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Ideas and issues in financial regulation

Tuesday 26 November 2013

John Laker, Chairman - The Third Warren Hogan Memorial Lecture, Sydney

It is a privilege indeed to give the Third Warren Hogan Memorial Lecture.[1]

I am a proud member of the ‘Class of 1971’, one of the earliest fourth year honours classes in Warren Hogan’s ‘comprehensive and demanding’ honours program at the University of Sydney, where he had arrived only a few years earlier. Warren Hogan had an abiding influence on my professional life. He was my mentor, my sponsor for post-graduate study abroad; he kindled in me a strong interest in economic policy that became a lifelong commitment. Hogan brought a sense of excitement about the discipline of economics to a tired and hidebound Department. In so doing, we learned that the discipline was not monolithic but a battleground for ideas and ideologies. We were exposed to the first whiffs of gunsmoke in the long and debilitating ‘political economy’ dispute within the Department.

It was only many years later that I came to understand how much pride Warren Hogan took from the honours program, which he described as ‘quite a powerhouse academically … Fourth year honours students are the pride, glory and joy of Australian universities, not to be lost’.[2] He may never have said those very words to us, but I’m sure the ‘Class of 1971’, and the many honours years that followed, left the University of Sydney with a confidence and enthusiasm to bring their economics education to life.

This memorial lecture series is an opportunity to showcase the attributes and insights of a great economist, and his enduring contribution to academia and public policy. In the inaugural lecture, the Governor of the Reserve Bank, Glenn Stevens, introduced us to Warren Hogan the person, and the macro-economist, highlighting his astute observations into the workings of Eurocurrency markets. Hogan’s ability to court controversy was echoed in the second lecture by Professor Calomiris of Columbia University, a lecture he himself described as ‘deeply subversive’ and in which he dismissed as an ‘abject failure’ the global regulatory regime for banks, known as the ‘Basel framework’ after the city of its birth, that my organisation, the Australian Prudential Regulation Authority (APRA), has been implementing!

In the third lecture, I want to talk about Warren Hogan as a ‘man of finance’. I use this term in a very specific way. As an academic, Hogan wrote extensively about financial markets, financial institutions and financial regulation; in his later years, with Jonathan Batten of Monash University, he was still immersed in the arcane world of financial derivatives. Hogan also practiced what he taught. He served a 15-year term on the Board of Westpac, one of Australia’s largest banks, as the era of financial deregulation and prudential supervision dawned. There, he became immersed in boardroom dramas and, behind the scenes, did much to raise Westpac’s focus on credit risk management and culture.

In one of his last roles, Hogan also brought his finance and public policy background to aged care issues, conducting a review of pricing arrangements in residential aged care. Though no fan of financial regulation, for reasons that will become clearer in this lecture, Hogan was a pragmatist. He was greatly concerned that the large sums of money held in accommodation bonds were not subject to some form of comprehensive monitoring and supervision, and he consulted with APRA on whether accommodation bonds ought to be prudentially regulated.

As I said, a man of finance. But not, fortunately, always right! Hogan argued that proposals by the Financial System Inquiry in 1997 for a mega-regulator (APRA), which would encompass all deposit-taking institutions, insurance and superannuation, were ‘likely to fail’. Fifteen years on, and with the global financial crisis safely negotiated to this point, I am pleased as the Chairman of APRA to say, respectfully, that great economists do not always make good forecasters!

I want to talk tonight about Hogan’s views on financial regulation in Australia. He wrote extensively on this topic over a twenty-year period, which spanned two major official inquiries into the Australian financial system. He wrote with clarity and cogency, buttressing his arguments with detailed references to the theoretical and empirical literature. His writings on this topic were co-authored by his lifetime friend and collaborator Ian Sharpe from the University of New South Wales, with whom Hogan was intellectually joined at the hip, so to speak.

The theme that emerges in these writings is a strong scepticism that the rationale for financial regulation in Australia, as it evolved from the early 1980's, had rigorous economic and empirical justification.

