Skip to main content

Macro prudence vs macro-prudential supervision

Wednesday 20 March 2013

Charles Littrell, Executive General Manager - Macquarie University Centre for Financial Risk, Sydney

Good morning. Today I propose to compare and contrast ‘Macro prudence’ and ‘Macro prudential supervision.’

The first phase of the North Atlantic financial crisis, which ran from 2007 to 2009, demonstrated that even the largest and previously most respected European and American financial institutions could fail, and fail in a manner which imposed crippling direct and indirect costs on the citizens of the countries affected. The North Atlantic crisis became a global crisis, when global financial markets shut down from late 2008 into 2009.

The financial crisis generated a great deal of regulatory and political response. Among these responses, the macro prudential supervision concept moved from its formerly rather obscure state to front and centre in the global regulatory discussion.

There is not yet an official definition for macro prudential supervision, or rather, there are many competing definitions. For our purposes we can simply define macro prudential supervision as the set of supervisory tools, and governance of those tools, deployed by the public sector to promote systemic financial stability.

This contrasts with so-called micro-prudential supervision, which focuses upon reducing the failure rate for individual institutions. ‘Macro prudence’ is a phrase I have invented for today’s speech. I propose to define macro prudence as: The way in which the public sector works collectively to promote financial stability.

The main point of this speech will be that macro prudential supervision, while an unobjectionable concept, is far from a panacea for financial stability. Macro prudence, by contrast, is the essential mindset which the public sector must maintain, if we are to have a reasonable chance to preserve financial stability over decades and ultimately generations.

What is financial stability?

To borrow a concept from a famous U.S. Supreme Court ruling, financial stability is hard to define, but we know it when we see it. We can describe the characteristics of financial stability, and the main characteristic is confidence. This includes justified confidence that:

  • Payment and clearing systems are reliable;
  • Repositories for safe money, such as banks, are in fact safe;
  • Qualified borrowers will receive credit on reasonable terms; and
  • Failures among prudentially regulated institutions will be rare, small, and managed in a fashion that does not create broader systemic problems.

Given APRA’s remit, today I will focus upon financial stability in the context of the banking system. This is not to slight the essential contribution to financial stability from sound payments and clearing systems, and for that matter the remarkably useful contribution of markets and behaviour regulators to fairer and more stable systems.

Cyclical failure: the natural state of financial systems

Any study of financial failure [1] will demonstrate that failures are both depressingly frequent, and cyclical. In an idealised sense, we know that the cycle looks something like this:

  1. After some period where economic fundamentals, asset prices, and bank behaviour is more or less in balance, we see a growth in confidence. This growth in confidence in turn leads to more open lending windows, and growth in asset prices somewhat in excess of long term trends.
  2. At some point, the confidence phase segues into a boom, possibly an unsustainable boom. Following Minsky’s typology, we move from the investment phase to the speculative phase, and eventually the Ponzi phase. In this last phase, investments are made and financed under the stretched assumption that asset price growth will make the investment profitable.
  3. At some point this trend becomes unsustainable, and we know that when a trend can’t continue forever, then it will eventually stop. There is a proverb that markets go up by the stairs, and down by the lift; sometimes banking systems and economies do the same thing.
  4. Once we get to the bust, the economy can go one of three ways. If the initial response to the bust is particularly ineffective, it can continue into a full fledged depression. We hope that the public and private sectors between them have learned enough over the past century to avoid this fate, though unfortunately there are no guarantees. In any event, at least so far the 2007 to 2009 crisis has not evolved into a full blown depression in either the United States or most of Europe, though some of the smaller and most afflicted European countries have experienced or are experiencing depression conditions.
  5. Ideally, the public and private response to the crash results in a V-shaped recovery, with the economy rapidly returning to its long term equilibrium. In 2008 and 2009, Australia and most of Asia generated this pattern, in response to contagion from the North Atlantic crisis.
  6. Less ideally, we see a U-shaped recovery, when the economy takes several years to recover its equilibrium.

