APRA’s statutory mission 2 includes the requirement to balance safety with competition, efficiency, and contestability in our regulated industries, and also to promote financial system stability. In this paper I shall explore some emerging international and Australian themes in safety and stability, in the context of systemic effects.
In particular, I shall consider the differences between macroprudential supervision (hereafter MPS), and macro prudence.
Before delving into these concepts, it will be useful to define financial stability. For this paper’s purposes, I will focus on two aspects of financial stability that are most relevant to the Australian Prudential Regulation Authority (APRA):
- depositors, policyholders, and other creditors of regulated institutions are justifiably confident that their claims on these institutions will be met in full and without difficulty; and
- there is neither a mania nor a panic in the Australian credit, insurance, or investment markets.
This definition ignores many elements of financial stability that are not APRA’s primary responsibility, including sound payment and clearing systems, and macroeconomic stability measures such as exchange rates, interest rates, and inflation.
Furthermore, given their relative size and systemic impact, this paper will focus upon Australian banking institutions (hereafter “banks” for convenience). This is not to say that insurance companies and (increasingly) the superannuation industry are not systemic, but that the systemic issues in those industries require consideration that is beyond the scope of this paper.
The above restrictions mean that this paper is not intended to address financial stability in a broad sense, but instead will focus upon how systemic issues are relevant to ensuring that Australia’s banking system is sound.
This paper was presented in July 2013 at the 18th Melbourne Money and Finance Conference (MMFC), which explored the theme Financial Sector Evolution – Prospect and Determinants.
For more papers presented in the conference, please click here.