Monday, August 06, 2012

Swan was advised to call a financial system inquiry. He hasn't. So it's up to Hockey

Two years to the month since Wayne Swan was urged strongly in then secret Treasury advice to commission a new Wallis-style inquiry into the financial system one of the members of the original landmark Wallis inquiry has broken cover and a labelled a new one long overdue.

Professor Ian Harper, considered one of the architects of the Australian Prudential Regulation Authority, says he would be prepared to consider refashioning it to hand responsibility for regulating banks back to the Reserve Bank, if another inquiry was launched.

“It was explict in the Wallis report, we said on the very last page it only had a ten year life and there would need to be another within ten years - well it’s now been fifteen,” Professor Ian Harper told The Age.

“I am not suggesting that the whole financial system is broken, but it is clear the trajectory of its evolution has been different to that anticipated by Wallis and for which Australia's regulatory institutions were designed.”

Professor Harper, then at the University of Melbourne, is widely regarded as the author of the recommendation in the 1997 report that the regulation of banks be split between the Reserve Bank (which looked after stability of the financial system) and the Australian Prudential Regulation Authority (which oversaw the solvency of banks and other financial institutions).

He told The Age he would now be prepared to consider ‘killing his baby’ and decentralising bank regulation within the Reserve Bank .

“One of the reasons we wanted to separate APRA from the Reserve Bank was to make clear that financial institutions were not supported by the central bank. We had recommended against bank deposit guarantees or bank deposit insurance. But such guarantees are now a fact of life. The distinction between regulators may no longer be unsustainable.”

“I am not advocating we re-establish the Reserve Bank as the sole regulator of banks, but I am advocating an examination of what is now needed... Britain has just decided to re-establish a single regulator of banks after after re-examining its systems in the wake of the financial crisis.”

Professor Harper said when incoming Coalition Treasurer Peter Costello set up the Wallis inquiry in 1996 financial markets were felt to be inherently competitive. Research conducted by Professor Harper for Abacus, the organisation representing Australian credit unions, building societies and friendly societies makes clear that this is no longer the case.

“They are a symptom of a larger issue. Credit unions are only about 1 per cent of the financial system by assets and they’ve never been much bigger than that, but until now always been reasonably competitive. They are like the canary in the mine. If these guys are in trouble, then something bigger is happening.”

Professor Harper’s paper quotes then-secret Treasury advice given to returning Treasurer Wayne Swan after the August 2010 election “strongly” urging he make a new financial system inquiry “a key priority in your second term”.

Mr Swan appeared to reject the advice, saying the time was not right, a position his office said last night he still held.

Shadow treasurer Joe Hockey confirmed the Coalition would begin work on a new inquiry on coming to office.

Mr Harper made clear he did not expect to head the inquiry, noting the previous heads had been from outside the financial system.

“Campbell in the early 1980s was a real estate guy, and Wallis in the mid-1990s used to say made cardboard boxes, I would be happy to merely contribute, in whatever way was wanted.”

In today's Sydney Morning Herald and Age

Treasury 2010 Red Book Overview

Related Posts

. July 2009: Son of Wallis, daughter of Campbell. The time is approaching

. July 2009: Why Australia Needs a Comprehensive Financial System Inquiry

. October 2010: Joe Hockey is right. It's time to talk banks

. November 2010. Here are the Terms of Reference