As a well-trained economist, Hogan had a clear conceptual framework for analysing arguments for financial regulation, whether through direct controls or prudential regulation. It was an orthodox view based on the concept of market failure, and it prefixed many of his contributions. Markets may fail to adequately price or manage financial risk because of the presence of externalities and/or asymmetric information. As he noted, positive externalities arise in banking because bank deposits are accepted by the community as a medium of exchange and a store of value. Negative externalities would be associated with bank runs if a loss of confidence in a bank under stress were, through contagion effects, to spill over to otherwise solvent banks and impair their viability. This would undermine system stability and have adverse impacts on the real economy. As bank assets (particularly loans) are generally risky and difficult to assess without careful monitoring, depositors lacking that information may question the value of bank assets in periods of poor economic news and may flee from both solvent and insolvent banks, precipitating a bank run.

The promotion of system stability and the reduction of information asymmetry may provide a basis for market intervention but, as Hogan emphasised, the strong test for justifying regulation was that the benefits of regulation exceeded the costs. This had to be resolved on the evidence.

One of Hogan’s early forays into the economics of banking regulation was an empirical analysis of the relationship between bank regulation and bank risk in Australia, a relationship that could not be determined on a priori grounds.[3] In the sample period covered, the Australian banking system was subject to a complex set of direct controls over bank activities, introduced for monetary policy and depositor protection reasons. These controls severely constrained the ability of banks to assume high risks and obviated any separate role for prudential regulation. The analysis assessed the impact of two periods of major change in the regulatory environment — an easing of direct controls in late 1960 and a substantial re-tightening in mid-1975 — and found that bank risk fell when regulation was applied more intensively.

That study acknowledged, but did not test, an alternative so-called ‘economic theory’ of regulation, in which regulation was viewed as a wealth transfer mechanism. In a version of this alternative theory, banks can be viewed as demanders of regulation because of associated benefits while governments supply regulation in return for votes or political support. This rather cynical rationale is not often heard in Australia, at least not in the context of prudential regulation. It is certainly hard to reconcile with the existence of an independent prudential regulator not known for forbearance, and with industry concerns about excessive regulation that emerged in the years preceding the global financial crisis, and are now resurfacing. However, it is a view that recurs in commentary on the US financial system. Indeed, Professor Calomiris appeared to endorse the view in his lecture last year, when he noted that ‘governments form coalitions of interest (not just big bankers) whose deals include politicized regulatory discretion. Governments and banks like having control over the measurement of loss, and the measurement of risk, and the enforcement of rules.[4]

The blueprint for financial deregulation in Australia was established by the Committee of Inquiry into the Australian Financial System (Campbell Committee), which reported in 1981. The Committee’s objective was to improve the efficiency and competitiveness of financial markets by reducing the heavy reliance on direct banking controls. At the same time, it argued that unregulated financial markets might not ensure stability and confidence, and it recommended that banks be subject to prudential controls and supervision by the Reserve Bank. The controls would cover capital, risk assets and liquidity, and would be reinforced by a bank examination procedure that would place particular emphasis on periodic in-depth examinations.

Hogan was scathing about this blueprint. His views were best reflected in the quote that headed his review article: ‘The lack of a clear understanding of the objectives and functions of regulation may be the single most important roadblock to reform.’[5] Always known for Kiwi directness, Hogan did not mince his words. The review article refers to the ‘regulatory morass’ of the Campbell Report, discussions on investor protection that were ‘… so vague as to be meaningless’ and the panoply of ‘… overlapping and unnecessary controls of dubious effectiveness for investor-depositor protection.’ What appeared to offend Hogan the economist most was that the Campbell Report gave no weight to the substantial body of theoretical and empirical work then available that cast doubts on the effectiveness and desirability of prudential controls. The Campbell Report’s failure to justify the imposition of prudential controls in other than vague terms, and the absence of any study about the effects of these controls, was ‘a glaring deficiency’.

