APRA highlights flaws in post-GFC reform

The APRA chairman told a Singaporean banking and finance conference that despite introducing a lot of positive reform since 2008, the world’s financial systems “have not yet done anywhere near enough to address” those two issues.

Mr Byres said not enough has been invested in promoting good supervision, as opposed to the creation of tougher regulations that were introduced after the GFC.

“The strengthened rules were absolutely essential, but they will not be effective in the long run without being supplemented by strong and robust supervision,” he said.

“Our approach in Australia is not to consider supervisors as a means of enforcing regulation, but rather regulation as a means of empowering good supervision. But this philosophy is not universally held, and I think the system is weaker for it.”

Mr Byres said “serious improvement” is also needed in the interrelated areas of governance, culture and remuneration.

Tougher rules aren’t enough to fix a damaged system – behavioural changes are also required, according to Mr Byres.

He said bankers often ask themselves not whether an action is right, but whether they can get away with it.

“For an industry that is ultimately founded on trust, something serious is amiss, and strong and ethical leadership within financial firms is needed to set this right,” he said.

Mr Byres said a lot of this is due to financial bonuses – banks claim to value one thing but then provide incentives that lead staff to do another.

“Much of the post-crisis reform agenda has been aimed at getting the organisational interests of financial firms more aligned with those of the wider community,” he said.

“Getting personal incentives correspondingly aligned with organisational interests needs to be seen as equally important. On this, we all have more to do.”

However, Mr Byres also told the conference that much work has been done since 2008 to create a more secure financial system.

Basel III substantially increased the quality and quantity of bank capital and introduced new standards for liquidity and funding, he said.

The too-big-to-fail problem has been reduced through measures that have reduced implicit subsidies and priced risk correctly, according to Mr Byres.

Mr Byres also said that important progress has been made in identifying the concentration of risk in the shadow banking sector.