Moving on from my very simple chart, here is a fancier version that generates the same result: regular but unpredictable cycles generate U or V shaped recoveries, or an even bigger bust. I show you this chart to demonstrate that it’s possible to make a simple concept apparently complicated. But apparent complication isn’t the same as truly knowing the future.

If we look at real world economic indicators, we see the pattern of boom leading to bust in cyclical patterns. Here for example are some recent share price movements. This is a well known price series.

In APRA’s world we spend a lot of time looking at credit growth. Over recent years we have seen business credit, the green line in this chart, follow the idealised pattern near exactly. But housing credit has followed a different pattern. So the idealised chart I demonstrated must allow for a lot of variance in reality.

Thematic approaches to macro prudence

If the natural state of economic affairs is confidence leading to overconfidence and then panic, and boom leading to bust, then the public sector’s various tasks are reasonably clear:

  1. First, we need to moderate any period of over-confidence, so that a long period of prosperity need not lead to the excesses of a boom.
  2. Second, when the business and financial cycle inevitably turns, despite our best efforts to moderate any boom, then we need to strive above all to prevent a crash turning into a depression.
  3. Having avoided the disaster of a depression, we then need to encourage a rapid or V-shaped recovery, rather than a long or U-shaped recovery, but without forgetting that we don’t want to overshoot into the next boom.

In the very long term, history suggests that we won’t be able to avoid catastrophic prudential failures forever. But it is possible to avoid them for a long time. The last Australian systemic banking crisis, for example, was in the 1890s. There are elements of good luck as well as good management in this result, but in Australia we have demonstrated that it is possible to run a reasonably safe private sector banking system on a generational time scale.

In addition to the endogenous economic cycle I discussed earlier, small open economies such as Australia need to protect themselves from exogenous shocks. The 2007 to 2009 financial shock was one example, when we had the good fortune to possess and use appropriate tools to reduce the local economic fallout.

There is a rather larger issue in the Australian economy, of course, in that we are benefitting from historically high terms of trade. The central estimate for our economy is that we are looking at good economic conditions for a long time, buoyed by rapid economic growth in Asia. There is nothing to guarantee, however, that 50 years of progress might not be offset by five year periods when Asia reverses, and therefore Australia’s terms of trade reverse.

The underlying Australian economy possesses a great many strengths [2], but we are clearly exposed to a terms of trade shock. In our supervision and regulation, we seek to create an Australian financial system that is a shock absorber, rather than an accelerant, in the face of unexpected external economic adversity.

This contrasts with the endogenous economic shock generated by the North Atlantic crisis countries. In the U.S. and much of Europe, to broadly generalise, lenders became far too lax, borrowers far too confident, and capital markets far too eager to finance suspect risks. The resultant torrent of cheap money artificially pumped up the subject economies. When the bust hit, the affected economies were brought down by many of their biggest banking and financial services companies.

APRA is unable to guarantee that Australia will never have a banking crisis. We do strive, however, to ensure that any banking crisis is caused by an exogenouseconomic crisis. The opposite result, that an economic crisis is caused by a banking crisis, is a much more serious, and ideally more preventable, regulatory failing.

Some comments on macro prudential supervision

Most of the remainder of my speech will focus on strategies for macro prudence. Before moving to this material, however, I will briefly review some comments APRA and the RBA have recently placed on the public record.

Late last year, my RBA colleague Luci Ellis gave a speech [3] that outlined the RBA’s and APRA’s views on macro prudential supervision. APRA and the RBA also jointly published a paper [4], originally developed as background for Australia’s participation in the IMF’s Financial Sector Assessment Program in 2012. To repeat Dr. Ellis’s main points:

  1. Macro prudential policies are only a subset of the policies intended to enhance financial stability. Hence my focus later in this speech on macro prudence strategies.
  2. Second, most macro prudential tools are in fact the usual prudential tools.
  3. Third, the recent crisis was a regular prudential crisis, in which major financial institutions in some countries were allowed to go astray in their credit and trading strategies. The innovation in this crisis wasn’t how banks and others went bust; it was that the bust was concentrated among very large entities in the United States and Europe. In other words, those institutions that regulation is set up to protect most carefully, failed most spectacularly.