The introduction of a more formal prudential supervision framework by the Reserve Bank in the mid-1980's, putting flesh on the bones of the Campbell Report and its follow-up, the Martin Report, gave Hogan more fertile fields to plough. Hogan noted that the framework had received scant public attention and that the Reserve Bank had provided little reasoning to support its approach. What more incentive did Hogan need! In a series of articles, somewhat more deferential in tone than the review piece I mentioned above, Hogan sought to provide a critical assessment of prudential supervision as it was then emerging.[6]

Hogan was unconvinced by the Reserve Bank’s rationale for prudential supervision. That rationale emphasised the ‘special status’ of banks in providing important payment services and as safe havens for small depositors, which needed to be supported — but not underwritten — by a system of prudential supervision. Hogan thought that the continued focus on depositor protection ‘reflected an historical concern … and was misplaced in the dynamic competitive environment of the 1980's. In this environment, Hogan argued, banks had lost their uniqueness in offering transactional services because similar products were increasingly available from non-bank financial institutions or through innovations in financial markets. This view was consistent with other internationally recognised academics, such as Douglas Diamond, Eugene Fama and Charles Goodhart, who were questioning the uniqueness of banks around the same time.

Hogan also argued that the ambiguous nature of depositor protection in Australian legislation — applying to all bank depositors but falling short of a guarantee — was the ‘worst of both worlds’. On the one hand, it unnecessarily extended protection to a large group of depositors who had the necessary ability and wealth to be able to protect their own interests and act as a market discipline on banks. On the other hand, uncertainty about the degree of protection provided would give depositors an incentive to withdraw funds from a bank rumoured to be in difficulty, setting a contagion effect in train.

For these reasons, Hogan thought it was necessary to consider alternative justifications for regulation. Drawing on his conceptual framework, he proposed a three-pronged approach:

  • an explicit mandate for the Reserve Bank, enshrined in legislation, to maintain the stability of the banking system, with the lender-of-last- resort facility its major tool;
  • enhanced market disclosure and other measures designed to overcome distortions created by transaction costs and imperfect information; and
  • a limited deposit guarantee (or insurance) scheme for small bank depositors, with variable premiums based on each bank’s risk to avoid moral hazard problems.

This alternative approach took firmer, and more radical shape, in Hogan’s later writings.

Hogan also had serious reservations about the Reserve Bank’s prudential requirements and supervisory approach, which he saw as also intended to contain the moral hazard problem associated with the special status of banks.

Starting with capital. Though earlier very sceptical about the effectiveness and neutrality of capital requirements, Hogan acknowledged that a strong case could be made for risk-based requirements, which would be a way of relating the implicit cost of depositor protection to the risk assumed. Accordingly, he commended the Reserve Bank for introducing the risk-based framework of the 1988 Basel Capital Accord. That said, he thought that the framework failed to appropriately address risk, not least because of its lack of granularity in risk-weights. What he would have made of the complexities in risk-weighting schema introduced in subsequent Basel reforms to address that issue we cannot know. We do know, though, that he took strong exception to the complete discretion the Reserve Bank had to determine capital requirements for individual banks above regulatory minima, something he described as ‘autocratic and indefensible’. Worse, non-disclosure of those requirements to the market reduced market discipline, concealed regulatory inequities and limited informed discussion and criticism about regulatory performance.

Can I beg to differ? The ability of a prudential supervisor acting behind the scenes to set minimum capital requirements for a banking institution based on its risk profile, and to adjust those requirements as that risk profile changes while avoiding the risk of over-signalling supervisory concerns, remains one of the most powerful tools in a risk-based supervisory approach.

Hogan had little to commend on liquidity regulation. He was highly critical of the Reserve Bank’s so-called liquidity requirement, under which banks had to hold a minimum level of high-quality (‘prime’) assets at all times. Hogan thought — as did some of us in the Reserve Bank at the time — that this requirement had little to do with bank liquidity, since locked-in liquid assets are not liquid except in an extremity. More fundamentally, Hogan argued that liquidity controls are superfluous if a bank has adequate risk-based capital; controls only add to the inefficiency of the regulatory framework and may even increase risk.

Again, can prudential supervisors beg to differ? One of the major lessons from the global financial crisis was that many banks — despite adequate capital levels — still came under stress because they had not managed their liquidity prudently. Northern Rock is the telling example. In the early phase of the crisis, liquidity in global funding markets evaporated and illiquidity persisted for some time, necessitating extraordinary central bank support for banking systems and individual banks in a number of countries. Rather than eschewing liquidity requirements, the G-20 reform agenda being pursued by the Basel Committee on Banking Supervision includes the introduction of two new global standards on liquidity, designed to promote the resilience of a bank’s liquidity risk profile over the short term and over a longer time horizon.

