there are somewhere between 100 and 200 financial institutions in the infirmary at APRA," Dr Carmichael said. "Around 20 per cent of these by number, and a higher percentage by assets under management, are returned to active duty. The vast majority of the others are merged voluntarily with other, stronger institutions."

He added that the focus on problem institutions fails to recognise that the vast majority of institutions under APRAs care are well managed and meet their obligations.

"APRA has some 4,000 institutions under its charge, managing over $1.5 trillion of assets. If we measure performing institutions as a percentage of all institutions, the performing entity ratio is currently 100 per cent. Even in 2001, with HIH and CNAL, the ratio was 99.9 per cent. Measuring the ratio in terms of assets rather than institutions paints a similar picture."

Dr Carmichael also said that APRA had had a rocky first four years and been confronted with its share of challenges, specifically those posed by the internal restructuring from nine predecessor agencies into one.

"The challenge posed by the internal restructuring cannot be overstated," he said.

Dr Carmichael said international experience had shown that the only way APRA could realistically progress towards the integrated regulatory model was to break down the old inherited silo-style structure from the start.

"When APRA was formed in the warm afterglow of the Wallis Report, we were never under any illusion about the magnitude of the task of creating a genuinely integrated prudential regulatory agency," he said.  "Given the circumstances and the objectives behind our formation, we believed at the time that we had little choice other than to move quickly."

He added: "It is a decision that I would make again in the same situation."

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.