In the global context, we see a great deal of regulatory reform that is intended to strengthen banks and promote financial stability. APRA supports the reform process, but we need to ensure that it ultimately leads to sound behaviour by major financial institutions. Strong supervision in our view is equally important in achieving behavioural change.

In the particular context of macro prudential supervision, we see several threats to good supervision emanating from an overly rules-based approach.

Implementing macro prudential supervision in many national jurisdictions runs the risk of the central bank or the finance ministry telling the prudential regulator how to use the regulator’s tools, even when the regulator doesn’t necessarily want to use them in that way. There are a great many problems with such an approach. The list starts with a resultant fuzziness in responsibility for prudential outcomes, continuing through the potential to impair relationships between the key public sector agencies, and finishing with a reduction in confidence on the part of the prudential regulator. In the Australian context, these would be disastrous results; we leave other jurisdictions to consider the implications in their countries.

Fortunately, there is no intent in Australia to take such an approach. APRA, and only APRA, uses the regulatory tools related to prudential supervision, and the more general tools of supervision for sensible behaviour by our regulated flock.

A second problem with macro prudential supervision is that it has become something of a ‘magic wand’ in the global regulatory debate. Over-confidence in a regulatory tool risks under-reliance upon supervision, and good supervision is the best countercyclical tool available to us.

Macro prudential supervision is only one of many rules based magic wands that are progressing in the world. Others include stronger capital and liquidity requirements, stress testing, recovery and resolution plans, and statutory schemes to facilitate the resolution of a systemically important financial institution. All these reforms are useful, but if they reduce a regulator’s resolution to supervise, or the political and public sector support for proactive supervision, they can do more harm than good.

At its best, macro prudential supervision is something that the prudential regulator already undertakes, and at APRA we hope that we are in this category. Our macro prudential work receives substantial assistance from the RBA in particular and the public sector in general, but at the end of the day, all supervision, micro and macro, is in APRA’s hands. I immodestly assert that these are a reasonably safe pair of hands.

Moving on to macro prudence

Having laid the groundwork, let’s move to macro prudence. In essence, macro prudence requires the responsible public sector agencies to cooperate for a common goal: long term financial stability.

The core agencies in this work in Australia are APRA, the RBA, Treasury, and ASIC. In this speech, as previously noted, I am focussed upon banking stability in the prudential regulation context, which in colloquial terms means discouraging regulated entities from behaving foolishly, and above all not failing.

In this context, the four core agencies need to achieve three outcomes:

  1. First, we need to know and agree, at least approximately, where we are in the financial stability cycle;
  2. Second, we need to know what responsibilities accrue to each agency in each part of the cycle; and above all
  3. We need to coordinate and help each other achieve our respective tasks.

We can define the economic cycle in four phases: normal (more or less), boom, crisis, and recovery. This table outlines which agencies have which roles in these phases.

Agency roles in Macro Prudence through the economic cycle

  Normal Boom Crisis Recovery
APRA Discipline outliers, ensure sound prudential framework Active restraint of most aggressive; possibly tighten standards Advise on which entities are sound and which troubled, estimate losses Avoid undue conservatism, manage exits
RBA Analysis, deepen understanding of potential threats Jawbone to support APRA, maybe monetary policy Liquidity support, systemic risk estimates Monetary policy
Treasury Guard against complacency, advise government, lead on legislation Support APRA, emphasise the cost of complacency Advise government on ad hoc responses Recovery initiatives
ASIC Discipline outliers Proactive enforcement Protect market operations Cleanup enforcement
All Agencies Building intra-agency cooperation, capacity building, contingency planning Coordinate anti-boom strategy Close coordination and crisis response Learn from experience, adjust statutory framework, encourage recovery

I emphasise that this table is the briefest of sketches on what we do, but hopefully it gives a sense for how we work together.