Finally, Hogan was cynical about the approach the Reserve Bank was taking to prudential supervision. This approach centred on the monitoring of banks’ compliance with a growing range of prudential requirements and on assessments of banks’ risk management systems. For this latter task, Hogan questioned whether the Reserve Bank had skills superior to those of the banks for designing, implementing and evaluating risk management systems. He took some comfort from the engagement of external auditors in bank examinations although he also questioned whether they were any better equipped to monitor risk. Beyond issues of competence, however, Hogan argued that prudential requirements and prudential supervision were, at a fundamental level, substitutes for market discipline on risk-taking behaviour. Better, as he saw it, that public policy require greater disclosure about the financial condition of banks so that market participants themselves could more carefully scrutinise the policies and performance of boards and management.

Hogan’s belief in the superiority of market mechanisms over regulatory frameworks in promoting financial stability brought his thinking closer to the ‘efficient markets’ view that was becoming the intellectual fashion. And it was a belief that subsequently found kindred spirits in New Zealand, the land of his birth. A touch of irony here! In the mid-1990's, the Reserve Bank of New Zealand adopted a prudential supervision philosophy built on a clear central bank mandate to promote financial stability, a public disclosure regime for banks to encourage market discipline, and a ‘light touch’ supervision process. No commitment to depositor protection, no deposit insurance scheme.

One of Hogan’s insights into market discipline has proven prescient. Hogan placed particular store on the potential of unsecured creditors and uninsured depositors to exert market discipline over risk-taking by banks, on the basis that these investors are exposed to losses from a risky strategy but gain no upside if the strategy succeeds. However, the discipline is muted if these investors perceive that they will be protected from losses in the resolution of a failed bank.

This issue is alive and well today. Another of the lessons from the global financial crisis was that some governments found themselves deploying public funds to cover losses that would usually be borne by creditors, and in some cases to cover losses that would normally be taken by capital providers, so as to avoid financial instability and economic damage. That let the moral hazard genie out of the lamp. As part of the response to the ‘too-big-to-fail’ problem, the G-20 reform agenda wants to ensure that unsecured and uninsured creditors of a systemically important financial institution can absorb losses and contribute to the recapitalisation of that institution — that is, they can be ‘bailed-in’ — during the institution’s life as well as, unavoidably, in the institution’s death. The new Basel III capital regime requires the bail-in of regulatory capital instruments and the global debate is about extending this concept to other creditors, in order of seniority. This raises some complex and challenging questions, but Hogan would surely have welcomed the policy intent.

By the time the Wallis Committee presented its Financial System Inquiry Final Report in 1997, Hogan had moved into the ‘narrow banking’ camp, influenced by the work of Robert Merton and colleagues.[7] Hogan agreed with the view that technological developments and financial innovation had stripped banks of their ‘pivotal position’ in the financial system and that banks did little that was not also done either by financial markets or other financial institutions. This erosion of the distinctions between various market participants argued for a focus on the functions performed by the financial system, not on institutions. On the narrow banking view, the only function that justified prudential regulation was the clearing and settlement function of banks, which provided the community with the capacity to complete financial transactions with certainty. Hence, Hogan argued, the classification of a bank should be narrowed to those institutions offering only transactions accounts and payment services backed by safe assets and, to prevent moral hazard, such banks should be heavily regulated through asset restrictions, risk-based capital standards and strong prudential supervision.

The other functions performed by the financial system – the pooling of funds, intermediation between borrowers and lenders, risk management, the provision of market price signals and minimising incentive problems between parties to contracts – would not be subject to any form of prudential regulation. Regulatory discipline would be replaced by market discipline.

