Report writing
Topic for the Report: Some experts have expressed the opinion that the regulators need to be more careful in bank regulation: discuss the issues that surround the bank regulation. Address your report to the Chairman, APRA.
- Direction:
Generally speaking, you will analyse current bank regulatory system in Australia.
Refer to past events/examples (within or outside Australia) to support your views.
Finally, on the basis of the discussion, draw your own conclusions/give suggestions.
Rather than just quoting the events/examples, it is more important to analyse them.
Provide references (Harvard system) to acknowledge the source of information.
Provide references within the body of the Report, and also attach a list of references.
Important:
Students MUST write the Report in their own words. Direct copy-paste of information from various websites will be treated as plagiarism and consequently the students may fail this assignment. Occasional direct quotes of 2-3 lines are allowed (with due reference). Although the Report will be written in your own words, the sources of information must be acknowledged.
If you want to learn more about finding information from the Internet, you can seek help from the staff at the University of Canberra Library.
You can do the Report assignment as a team (not more than six students in a team). If you wish to do this assignment individually, you can do so. Please note that assessment criteria will remain the same in both these situations.
Word limit: 1,500 words (+ or – 10% words allowed)
Spacing: students must use double-line spacing.
Assessment criteria:
- Collection of relevant data and information: maximum 10 marks
- Analytical ability: maximum 10 marks
- Overall presentation, spellings, grammar, referencing etc: maximum 5 marks
Following one of the worst global financial crisis in the past few years, the world is now looking for those economies governed by good regulations. Many investors lost confidence even in well-developed economies after that credit crunch. However, in case of Australia, the well-regulated banking and financial environment provides comfort and benefits to consumers and companies in many forms, such as: they can get capital at competitive rates in a less risky setting, they are assisted to operate their businesses internationally, they can participate assertively in the financial system using reliable information for making investment decisions, etc. Over the years, Australian economy has improved a lot, and is seen respectfully due to fair and reliable regulations.
The ongoing system of banking regulations took its roots back in 1996 after the establishment of Financial System Inquiry by Stan Wallis. It should be noted that this inquiry was not a result of any financial crisis or emergency, rather it took place to develop a system and regulations for banking and financial institutions in Australia in a steady and calm times. The current ‘twin peak’ regulatory architecture was presented then by Wallis as an effective framework to operate. The bottom-line of this framework was that there would be two financial bodies to regulate the financial market activities, along with the assistance of Central Bank. One is the Australian Prudential Regulation Authority (APRA) – taking responsibility for prudential regulation, and the other is the Australian Securities and Investments Commission (ASIC) to ensure veracity of the financial markets through closely monitoring the participants’ conduct and the quality of their disclosure about the financial products traded on those markets. Two highly specialized regulatory bodies were created as a result of this framework, with their clearly defined regulatory roles.
In March 2001, the USD $ 3.75 billion collapse of an Australian insurance giant, HIH posed dubious questions for APRA. In the investigation carried out by the government commissions, it was revealed that APRA needs a more focused and close questioning criteria to assess the actual financial performance of the institutions. This led APRA to introduce a new set of parameters to evaluate the financial institutions. It was named as Probability and Impact Rating System (PAIRS). In the next four years, over 99% of the financial entities in Australia were PAIRS rated by APRA for more than once. The rating is done through different measurements, like on-site visit, consultations and meetings, etc. This investigation also explored the negative side of the relationship between APRA and ASIC. It was found that the functions performed by the two bodies were somewhat overlapping and unclear in some dimensions in relation to financial services providers. And because of that, ASIC was somewhat unaware of events and practices taking place at HIH.
The term ‘Credit Crunch’ was coined to name the panic and turmoil brought in general and particularly in the United States’ financial market in the summer of 2007, posing a severe threat to trigger a worldwide economic recession. It took the decade of increasing prosperity and employment in west, to near a freezing point, and caused around 1 trillion dollars to just wipe off of the value of world economy. Nevertheless, the global stock market integration with the west (including Australia) was subject to a downturn. Among the few major reasons that initiated this crisis, the burst of the US housing market bubble topped the list. It was the lenient regulation in practice that allowed filling up that bubble. Most of the institutions in mortgage-backed securities industry were badly affected and many of them chose to exit the market through different means. The fragility of a free capitalistic approach was unveiled then.
The major ingredients of the west’s commercial financial system have been: highly risky investments, excessive speculations and interest bearing debts. These were followed by much narrowed and complex means of investments to trap every single member of the society, majorly goaded by the greed of the capitalists and reached its apex – breeding conflicts of interest and mismatch between incentives of the various groups and individuals involved in the financial games. Several policies were announced in an attempt to lessen the financial crisis, including huge bail-out packages.