In normal times, there is more or less a balance between the four agencies. APRA and ASIC are working with our respective flocks, not in identical but fairly similar ways. The typical regulated entity is operating well, so we focus on bringing outliers to a better position. APRA also attempts in normal times to keep our statutory infrastructure, comprising legislation, prudential standards, and guidance material, up to speed. We much prefer to deal with regulatory issues in normal times, as the focus must be more on supervisory intervention at other times.

For historic and other reasons, the RBA has the deepest pool of analytic capacity on the Australian financial system. In normal times the RBA and the other agencies benefit from this analytic capacity, which among other things helps us identify the substantial potential imbalances which might require attention.

The other agencies rely upon Treasury to take the lead in dealing with government and Parliament.

APRA needs three resources from government in order to perform to a high standard, and Treasury is critical in helping APRA secure these resources.

First, we need sufficient funding to conduct normal operations.

Second, we need sufficient statutory powers to deal not only with competent, honest, and cooperative regulated entities, but to deal with entities that fall down on any of these three measures.

Finally and most importantly, we need moral support from government to take necessary but unpopular supervisory actions.

My experience is that essentially all the prudential regulators in developed economies have at least reasonable budgets, and on paper they all have strong statutory powers. The essential differences in outcomes, however, tend to stem from the support or lack thereof that governments give regulators for proactive supervision.

In Australia, for a very long time in banking and over the past decade in superannuation and insurance, there has been a strong bipartisan consensus that the financial system should be safe as well as dynamic. APRA has for many years felt confident that the Government and Parliament more generally support us, as we undertake our sceptical, intrusive, and where necessary aggressive supervision [5].

This is consistent with the approach we see in most of Asia, Canada, and the Nordic countries. It is less obvious in the United States and in some European countries. This latter group of countries suffered most from the financial crisis.

It turns out that Treasury is the critical agency to ensure that successive generations of ministers understand that responsibility for the prudential regulator carries with it an inevitable level of complaint. There is a choice, however: ministers can receive more or less constant low-level grumbling from the financial industry about the alleged conservatism of the prudential regulator. Alternatively, once a generation they can receive, often on their way out of office, complaints from millions of voters who have had their financial prospects destroyed by overly lax supervision of the financial sector.

Happily, the Australian Treasury is more than up to this task. APRA generally has enough funding, sufficient statutory power, and unequivocal support for its supervisory approach.

Pushing against the boom

In the boom, financial regulators must consciously move from the normal times mindset, to a proactive resolution to change the facts that exist on the ground. Restraining overly aggressive behaviour in a boom is where APRA most succeeds or fails in its long term bank supervision mission.

The key challenge here is that in the boom, risk is at its highest point, and risk perception at its lowest point, not only among regulated entities but in society more generally. Furthermore, the most aggressive, rapidly growing institutions are led by the most aggressive, least risk-conscious, and often most arrogant managers.

In this environment, APRA must take strenuous action to reduce entity and system risks, at a point when there is least public consensus that we should do so, and most resistance from the entities creating the biggest problems. As I tell the new graduates joining APRA: if you joined APRA to be popular, you made a bad career decision. Prudential regulators are most valuable when we are least valued: that is, when we are pushing hard against the most aggressive institutions in a potentially dangerous boom.

ASIC is in a similar position, possibly made even worse by the inevitable avalanche of slick operators looking to make money from the gullible in overheated financial markets.

This is the point in the cycle where most public sectors drop the ball. They don’t intervene with sufficient counter-cyclical force, and the boom inevitably becomes a bust. This is not because regulators can’t see the boom, but because industry and politicians mistake the boom for the ‘new normal’, and don’t want regulators to do anything to mess up this dream. Australian Governments, thankfully, have for decades displayed good sense in not mistaking booms for normality, and this makes all the difference for prudential outcomes.

In Australia, by intention but also with a useful dollop of good fortune, for the last twenty years we have been able to stay at least slightly ahead of any unduly dangerous booms.

It turns out that a key element in APRA (and ASIC) being able to perform its necessary but remarkably unpopular role at this point, is the public support of the RBA, and the private support of both the RBA and Treasury.