This ‘functional’ approach to financial regulation was a radical one, but one that Hogan thought had considerable merits and a strong grounding in economic and empirical analysis. The regulatory safety net would be confined to transactions banking activities while market discipline, supported by adequate disclosure, would constrain risk-taking elsewhere in the financial system. Hogan by this stage had become even more convinced that prudential supervisors were not more efficient than market participants in assessing changes in bank risk promptly, and responding appropriately. He highlighted a principal-agent problem confronting prudential supervisors, which created perverse incentives to pursue self-interest rather than the public interest. Because prudential supervisors face reputational damage for bank failure but get little recognition for a bank’s prudent risk management and success over time, they are pre-disposed to take an overly conservative approach towards bank risk-taking.

At the same time, Hogan acknowledged that effective market discipline required that there be a strong policy commitment to no public sector bail-out of non-regulated financial institutions, and that this commitment have credibility with market participants. He was certainly right on this point, as the G-20’s current drive to get the moral hazard genie back into the lamp confirms.

Having established what he believed was a logically coherent framework for functional regulation, Hogan was disappointed at the approach proposed by the Wallis Committee, and accepted by the Government. The Wallis Committee took the same starting point as Hogan — a conventional recognition of potential market failure due to system instability and information asymmetry — but reached an entirely different conclusion about what it also called ‘functional’ regulation. Rather than narrowing the regulatory safety net, the net was significantly broadened, in Hogan’s view.

The Wallis Committee’s approach introduced the concept of the ‘intensity of promise’ inherent in a financial product. A high intensity promise was one that was inherently difficult for an institution to honour, where the creditworthiness of the institution making the promise was difficult to assess, and where a breach of the promise would have adverse consequences, particularly for financial stability. However, since it was often impractical to regulate products directly, the Wallis Committee argued that the focus of prudential regulation must remain on the promising institution as a whole; further, that institutions offering promises of highest intensity should be subject to the same scope of regulation. On this basis, deposit-taking and insurance would come into the remit of a new integrated prudential regulator. Superannuation did not fit as easily into this paradigm but, for a number of reasons, was added to the remit. Thus was APRA born.

And not without controversy! Hogan and other academic commentators at that time struggled to understand the rationale for the allocation of prudential responsibilities.[8] To them, the claim of a functional approach, the focus on product characteristics and the continuing institutional distinctions all sat uneasily together. Hogan had particular reservations about the new regulatory arrangements:

  • they did not embrace any form of deposit insurance, but left in place the ‘vagueness’ of longstanding depositor protection provisions;
  • they did not address the ‘too-big-to-fail’ problem, leaving the larger banks with funding advantages because of public perceptions that deposits with such banks were implicitly guaranteed
  • the widening of the regulatory perimeter would stimulate disintermediation in the form of a shift in funding from the regulated sector to unregulated financial institutions (‘shadow banks’) and financial markets;
  • the splitting of responsibilities between the Reserve Bank and the prudential regulator was not conducive to swift and effective resolution of threats to financial stability; and finally,
  • an integrated regulator would not necessarily be better placed to supervise the activities of financial conglomerates, which the Wallis Committee thought would become an increasingly important feature of the landscape, because it would probably be structured on an industry ‘silo’ basis.

Wisely, APRA dealt with that last reservation early by breaking down the silos it inherited and introducing a supervisory structure that distinguished between conglomerates and single industry institutions.

All in all, Hogan must have felt that the major financial reforms in 1997, still very much in place today, were an opportunity lost. An opportunity to further deregulate outside narrow banking, to further unleash the power of market forces to develop products that share and limit risks among market participants and, as he saw it, to ensure greater completeness of financial markets. He would have been mollified, at least, if he knew the expectation of some on the Wallis Committee was that markets would ultimately come to play the dominant role in financing economic activity in Australia and that intermediation through the banking system would inexorably shrink in importance.

Another financial system inquiry looms! Sadly, we will not have Warren Hogan’s wise counsel to draw on, and to help separate sound economic analysis from ideologies and special pleading. However, from what we have learned tonight, we could perhaps speculate on some of the issues that would have piqued his intellectual curiosity.