Similarly, the Sweden’s financial crisis also stemmed out from a massive increase in speculative investment in real estate and consumer debt. This housing estate bubble was collapsed and the price went below 25% in real terms in the late 1990s. Major banks in Sweden fell below their required capital reserves due to rising loan defaults. It went to such an extent that the aggregate losses of only seven largest banks reached up to equivalent of 12 percent of Sweden’s annual GDP. Then in order to avoid the collapse of the whole banking system in country, the government initiated a three-pronged program: recapitalizing of banks, establishment of an aggregate bank to buy up bad assets, and nationalization of banks.
On the other side, a number of financial experts and officials of Islamic Financial Institutions have been claiming that Banks regulated by Islamic principles remained untouched by the above discussed financial crisis. They include Islamic Banks in Arab countries, Pakistan, India and few banks in West as well. The underlying reasons they claim are that a Shariah-complaint Islamic bank does not follow any unrealistic financial approach; its transactions are based on the real exchange of goods and utilities. It does not rely merely on speculative stocks and bonds, and is not involved in the trade of debt. Therefore, the Islamic banking system remained safe from the global financial crisis, and is growing at a much faster pace every year.
In light of the few above mentioned global examples and beyond, regulatory authorities in Australia are performing at their best to come up with the most appropriate solutions for their financial economy. However, the challenges are there. First of all, APRA has a challenge to design and develop such regulations and policies for the financial sector of the economy, that they go in line and up with the all the time evolving and progressively more complex financial services sector. The investigations have also seen that corporate collapses do not usually occur without the presence of elements of frauds in them, and these are extremely difficult to be identified prior to the occurring. Furthermore, another potential challenge for APRA is to improve its perception in general public; because usually the agency is found working behind the scenes and people remain unaware of its contributions. As it was noted by Dr. Jeffrey Carmichael (former Chairman of APRA) that: “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 APRA’s performance[1].” Furthermore, the ASIC is regulating the assessment of the greatest risky areas. Their main job is to minimize all those elements of misconduct and nonconformity which adversely affect the investment decisions of consumers, and pose a threat to the international reputation of Australian Financial Markets.
APRA and ASIC are functioning well; and providing as much support for a fair financial game, as possible. A few points are there, however, which need more careful consideration to be drawn on. First of all, the regulatory bodies must ensure a financial system without excessive speculations. The elements of high risk must also be reduced. These two were the major factors responsible for the collapse of the global financial giants in the past decade. Avoidance of these factors enabled Islamic Banks to achieve huge success. Secondly, the two regulatory bodies need to sit down and discuss, and focus more narrowly on their functioning domains. Their roles must be totally unambiguous and transparent, thus, will allow them to operate without overlapping and cross-functioning. This will increase the productivity of the two agencies. Also, the communication channels should be well-developed between the two agencies, between them and the government, between them and financial institutions in the market, between them and the consumers. This will further increase confidence level of the investors and consumers in the financial system. Their respective efforts will be properly recognized by everyone. And last but not the least; the Australian financial system should try to benchmark the successful financial systems in the world, let’s say, the Islamic Financial System, the commissions should take a research on the factors which contributed in the success of this system, and then should try to incorporate those elements in its own financial system.
(Word Count: 1449)
References:
– Carmichael, J. (2000). Financial Sector Reform and Prudential Regulation in Australia. Available at: http://www.apra.gov.au/speeches/00_05.cfm
[Accessed: April 4, 2010]
– Carmichael, J. (2002). Speech: APRA – The Way Forward, Friday, Nov 22, 2002. Available at: http://www.apra.gov.au/speeches/02_12.cfm
[Accessed: April 4, 2010]
– Cooper, J. (2006). The integration of financial regulatory authorities – the Australian Experience. Available at: http://www.asic.gov.au/asic/pdflib.nsf/lookupbyfilename/integration-financial-regulatory-authorities.pdf/$file/integration-financial-regulatory-authorities.pdf
[Accessed: April 4, 2010]
– Killoren, G. D. (2009). Comparative Analysis of Non-U.S. Bank Regulatory Reform and Banking Structure. Available at: http://business.cch.com/bankingFinance/focus/News/comparative.pdf
[Accessed: April 4, 2010]
– Laker, J. F. (2009). The Regulatory Landscape. Available at: http://www.apra.gov.au/Speeches/upload/08-Finsia-Financial-Services-Conf-28-October-09.pdf [Accessed: April 4, 2010]
– Llewellyn, D. T. (2006). Institutional Structure Of Financial Regulation And Supervision: The Basic Issues. Available at: http://info.worldbank.org/etools/library/latestversion.asp?232743
[Accessed: April 4, 2010]
– Sykes, T. (1998). Australia’s Banking History. Available at: http://www.abc.net.au/money/currency/features/feat3.htm
[Accessed: April 4, 2010]
[1] Dr. Jeffrey Carmichael (ex-Chairman of APRA) – Speech: APRA: The Way Forward, Nov 22, 2002.
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