Consider the early 2000s home loan boom. Both APRA and the RBA identified that the 1998 to 2002 boom might get out of hand. APRA took the following steps from 2002 to 2005:

  1. We materially ramped up our communication with ADI boards and executives on the dangers they evidently weren’t seeing in home lending;
  2. We strongly discouraged sub-prime lending;
  3. We disallowed capitalised origination expenses, which removed up to 15 per cent of the Tier 1 capital from some institutions;
  4. We changed the risk weighting on home loans to reflect loan to valuation ratios, insurance status, and non-standard conditions, in a fashion that strongly discouraged more risky home lending;
  5. We removed capital arbitrages between the ADI and lenders mortgage insurance industries, and greatly increased the capital requirements on LMIs;
  6. We conducted a major stress test, which demonstrated among other things that many ADIs were taking much more downside risk than they thought they were taking; and
  7. We engaged in strenuous supervisory intervention to restrain the most aggressive lenders.

At the same time, what did the RBA do? Among other things, the RBA’s senior leadership strongly encouraged APRA to take these steps, and strongly supported APRA in public and in Canberra. Treasury was similarly but more privately supportive.

As a result, APRA was allowed and even encouraged to take steps to restrict a home lending boom. This is probably one reason why Australia escaped relatively unscathed from the 2007 to 2009 phase of the global crisis.

This audience might think: ‘What’s the big deal? Of course this is what APRA does.’ But in most of the world, this is not what a prudential regulator is allowed to do. Our American cognate agencies, for example, attempted to take most of the above actions prior to 2007, but were invariably shouted down by the U.S. lobby groups and the U.S. Congress.

This is a crucial point: APRA staff are not notably smarter, wiser, nor more committed to the public good than are the equivalent staff at U.S., U.K., and other regulators in the countries recently suffering massive financial failures. What we have that some others don’t have, is strong support from the rest of the public sector, and strong political support for a sound Australian financial sector.

The crisis

If APRA takes the lead as ‘most unpopular but effective’ agency in the boom, what happens in the crisis? Well, hopefully there isn’t a crisis, or at least not a large crisis.

But despite the best efforts of the Australian public sector, Australia was exposed to the 2008/09 financial markets crisis. What roles did the financial regulators play at this point?

For APRA, by the time we get to any crisis, it’s too late to shore up the system or individual entities. We are mainly fire fighters at that point, seeking to identify potential problem entities, and facilitate fixes, mergers, and closures to improve or resolve problems.

The RBA’s market operations become critical, as private sector liquidity will have probably dried up. Australia is fortunate because the RBA was one of the earliest, most proactive, and most flexible liquidity providers during the global crisis. One reason they were able to do this was confidence that the banking system was well capitalised with sound asset quality. Another reason was that APRA and the RBA had at least in general outline thought about what we would do in such a crisis situation, before this particular crisis emerged.

As the crisis deepened, it became evident that extraordinary public sector support would be necessary to the ADI sector’s liquidity, as the world’s money markets closed. At this point Treasury and the RBA took the lead in advising government. APRA’s main contribution was that we helped deliver a soundly capitalised banking industry, prior to the crisis, so the odds of taxpayer loss were much lower.

In a crisis, it is generally the case that the government and public sector suddenly need a lot more information from the banking sector. APRA was able to facilitate much of this information flow.

The recovery phase

Treasuries and central banks tend to take the lead in the recovery phase, with fiscal and monetary policy. APRA’s main job from say 2010 was to ensure that any 10 impaired entities resolved their impairments. Possibly this is counterintuitive, but we also strive not to tighten our regulatory settings in the recovery phase. To take the banking industry as an example, markets were requiring much more capital and sounder liquidity from the larger banks, so we did not feel the need to impose tighter limits ourselves. As the Australian market stabilised, APRA has coordinated a move to the new and more demanding prudential requirements for internationally active banks. Happily, because our banking sector is among the strongest in the world, APRA has been able to revert to our more or less normal regulatory settings, which in our case means conservative in the global context.

