Jun 30, 2014

APRA chief John Laker leaves, with questions in his wake

John Laker leaves APRA -- and his long reign is heralded by some as a success. But don't forget the role of APRA in allowing a problematic foreign-borrowing before the GFC ...

Today is the last day in the job for the chairman the Australian Prudential Regulation Authority (APRA), John Laker. As chairman for 11 years, Laker oversaw the rebuilding of APRA after Peter Costello gutted it following the HIH insurance collapse in 2011. Laker's tenure at APRA is widely regarded as a success and prima facie that is true. After HIH, APRA needed a steady hand to rebuild its credibility and Laker's APRA can claim to have guided Australia comfortably through a global financial crisis that left other comparable regulators around the world with epochal egg on their faces. Despite some jitters in Australia, and the wholesale collapse of non-banks in the crisis, Australia's financial system proved more robust than elsewhere. As well, in the period following the GFC, APRA positively shined. As the primary bank regulator it played a key role in reforming the bank vulnerabilities that were exposed by the crisis. It did this largely by insisting that banks lend dollar-for-dollar against deposits. Unquestionably, Laker leaves the financial system more stable now than it was in 2008, something of which he can be rightly proud. If Laker handled the GFC and its aftermath well, the same can’t be said for the period leading up to the crisis. In 2003, Australian banks were halfway through a foreign-borrowing surge that extended right through 2008: 

When the GFC struck, these bank liabilities proved to be very vulnerable as external lenders refused to rollover loans. The result was a desperate scramble within Australian government circles to guarantee the loans. Laker was central to that bailout, which was necessary lest a current account crisis overtake Australia, yet it was also his APRA that had failed to foresee the crisis and allowed the huge offshore expansion in the first place. A former APRA insider confessed as much at an industry conference in October 2012 when questioning the RBA's Luci Ellis, who was trumpeting the preparedness of Australia’s financial regulators pre-crisis.

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