APRA learned some hard lessons from the collapse of HIH in 2001, and the regulator is determined to avoid “disorderly” failures in the future, says chairman Wayne Byres.
Speaking at an Actuaries Institute seminar on bank capital in Sydney this week, APRA chairman Wayne Byres said there are “no guarantees” when it comes to bank solvency.
As much as APRA is focused on “the steady accumulation of capital” by the banks, a stable and resilient banking system will not just be delivered by more capital, Mr Byres said.
APRA is still working on its final determination on what it will take for the banks to meet the “unquestionably strong” benchmark set by the Financial System Inquiry.
But in a world of fractional reserve banking, a “zero failure” regime is not desirable – and as a result the banks will never be invincible, Mr Byres said.
APRA’s job is to ensure any future failures in the finance sector are “orderly” rather than “disorderly”, he said.
Mr Byres said APRA had learned some “hard lessons” from the 2001 failure of HIH Insurance, which resulted in losses of $5.3 billion.
“The importance of active supervision, and a willingness to intervene where appropriate, were some of the hard lessons that APRA took to heart following the HIH episode,” he said. “Justice Owen found APRA under-resourced to identify problems, and slow to respond to them once found.
“These were fair conclusions, and APRA worked hard under my predecessor to build both its capacity and conviction,” Mr Byres said.
Fifteen years on from the collapse of HIH, the prudential regulator is looking to identify risks early and respond to systemic issues promptly, he said.
Along with active supervision, APRA is calling for increased powers to intervene in financial markets to manage potential failures before they happen, Mr Byres said.
“Treasurer [Scott Morrison] noted [last week] the government’s intention to make improvements in this area, which we see as a very valuable (and low cost) investment in the stability of the financial system,” he said.
APRA is also focusing on its recovery and resolution planning, he said, which includes maintaining critical functions within organisations that are in financial distress.
“Adequate capital is undoubtedly critical to the stability of any banking system. But … we can’t solely ‘bank on capital’ to deliver safety and stability,” Mr Byres said.
“If we accept that failures, while hopefully still reasonably rare, are nevertheless inevitable, then preparation to minimise their impact is an essential investment.
“Successful failures might seem a contradiction in terms, but they are far better than the alternative,” he said.
The corporate regulator has buckled down on keeping the banks in line during the last four months, reporting a 52 per cent rise in enforceme...
APRA’s climate change financial vulnerability assessments for the banks will boost the quality of disclosures and risk management, accordi...
The Financial Services Council has cautioned that if not executed well, the extension of the Banking Executive Accountability Regime (BEAR) ...