Peter Martin August 06, 2012
'I am not advocating we re-establish the Reserve Bank as the sole regulator of banks, but I am advocating an examination of what is now needed' says Professor Ian Harper. Photo: Peter Braig
TWO years to the month since Wayne Swan was urged strongly in then secret Treasury advice to commission a new Wallis-style inquiry into the financial system, one of the members of the original landmark Wallis inquiry has broken cover and labelled a new one long overdue.
Professor Ian Harper, considered one of the architects of the Australian Prudential Regulation Authority, says he would be prepared to consider refashioning it to hand responsibility for regulating banks back to the Reserve Bank, if another inquiry was launched.
A fresh look at the financial system ''was explicit in the Wallis report,'' Professor Harper told BusinessDay.
''We said on the very last page it only had a 10-year life and there would need to be another within 10 years - well, it's now been 15,'' he said.
''I am not suggesting that the whole financial system is broken, but it is clear the trajectory of its evolution has been different to that anticipated by Wallis and for which Australia's regulatory institutions were designed.''
Professor Harper, then at The University of Melbourne, is widely regarded as the author of the recommendation in the 1997 report that the regulation of banks be split between the Reserve Bank (which looked after stability of the financial system) and APRA (which oversaw the solvency of banks and other financial institutions).
He told BusinessDay he would now be prepared to consider ''killing his baby'' and decentralising bank regulation within the Reserve Bank.
''One of the reasons we wanted to separate APRA from the Reserve Bank was to make clear that financial institutions were not supported
by the central bank. We had recommended against bank deposit guarantees or bank deposit insurance. But such guarantees are now a fact of life. The distinction between regulators may no longer be unsustainable.
''I am not advocating we re-establish the Reserve Bank as the sole regulator of banks, but I am advocating an examination of what is now needed. Britain has just decided to re-establish a single regulator of banks after re-examining its systems in the wake of the financial crisis.''
Professor Harper said that when incoming Coalition treasurer Peter Costello set up the Wallis inquiry in 1996 financial markets were felt to be inherently competitive. Research conducted by Professor Harper makes clear that this is no longer the case.
''They are a symptom of a larger issue. Credit unions are only about 1 per cent of the financial system by assets … but until now have always been reasonably competitive. They are like the canary in the mine. If these guys are in trouble, then something bigger is happening.''
Professor Harper's paper quotes then secret Treasury advice given to returning Treasurer Wayne Swan after the August 2010 election ''strongly'' urging he make a new financial system inquiry ''a key priority in your second term''. Mr Swan appeared to reject the advice, saying the time was not right - a position his office said last night that he still held.
Shadow treasurer Joe Hockey confirmed the Coalition would begin work on a new inquiry on coming to office. Mr Harper made clear he did not expect to head the inquiry, noting that the previous heads had been from outside the financial system.