In the first of a two-part series on financial regulation, Sandra Hajda looks at whether Australia should make changes to its financial regulations in response to the passage of the Dodd-Frank Act in the US.
The future of financial regulation reform in Australia
“As the annual general meeting season draws to a close for the banks, it seems their chief executives may have to work harder for their multimillion dollar pay packets next year. Already facing consumer pressure over fees and interest rates, Australia's banks are likely to face growing stress from another source: a rapidly deteriorating global economy.
“Regulators are warning of growing economic risks ahead, and the Australian bank regulator has reportedly forced institutions to test how they'd cope with a worst-case scenario.”
(Matt Peacock, ABC PM, 16/12/2011)
When presenter Matt Peacock declared on ABC's PM that “chief executives may have to work harder for their pay packets” it seemed like the sort of news for which Occupy protesters had been waiting. But the remaining report by Michael Janda was something of an anti-climax — as it focused on a pre-Christmas move by APRA to force banks to explain how they would respond to a worst case scenario.
What was initially reported to be a tough move designed to avert another 2008-style financial crisis was dismissed by insiders as 'business as usual'. According to the Australian Bankers' Association's chief executive Steven Munchenberg, stress tests are common place.
As Occupy protests gather momentum in many parts of the world, very little is being reported on regulation of the financial markets. Anecdotes about reckless executives, laments about undeserved pay packets (Nobel laureate Daniel Kahneman has come forward saying that the ‘skill’ of financial advisers is an illusion, rather it’s all a game of chance) and statistics about income inequality are everywhere, but few – in Australia, at least – have yet turned a critical eye on the party with immediate power to do something: the regulators.
Are the Australian media simply lazy or do they have nothing to report?
Or does a small player like Australia even need to reconsider its regulations after 2008? Perhaps that can safely be left to the US, with its Goliath of a financial sector. Australia's 'David' Big Four Banks (ANZ, Commonwealth, Westpac and NAB) did not bring the world screeching to a halt in 2008. Companies like Lehman Brothers did.
Even if Australia can do nothing to avert (or for that matter, cause) a crisis on its own, there are already whispers about US regulation changes (particularly the Dodd-Frank Act) having an impact (perhaps one could say a 'trickle-down' impact) on our shores. This impact may be negative (Steven Rice declared in the Financial Reviewthat ‘Dodd-Frank potentially subjects foreign non-bank financial companies, including Australian companies, to prudential supervision in the US). It may require a response, perhaps some counter-regulations. Therefore it is something that needs to be reported on.
Part One: The United States
The Dodd-Frank Act – a two- thousand page piece of legislation – is the Obama administration’s official response to the late-00s crisis.
From the Financial Times:
‘The Dodd-Frank law tries to restructure US regulation to force regulators to consider institutions in the light of what they do - rather than what they nominally are. So AIG would be considered as a financial institution selling risky credit default swaps - rather than just an insurer. Plus, an asset bubble should be considered not in isolation but in terms of the impact it could have in other asset classes.
Institutions that are not banks but are designated as “systemically significant” face tougher risk-based standards forcing them to set more capital against proprietary trading as well as large derivatives or securitisation operations.’ [Note: underlining mine]
Definitions have a lot of power here. Rice’s gripe in The Financial Times was that any institution – including an Australian one – can be judged ‘systemically significant’, and thus subjected to US scrutiny. There also seems to be a loophole through which banks can escape the Volcker Rule (a limit on banks trading for their own benefit, or ‘proprietary trading’) by giving up their status as ‘bank’.
In general, after Dodd-Frank is enacted one might expect dealers in notorious credit default swaps (unregulated prior to 2010) to be reined in, and a whip to be cracked on unreliable risk rating agencies. On the surface, the right moves appear to have been made. Perhaps most ingeniously, according to Bloomerg, Dodd-Frank ensures that “lenders must hold a portion of the mortgages they originate” because this “reduces the temptation to make bad loans and sell them off to greater fools”.
Yet Dodd-Frank is already being dismissed as a sham. A typically cynical Jon Stewart featured a segment in which a battered and bruised Act sang a musical number about its own powerlessness.
Like all debates about the economy, this one is terribly convoluted. Some argue that new regulations simply transfer new power to the same credit rating agencies (Standard and Poor’s, Fitch, Moody’s) that got us all into trouble in the first place. Ultra-rightwing commentators have actually found a way to blame the welfare state, saying government-supported lending companies like Fannie Mae and Freddie Mac – which were designed to help people who could not gain credit through traditional channels like private banks – distorted the mortgage market, triggering the sub-prime crisis.