First and foremost, though, I hope he would have been willing to acknowledge that, despite his various misgivings, Australia’s financial regulatory arrangements have worked, and under the most testing circumstances since the Depression. They are widely judged to have been an important contributor to the resilience of the Australian financial system through the global financial crisis. Other key factors were at play, of course, but Australia’s experience stands in stark contrast to that of many major economies where regulatory arrangements were found wanting and are now being overhauled. Coordination arrangements between the Reserve Bank and APRA, a specific concern of Hogan, proved particularly effective during the most fraught periods of the crisis. A source of quiet pride for him, perhaps, that during those periods both agencies were headed by a graduate of his honours program. And he would have felt vindicated when a deposit insurance scheme was introduced in 2008 that made explicit, but limited, the protection available under Australia’s depositor preference arrangements. However, his preferred system of risk-based deposit insurance premiums appears still a way off.

What of some of the broader developments?

Firstly, the expected disintermediation of funds spurred by APRA’s wider regulatory perimeter has not eventuated. The bond market for non-financial corporations has grown moderately over the past decade and a half but this mainly reflects the accessing of offshore bond markets by larger, highly rated corporates, particularly during the mining boom. Smaller corporates have continued to rely on funding from traditional banking sources, whether for pricing or access reasons, or both. The development of a deep and liquid corporate bond market in Australia, opening up non-traditional financing sources for sub-investment grade corporates, is an on-going policy issue. In contrast to some overseas experience, a large shadow banking system — institutions involved in credit intermediation outside APRA’s regulation — did not develop in Australia. Some sectors such as managed funds and securitisation vehicles did gain in market share, at least until the crisis damaged the reputation of even high-quality securitisation products, but the shadow banking sector is now smaller as a share of total financial sector assets than it was before the Wallis reforms.

The reality is that banking institutions — in Australia and globally — have continued to play a pivotal role in the financial system, as the means of settlement for most transactions, in intermediating between borrowers and lenders, and as a major source of liquidity. The importance of this latter role became starkly apparent when global banks retreated to their laagers during the crisis.

Secondly, market discipline did not prove effective in restraining excessive risk-taking. Risk in many financial markets was badly mispriced. This was nowhere more obvious than for the toxic structured instruments spawned in the US sub-prime mortgage market. Or in the pricing of bank shares and bank risk, the latter reflected in credit default swap (CDS) spreads. In his detailed post mortem of the global financial crisis, Lord Turner of the UK Financial Services Authority noted that share prices of major global banks failed to indicate that bank risks were increasing ahead of the crisis but, au contraire, provided apparent vindication of aggressive growth strategies. And CDS spreads for major global banks were at historical lows, but should have been at historical highs, immediately before the crisis.

In Lord Turner’s words:

‘A reasonable conclusion is that market discipline expressed via market prices cannot be expected to play a major role in constraining risk taking, and that the primary constraint needs to come from regulation and supervision’.[9]

A substantial global reform effort is now underway, under G-20 auspices, to strengthen market disciplines. It includes the ‘bail-in’ initiatives I described earlier and enhanced disclosure initiatives aimed at improving the level and quality of information — about individual financial institutions and financial markets — that is available to market participants and authorities.

Lord Turner’s quote is a natural segue to a third issue — the importance of good prudential supervision. The global financial crisis confirmed emphatically that the supervision process, which is much more than ‘tick-box’ monitoring of compliance with rules and regulations, is genuinely value-adding. Quality prudential supervision — the active and hands-on engagement with a regulated institution to understand its strategies, strengths and weaknesses, and risk management capacities — does contribute to sound financial outcomes, as some of the crisis-affected countries learned too late. APRA has earned high domestic and international regard for its robust approach to prudential supervision, an important dividend from its commitment to build up its skills and experience in risk analysis, to address the sorts of concerns Hogan had raised much earlier. And one of APRA’s strengths is its integrated approach, which enables it to take a holistic, group-wide view of emerging risks and set prudential requirements that are harmonised, as much as possible, across deposit-taking, insurance and superannuation. The Wallis Committee surely got that right.

Fourthly, and away from issues of regulation and supervision, the global financial crisis has shone an unflattering spotlight on standards of corporate governance. This is where the spotlight should be, since ineffective governance goes to the very core of the crisis. There is no shortage of examples abroad where significant shortcomings in governance and risk management of financial institutions, and in their underlying culture and ethics, produced substantial losses and failures.

