Australia has nothing to learn from President Obama’s proposed reforms of financial regulation in the US.
In fact, President Obama has much to learn from Australia and the way we have managed to arrive at what appears to be a sensible structure.
Australia has a council of regulators consisting of Federal Treasury, the Reserve Bank (which regulates the economy through monetary policy), APRA, which regulates all financial groups and ASIC which regulates markets and companies. The Council was set up to make sure nothing slipped through the cracks, as has happened in the US and UK, for example.
Australia has not had a bank or financial failure so far this crisis (we learned a lot from the $A5.3 billion failure of HIH) and APRA moved early to force up the cost of some forms of off-balance-sheet financing by the banks.
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The key here seems to be better co-ordination, good intelligence and information flows and a willingness to use the regulatory powers: especially at APRA.
ASIC, like the SEC in the US, has been a weak point locally. Look at the way the likes of Opes Prime, Allco, Babcock and Brown and a host of other financial engineers were allowed to flourish with no regulatory checks. The failures have been costly. The Managed Investment Scheme debacles are further examples.
But the main point to be made from the President’s proposals is that no matter how much you change, revamp, re-work and legislate, it comes down to two things: the quality of the regulators and their independence from the industries/sectors they oversee.
In Obama’s new proposals the Fed gets a significant boost in its powers to regulate the financial system and override other regulators; especially in assessing systemic risk. It’s the only way the President can work his way round the entrenched interests in Congress.
Too many regulators get captured, to varying degrees, by their industries and key players and end up defending their turf, rather than regulating for a broader, national good. The US Securities and Exchange Commission is a recent example, as is the Office of Thrift Supervision and the Office Of The Comptroller of The Currency, both of which allowed some of the biggest recent failures. The SEC regulated Bear Stearns and Lehman Brothers, not to mention Merrill Lynch and yet in all cases the Fed in the end ran the rescue attempts and oversaw the outcomes.
When a body like the US Congress has an oversight role, there’s a further problem. Congress itself has been shown to be captured by lobbyists for industries and major companies, and more interested in protecting rather than regulating banks, stockbrokers, investment banks, commodity traders, mutual funds, and the like.
A feature of the reforms outlined is the way ratings agencies, which played a key role in the subprime mortgage crisis, have escaped unscathed.
They were largely spared in the Obama administration’s financial regulation overhaul which merely urges them to ‘lift their game chaps’.
The plan says Moody’s Investors Service, Standard & Poor’s and Fitch Ratings and others should bolster the integrity of their ratings, especially in structured finance.
It also calls for reduced conflicts of interest and for regulators worldwide to tighten oversight.
But in the 90 pages of proposals, there is nothing to address the ratings industry’s main shortcoming: issuers pay for ratings of their securities the ratings groups rate. That creates an incentive to win more business by assigning high ratings, and return business.
Regulation of insurance is also touched on lightly because the Obama administration doesn’t want a brawl with powerful state insurance regulators in New York and California.
Every US financial sector and its major players have paid lobbyists in Washington, have given billions of dollars to members of Congress and the Publicans and Democrats, and continue to lobby, despite nearly dragging the US economy into its second depression in 70 years.
That’s why President Obama has been forced to go for a patchwork revamp of regulation, instead of a top to bottom clean out and restructure. Too many people in Congress have been bought and would block any radical revamp.