Macro-prudence: What the FSI really needs to do

The Financial Systems Inquiry panel will be hard pressed to find evidence to support fundamental change to the regulatory structure of the banking sector, especially the kind that might flow into regulative change - one of the central issues it is considering.

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In September, responding to the FSI interim report, we welcomed the inquiry’s willingness to recognise and give serious consideration to the differing concerns of stakeholders in the review.

"As it stands, Australia’s current regulatory regime is too complex, impeding efficiency and reducing confidence in the system."
Richard Batten and David Eterovic, Partners at Minter Ellison

It is very true Australia’s regulatory regime should not wait for a crisis to occur. It should indeed be subject to a regular review cycle, say every 10 years. 

There is scope for the inquiry to make broad recommendations on capital settings and address the ‘moral hazard’ associated with implicit (or explicit) government support of the banking sector. 

It is also important to address the problem of pro-cyclicality which poses challenges for both boards and regulators. 

To address this challenge, Minter Ellison believes the establishment of a body with macro-prudential powers to address issues arising outside the regulatory perimeter - to the extent they are required to support the stability of the financial system - is warranted. This is what we do want to see. 

What we don't want is a new regulator with its own power to impose additional requirements on financial system participants. A macro-prudential regulator should be required to work through existing regulators to ensure consistency of approach.  

We would also highlight the importance of financial system regulators being required to consider the effects of regulation and policy on innovation, efficiency, and competition in the sector. 

This could be achieved through requiring regulators to submit new or changed requirements to an independent panel made up of representatives from government, consumer and industry. 

The panel would assess how proposed changes promote, or at least minimise impediments to innovation, efficiency and competition. 

Emphasis must be placed on the need for greater self-regulation in the financial sector and for approaches that engender efficiency and regulatory certainty. 

As it stands, Australia’s current regulatory regime is too complex, impeding efficiency and reducing confidence in the system. 

The consultation on reform initiatives being undertaken by the FSI is essential; it as an example of the approach that needs to be followed to achieve an efficient financial system that meets the needs both of participants and consumers. 

Richard Batten is an expert in financial systems regulation and a partner at Minter Ellison. David Eterovic is a corporate finance and debt restructuring partner at Minter Ellison.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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