Hogan would have supported the heightened focus now on governance and risk culture by institutions, industry and professional bodies, and prudential regulators. He had a strong sense of professional ethics and propriety and understood the vital importance of personal integrity and accountability to financial institutions. His Westpac experience would have confirmed the need for strong and independent Board directors. He was one of the first Board members to raise concerns about Westpac’s growth strategy ahead of the bank’s difficulties in the early 1990's. His analysis of the principal-agent problems exposed in Barings’ failure almost twenty years ago drew attention to issues of shareholder activism, executive remuneration and the effectiveness of management oversight of risk, all lively issues today.[10]

Finally, the notion of ‘narrow banking’ is still with us! Not in the pure sense advocated by Hogan and others, but in the form of proposals — associated with the names of Volcker, Vickers and Liikanen — for structural separation of retail banking from proprietary trading and other high-risk activities. A complicated issue, but not one for Australia.

This has been a long memorial lecture but anything shorter, I feared, would not do justice to the breadth of Warren Hogan’s thinking, the strength of his convictions and the richness of his insights on financial regulation. He was a man interested in ideas and issues and this topic, though only one of his many fields of academic and policy interest, captured his attention and drew out his skills over a period of unprecedented change in the Australian financial system. His contributions serve as a continuing challenge to policymakers to seek rigour in their economic analysis, to acknowledge the powerful driving forces in financial markets, efficient or otherwise, and to understand the consequences of policy interventions in the world of the second-best. Warren Hogan remains our policy ‘conscience’. This is the mark of a valuable legacy; this is the mark of a great economist. It has been an honour for me to pay tribute to Warren Hogan tonight.



  1. I would like to acknowledge the assistance of Dr Joel Grant of APRA’s Supervisory Support Division in the preparation of this lecture.
  2. See Lodewijks (2007).
  3. See Hogan and Sharpe (1984).
  4. See Calomiris (2012).
  5. See Hogan and Sharpe (1983). The quotation comes from Edward F R and Scott, J H (1979) ‘Regulating the Solvency of Depository Institutions: A Perspective for Deregulation’, in Edwards F R (ed.), Issues in Financial Regulation (McGraw-Hill, New York).
  6. See in particular Hogan and Sharpe (1990).
  7. See for example Hogan and Sharpe (1997a).
  8. See Hogan and Sharpe (1997b).
  9. See Turner (2009), p 45.
  10. See Hogan (1997) and Hogan and Batten (2001).


Calomiris CW (2012), ‘Restructuring Prudential Regulation in Light of the Global Financial Crisis’, Second Warren Hogan Memorial Lecture, October 17 (presentation).

Hogan WP (1997), ‘Corporate Governance: Lessons from Barings’, Abacus, 33, pp 26-48.

Hogan WP and IG Sharpe (1983), ‘On Prudential Controls’, Economic Papers, Special Edition, April, pp 144-65.

Hogan WP and IG Sharpe (1984), ‘Regulation, Risk and the Pricing of Australian Bank Shares’, Economic Record, March, pp 34-44.

Hogan WP and IG Sharpe (1990), ‘Prudential Supervision of Australian Banks’, Economic Record, 66, June, pp 127-45.

Hogan WP and IG Sharpe (1997a), ‘Prudential Regulation of the Financial System: A Functional Approach’, Agenda, Vol 4 No1, pp 15-28.

Hogan WP and IG Sharpe (1997b), ‘Financial System Reform: Regulatory Structure, Financial Safety, Systemic Stability and Competition Policy’, The Economics and Labour Relations Review, Vol 8 No 2, pp 318-32.

Hogan WP and Batten (2001), ‘Corporate Governance Issues in Barings’ Failure’, Issues in International Corporate Control and Governance, Vol 15, pp 331-51.

Lodewijks J (2007), ‘A Conversation with Warren Hogan’, Economic Record, 83, December, pp 446-60.

Turner A (2009), The Turner Review: A Regulatory Response to the Global Financial Crisis, The Financial Services Authority (United Kingdom), March.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.