The Global Financial Crisis from an Australian Perspective: Great Farsighted Choices, or Good Fortune and Chance?
Hamar, Michael, Auty, Bruce, The RMA Journal
AUSTRALIA AND ITS financial institutions emerged from the 2007-09 financial crisis relatively unscathed compared to their international peers. Why? Our analysis indicates there is no easy answer to that question. However, we believe that no single factor has emerged with greater weighting than that of risk culture and appetite. These cornerstone themes continue to hold fast in the face of changing market conditions and challenging economic times.
We also learned that large financial institutions can, with seasoned risk managers in the chief risk officer (CRO) role, position themselves to be opportunistic acquirers both during a crisis and as the tsunami-like effects of major market disruptions dissipate. Smaller financial institutions do not necessarily fare so well in such dramatic times.
The underpinning Australian economy provides context for our analysis. Briefly, consistent budget surpluses and economic growth were the hallmarks of the domestic economy pre-crisis. When the global effects of the crisis were recognized, the federal government took quick action. It implemented guarantees for bank depositors' funds as well as for bank borrowings, it enacted spending programs across the building construction industry for upgrades of public facilities, it made small cash payments to individual taxpayers, and it introduced a program to facilitate the purchase of residential mortgage-backed securities. Concurrent with these interventions, Australia benefited from China's rapidly growing appetite for Australian natural resources (coal, iron ore, minerals), which has resulted in an eightfold increase in exports over a decade.
Within this particularly advantageous economic setting, we examined four principal themes:
1. Regulator behavior.
2. The shape of the industry and lessons learned.
3. Internal systems and processes.
4. Risk culture and appetite.
Prudential regulation in Australia was the subject of the Wallis Enquiry, an extensive public examination of the country's financial system that began in 1996. The findings, which emerged in 1997, led to a separation of powers and responsibility in financial market regulation, as well as the pooling together of regulated organizations including insurers, banks, credit unions, and building societies.
Wallis oversaw the separation of regulatory risk from that of systemic risk and created two new entities: the Australian Securities and Investment Commission (ASIC, the financial markets regulator) and the Australian Prudential Regulatory Authority (APRA, the regulatory supervisor of financial institutions). Responsibility for systemic risk remained with the central bank, the Reserve Bank of Australia.
The separation of these responsibilities in the late 1990s led to the emergence of invigorated regulators that had secured a recent mandate to drive a refreshed approach to their individual areas of focus. The result was enhanced oversight of all risk areas, with increased focus on operational risk and market risk.
The Asian financial crisis of 1997 served to underscore those mandates. In addition, in 2001, APRA experienced a significant early setback with the failure of a major Australian insurance company, HIH. Much of the thrust of APRA's regulatory activity in the period that followed was distinguished by a determination that such failures would not recur. For example, APRA required the country's four major trading banks to comply with Basel II's advanced accreditation across the key risk classes by 2008. This APRA requirement was more aggressive than that which its international regulatory peers had demanded.
APRA clearly sought and achieved international recognition as a leading bank regulator, despite the relative unimportance of Australian banks internationally. In this vein, APRA took a particularly hard line on a market risk failure within a major domestic bank, ensuring that all market participants felt its presence. …