Where are we now?

The previous discussion hopefully naturally leads you to ask: ‘where is Australia now on its economic cycle?’

The answer to this question from APRA’s position is essentially: ‘ask the RBA and Treasury’. We don’t focus on expected outcomes, but the left side of the probability distribution. In that sense we are the designated paranoiacs among our peer agencies.

Having said this, with inflation and unemployment low, personal income and wealth high, and asset values high, we are in no worse than ‘normal’ territory. There are many potential exogenous shocks which bear monitoring, however, in a regulatory and supervisory sense.

APRA is implementing the Basel III capital reforms to the banking system, on a slightly more conservative basis than the international minimum requirements, and at the faster end of the global timetable. We will consult again in the near future on the Basel III liquidity reforms. We have taken the opportunity to refine the general insurance and life insurance capital regimes, which did not so much tighten but make more risk sensitive these standards. In superannuation, following the current Government’s reforms, we have been able for the first time to introduce prudential standards, which will help improve the risk governance in this rapidly growing industry. We are also taking this opportunity to work with Treasury on many incremental improvements to our legislation, particularly to improve our failure management capacity.

As for supervision, we are lifting our focus on stress testing, and upon recovery and resolution planning. We continue to take a reasonably firm supervisory approach, but on current credit growth rates and from what we are seeing on our visits, there is no reason to take a more consciously anti-boom approach.

With our colleagues at other agencies, we are also striving to build better joint agency approaches, on matters such as dealing with the failure of one or more regulated institutions.

International conformity vs. Australian optimality

From 2009, there has been a large international push towards tighter regulation of the financial sector, particularly for large banks, but extending more broadly to any substantial financial institution. In addition to a tighter rule set, there is now a sense that each country’s ability to vary from the international rules is considerably more constrained. This mindset has emerged from many groups, including the G20, the Financial Stability Board, standard setting bodies such as the Basel Committee, and the IMF.

Australia complies with the many international standards that bind us in financial regulation. APRA and our ‘cousins’ on the Council of Financial Regulators are responsible for ensuring this outcome.

But having achieved international compliance, our job is only half done. The real trick is to ensure that the Australian standards produce an appropriate balance between systemic efficiency and systemic safety, for Australian preferences.

So far we have been able to achieve this balance, and expect to be able to do so in the future. But it would be fair to say that in recent years APRA’s regulatory task has been somewhat complicated by the increasing pressure to adopt a uniform global approach to financial regulation. This approach is not necessarily optimised for conditions in Asia and the Pacific.

In maintaining financial stability, ‘everybody must do it the same way’ is not necessarily the best path to stability. If we look at natural selection in nature, for example, we see that the race in the long term goes not to the strongest, nor the largest, but to the most flexible and diverse. It is possible that the global push for stronger financial regulation, while suppressing financial instability for perhaps a decade or so, may in fact produce rigidities and imbalances over many years that erupt into another, and perhaps worse, financial crisis at some point in the future.

Australian inter-agency cooperation

One area in which Australia varies from some international practice is the way in which the four relevant agencies cooperate with each other. As it happens, and very fortunately for Australian financial stability, APRA, ASIC, the RBA, and Treasury have a demonstrably successful track record of inter-agency cooperation.

International assessors coming to Australia often ask a question along the lines of: ‘How have you achieved this remarkably successful cooperation?’ To which our response is along the lines of: ‘well, we talk to each other a lot.’

More substantially, not only do we talk to each other a lot, there are several reasons why the relevant agencies work well together.

First, we share the same mission, but crucially, we don’t have much overlap. All four agencies are firmly committed not only to our various individual mandates, but to the need to ensure that the Australian financial system is as stable as it can reasonably become, while maintaining sufficient dynamism for competitiveness and efficiency. But in this work, we cooperate rather than compete.

