Australian Prudential Regulation Before and After the Global Financial Crisis

This paper reviews the nature of Australian bank prudential regulation before and after
the Global Financial Crisis (GFC). It provides a detailed conceptual framework for
understanding the functions of banks and deposit-takers, the theory of what can go
wrong with the operation of these institutions, and the logic of prudential regulation. It
traces developments in Australian prudential regulation from the introduction of the
formal capital-based framework in the 1980s to the implementation of the Basel III
regime after the GFC. The paper concludes that i) the introduction of the Financial
Claims Scheme was a clear and welcome change compared with pre-GFC
arrangements; ii) the introduction of the Basel III liquidity regime constituted a more
fundamental modification, best characterised as a significant refinement to the riskbased
calculation of capital than as a fundamental change to regulatory philosophy; iii)
the Australian Prudential Regulation Authority (APRA) had been practising
macroprudential regulation well before the GFC even though Australia’s adoption of
Basel III’s macroprudential apparatus appears on the surface to constitute a genuine
innovation in prudential regulation; and iv) the importance of financial stability as a policy
objective and the nature of macroprudential regulation raise questions about the wisdom
of having split monetary policy and prudential regulation functions in 1998, and a revisit
of this question and a reassessment of institutional structures are called for.