The Money Men by Chris Bowen (superbooks4u .txt) 📕

that countries like Denmark, Norway, Sweden and Japan all had stand-alone prudential regulators, and all had experienced financial instability in recent years.45 Naturally enough, it wasn’t only the RBA that opposed losing its prudential regulation functions. Three of the four big banks, as well as the Australian Bankers’ Association (ABA), supported the RBA’s position.

The Wallis report was released on 9 April 1997, and Costello announced the government’s response in September. Costello, with the support of Howard and the Cabinet, had decided that the Wallis Inquiry’s key recommendation was sensible. He moved to set up a new body that was called the Australian Prudential Regulation Authority (APRA).

It is worth questioning whether Costello was right to stare down the RBA and the private banks and set up APRA. The answer is yes. Prudential regulation has benefited from having a stand-alone authority, and there is no evidence that not having the prudential duty has made it harder for the RBA to fulfil its responsibilities in relation to monetary policy or financial stability.

It is also worth asking whether the reorganisation of Australia’s prudential regulation in 1998 was one of the factors that allowed Australia to effectively weather the GFC ten years later. This is an altogether more complex question. The RBA had been a very good prudential regulator, with very few bank failures on its watch. APRA’s subsequent success should be seen in this context. APRA served Australia well during the GFC, when Australia’s best-practice prudential regulation was a major factor in avoiding recession. However, it is difficult to give credit for this efficient regulation to Costello’s 1998 reorganisation. After all, having APRA as a single regulator did not stop the failure of HIH Insurance in 2001, which represented the biggest financial collapse in Australian history.

HIH had been founded in 1968 and had undertaken a range of takeovers in 1997 and 1998, most notably that of FAI Insurance. Prior to the collapse of HIH, which involved losses of $5.3 billion, APRA had not identified the shortcomings in the insurance company’s books. It was a major embarrassment to the authority that it had not noticed practices that resulted in three people going to jail. Howard called a royal commission into the collapse, appointing former Western Australian Supreme Court justice Neville Owen as the commissioner. Owen subsequently recommended a wholesale rejigging of APRA’s governance, including the removal of RBA representatives on the APRA board and the appointment of three full-time commissioners. Even more importantly, the HIH collapse led to a wholesale revision of APRA’s approach to regulation, which stood our financial sector in good stead when the GFC hit. Australia, in effect, received a prudential wake-up call via the HIH collapse seven years before the GFC.

Another sensible recommendation made by the Wallis Inquiry that was implemented by Costello was the creation of the Australian Securities and Investment Commission (ASIC). Corporate regulation in Australia was divided and largely dysfunctional. There was a role for the Australian Securities Commission (ASC), the Australian Competition and Consumer Commission (ACCC), the Insurance and Superannuation Commission (ISC) and the Australian Payments System Council (APSC), but Wallis recommended a streamlined approach that would bring corporate regulation under the umbrella of a Corporation and Financial Services Corporation (CFSC). By the time Costello had responded on behalf of the government, the CFSC had transmogrified into the ASIC, but regardless, its creation was a very worthwhile initiative.

The only substantial recommendation stemming from the Wallis Inquiry that the Howard government did not accept was the abolition of the ‘six pillars’ policy enacted by treasurer Keating, which prevented Australia’s four largest banks and two largest insurance companies—AMP and National Mutual—from merging. Wallis also recommended that any proposed financial mergers be subject to the normal approval requirements of the ACCC. A number of media articles at the time suggested that Costello wanted to accept this recommendation but could not get the support of the Cabinet. Costello denies this, and there is no reason to dispute his version. ‘I was the person who decided it was the one recommendation we should not follow,’ he told me in 2015.46 Costello was relaxed about the future of the large insurance companies, but he insisted that the banks be maintained in a separate regulatory structure when it came to mergers. As a result, the six pillars policy morphed into the four pillars policy that has remained in place to this day.

Costello was right to reject this recommendation. The banks were keen to be allowed to merge so that they could combine their back-office administration tasks and branch networks for major cost savings. They also wanted to be the requisite size to enable them to embark on aggressive international acquisitions and expansions. The mergers and acquisitions sector, consisting of large law firms and merchant banks, was also keen on the substantial amount of work and hence profits that would emerge from big bank mergers. Needless to say, the banks lobbied heavily to be allowed to amalgamate. However, Costello saw the dangers and had the same concerns that led Keating to introduce the restrictions in the first place. He told me:

If you let say the Commonwealth Bank and ANZ merge, you’d have to quickly let Westpac and NAB merge. You couldn’t tell the two smaller banks that were left that they had to compete with the behemoth that had just been created. So you’d go from four banks to two, and that would be dangerous.47

Banking competition would have been severely diluted if the banks had been allowed to merge, and it is difficult to see substantial benefits in this for Australian consumers. It also would have been dangerous for Australia. One or two huge Australian banks, more exposed to international bad debts because of foreign acquisitions, would have been very vulnerable during the GFC. One of the reasons that Australia and Canada got through the crisis with less financial disruption than countries with comparable economies is that both nations have long had restrictions on bank mergers.

‘Don Argus [then CEO of NAB] complained to me that