Bank Regulation and Future of Banking: reform in banking will increase stability but also the cost of credit

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In the post-GFC environment there has been a rise in loan rates relative to the cash rate – the margin on home lending has risen from 150 to 275 bp. As a consequence of the failure of banks to pass through cash rate reductions to consumers, the cash rate is around 150 bp lower than it might have been otherwise.

Striking the right balance between risk reduction and the cost of financial intermediation is something the RBA is working closely with industry on, explained Mr Lowe.

The sentiment was echoed by John Laker, Chairman of the Australian Prudential Regulatory Authority (APRA) who revealed that APRA is currently performing a cost-benefit analysis of the proposed regulatory reforms. With all Basel 3 elements now in place for implementation, together with provisions for domestically systemic important banks (DSIBs), APRA is in the process of assessing likely regulatory impacts.

The soon to be released analysis will compare improvements in these areas to any expected increase in the cost of economic activity. The results of the analysis will be released shortly.

CEO of the Australian Bankers Association (ABA), Steven Munchenberg noted that while regulatory reforms have in some cases led to improved economic outcomes, regulation without a complete understanding of the underlying issues can be problematic.

The lost faith in markets that has resulted from the North Atlantic crisis should not be replaced by blind faith in regulation he warned, tighter regulation may lead to unintended consequences such as more expensive and more exclusive financial services.

It is important to learn from the GFC, Mr Munchenberg said, neither markets nor regulation are a perfect solution. What is needed is an appropriate balance between the two.


ACFS held the Bank Regulation and the Future of Banking Panel on 11 July 2012 in partnership with the Economics Society of Australia as part of the 41st Australian Conference of Economists in Melbourne and sponsored byBendigo and Adelaide Bank.