Why Obama should have copied Australia’s system of financial regulation: Kohler

Unhappily, US President Obama and his team have chosen not to examine and follow Australia’s system of financial regulation – in fact it probably never even occurred to those people who hold meetings while they stride around the West Wing of the White House that the bumpkins in the Land of Oz have anything to teach them. We do, actually.

If they had looked, they would have seen that the supervision of Australian banks was moved from the central bank to the new Australian Prudential Regulatory Authority in 1998, which was established to consolidate all financial prudential regulation in one place.

This has worked passably well, it must be said – Australia’s banking system is travelling beautifully in the midst of an international shambles emanating from the United States, and as a result Australia is so far in only the mildest of non-technical recessions.

In the set of reforms proposed this morning, President Obama has chosen not to consolidate financial regulation – he is only reducing the plethora of regulatory agencies in America by one – and wants to move the most important part of the system to the central bank (the regulation of systemically significant banks).

The Federal Reserve will thus become a regulatory conglomerate, managing both monetary policy and the prudential supervision of the largest banks. So the Obama administration and the Federal Reserve have obviously decided that these things do not conflict.

Australia can’t prove that they do conflict. We don’t know what would have happened if the Reserve Bank of Australia was still having cups of tea with the banks during the global credit boom and bust (that is the way the RBA used to conduct prudential regulation in the past – through quiet chats with bank CEOs over tea served in fine china).

But we can have a guess. It is undeniable that both monetary policy and bank supervision in Australia have been carried out very successfully over the past decade by two agencies that have been concentrating on their own specific task, and no other.

And there are no cups of tea with Australian Prudential Regulation Authority – tap water only, if you’re lucky. When National Australia Bank’s foreign currency scandal hit in early 2004 – the first big test of the new regulatory system – APRA was all over NAB and the other banks like a rash. In fact, some argue that APRA’s tough response to that issue – at the same time as US banks were running amok – was one of the key reasons Australia’s banking system has survived the crisis intact.

Anyway, some people just can’t be told.

Aside from the failure to properly consolidate financial regulation and to keep it away from the Fed, President Obama’s blueprint for reform of financial regulation is reasonably sensible. But it is more a carefully nuanced narrative of what the president and his team think should happen than a set of specific proposals for what will happen.

It appears to be a compromise designed to steer a course between US Congress and the still powerful (amazingly) financial lobby.

And that, in some ways, is the most striking thing about the proposal – there is nothing really draconian in it. For example, the Glass-Steagall Act, imposed in 1933 to separate commercial banking from investment banking and repealed in 1999, is not to be reinstated.

Yes, if everything in the plan gets through Congress there will be more – and more appearcomprehensive – regulation, but neither the failed regulators nor the mendacious mendicants in the financial sector are being fully held to account.

This article first appeared on Business Spectator.