APRA boss questions post-GFC regulation

Speaking at the Global Association of Risk Professionals (GARP) Global Risk Forum in Hong Kong this week, Mr Byres said a lack of willingness to place more faith in supervision has been a major contributor to the “pipeline of international regulation” that continues to flow.

“Giving some greater thought to the relative benefits of regulatory and supervisory approaches, and devoting some time to strengthening the latter as well as the former, might allow us to not only draw a line under current rule-making efforts, but also to achieve our objectives in a lower cost manner,” he said.

The APRA chair highlighted the cost of regulation by giving the example of the regulator’s recent changes to mortgage risk weights in Australia.

“In very rough terms, this added $10 billion to the capital requirements of the banking system,” he said.

“If one assumes that the banks’ cost of equity is roughly around 10 per cent, the additional cost from this one change is in the order of 15 to 20 times the total operating cost of my organisation’s banking supervision activities each year.

“Against that backdrop, a few more supervisors are not that costly at all!”

Speaking about the effectiveness of disclosure and market discipline, Mr Byres said the expectation of a government backstop has been one area where, “unfortunately but necessarily, expectation has been matched by reality”.

“Some governments were even forced to bail out the holders of capital instruments. And by allowing over-leveraged banks to strengthen their balance sheets by shedding assets and constraining lending, rather than being more forcefully recapitalised, we have seen shareholders effectively bailed out too,” he said.

“If this remains the prevailing expectation, then we have an even bigger problem than we thought: not only will markets fail to adequately act as a disciplining device, but they will continue to encourage and reward excessive risk-taking.

“The costly misallocation of credit will again be the result.”

Mr Byres argued that a key issue to be resolved is the extent to which regulators can engineer a world in which disclosure, and the resulting market discipline, can help in banking regulation.

“If we can, there may be instances in which disclosure might work better than, or at least as well as, more regulation,” he said.

“We cannot expect markets to appropriately monitor financial institutions and correctly price their underlying risk if there is no incentive to do so.”