To take one example, many of the central banks in countries that have created specialist prudential supervisors, have retained some form of bank supervision department. This approach guarantees that the prudential regulator commences business with insufficient skills in bank supervision, and that the prudential regulator and the central bank will compete rather than cooperate in supervising the largest banks. It is much to the credit of Ian Macfarlane, the RBA’s Governor at the time, that the RBA’s bank supervision department moved in its entirety to APRA in the late 1990s, and that the RBA does not seek to second guess us in bank supervision.

Similar stories exist between APRA and ASIC. We both have our jobs to do, which are clearly related, but not overlapping. In 2006 the government conducted an enquiry which among other things looked at APRA and ASIC overlap [6]. This review identified only minor overlaps, which have since been dealt with.

In addition to an appropriate balance between shared and separate missions, it would be fair to observe that Australian financial regulators are staffed by apolitical professionals with decades of relevant experience. Not all of us spend our whole career in the public sector, but all of us are experienced. I have worked with many colleagues in APRA, ASIC, the RBA, and Treasury in the past decade. I could tell you quite a lot about their individual and collective professionalism. I wouldn’t have a clue, and care less, about their political preferences.

The Australian approach is far from unique. Many countries staff their regulators with experienced, apolitical leaders, but not all countries follow this approach.

Finally, and hopefully not temporarily, the four Australian agencies work much harder than average on building professional but personal relationships among our respective leaderships. Partly this is a legacy of how APRA was staffed upon its foundation, and this legacy will eventually recede. In the interim, we are striving to continue building these personal links. APRA sends and receives staff on secondment or transfer to the RBA, ASIC, and Treasury. We frequently meet our counterparts, not only at the most senior level but several levels down, in all four agencies.

Personal relationships do not compensate for poor institutional arrangements, particularly in a crisis. But personal relationships built over years, and in some cases decades, certainly do help Australia’s financial regulators cooperate effectively through the economic cycle.

Where to from here?

From APRA’s perspective, we are reasonably well placed to protect Australia’s financial stability. Our statutory powers have been considerably enhanced over the past decade, as have our prudential standards. Currently Treasury is inviting consultation on a bill [7] that is intended to further strengthen APRA’s failure management powers, and harmonise a great many small differences among our various industry acts. It would be fair to say that perfection is difficult if not impossible to obtain in statutory powers, but lack of statutory powers is not a material obstacle to APRA’s day to day supervision.

As for supervision, again perfection is impossible, but in general we feel confident that APRA is responding appropriately to identified emerging risks. The larger problem is that, as with any risk based regulator, one must cover many risks that never eventuate, and there are many risks that could emerge over which we have little control.

Closing thoughts on macro prudence

APRA accepts that Australia may, and most likely will, eventually suffer a financial and economic crisis. We don’t work on the basis that major prudential failures will never occur, but that they will not occur for any cause that is reasonably predictable. Let us hope that the next Australian financial crisis will not occur for many years, and preferably not for many decades. But this hope must be balanced by the sober knowledge that the conditions for such a crisis, while unlikely to arise at any particular moment, are always latent in Australia’s reliance upon its international economic and financial connections.

Macro prudential supervision is useful, but macro prudence, the ability of a nation’s public sector agencies to work effectively to ward off financial instability, is a much more useful concept. In Australia, APRA and our close colleagues at the other financial regulators continue to strive for macro prudence, and with any luck at all, we will continue to do so successfully for many decades to come.

Thank you for your attention.



  1. Reinhardt and Rogoff, Delivering effective corporate governance: the financial regulators role, for an 800 year review of financial failure.
  2. IMF’s 2012 FSAP, report on Australia.
  3. Macroprudential Policy: A Suite of Tools or a State of Mind?, October 2012, available on the RBA website.
  4. Macroprudential Analysis and Policy in the Australian Financial Stability Framework, joint APRA and RBA paper, September 2012, available on the APRA website.
  5. See HIH Royal Commission report, recommendation 26.
  6. Report of the Taskforce on Reducing the Regulatory Burdens on Business—Rethinking Regulation, 2006. Available on the Treasury website.
  7. Strengthening APRA’s Crisis Management Powers, September 2012, available on the Treasury website.

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.