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The Development & Role of the RBA and APRA - Case Study Example

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The paper "The Development & Role of the RBA and APRA" is a great example of a finance and accounting case study. When the Commonwealth was formed from the Federation of the Australian states, the authority to make laws concerning banking and currency was given to the Australian Parliament, which passed the Commonwealth Bank Act in 1911…
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The Development & Role of the RBA and APRA History & Development of the RBA When the Commonwealth was formed from the Federation of the Australian states, authority to make laws concerning banking and currency was given to the Australian Parliament, which passed the Commonwealth Bank Act in 1911. The Commonwealth Bank of Australia, which opened for business in 1912, was not a central bank but was rather the first in the country to conduct both savings and commercial banking business, and to operate a government guarantee. (Commonwealth Bank, 2009) In that position, the Commonwealth Bank by virtue of having other banks for customers did have some central bank functions. That role, however, was not specifically given to it by the legislation, and responsibility for issuing the national currency was with the Department of the Treasury. (RBA, 2009) Between 1920 and 1924 the issuance of notes was the responsibility of a Government-appointed Notes Board, one of whose four members was the Governor of the Commonwealth Bank. The Bank managed the issuance of the notes on behalf of the Notes Board, and was finally given the formal responsibility for notes issue when the Commonwealth Bank Act was amended in 1924. The 1924 legislation established an eight-member Board of Directors, which included the Secretary of the Treasury, for the Bank, and can be considered the real start of a central bank in Australia. Until 1945, the Commonwealth Bank’s central banking functions, such as exchange rate management, policy-setting, determining interest rates, and requiring private banks to deposit reserve funds, steadily developed until these were finally formalised by the new Commonwealth Bank Act and the Banking Act in 1945. (RBA, 2009) The role of the Bank as both the central bank and as a savings and commercial bank was becoming a bit problematic by the 1950s. To separate the business part of the bank from the sovereign financial management part two legislative acts in 1959, the Commonwealth Banks Act and the Reserve Bank Act were enacted. The Reserve Bank of Australia was formally established on January 14, 1960 and given responsibility of all the central banking duties, while the Commonwealth Bank was arranged as statutory authority, and with the newly-formed Commonwealth Development Bank, formed the Commonwealth Banking Corporation. The Commonwealth Bank of Australia as it exists today was privatised by degrees between 1991 and 1996, and is now a public corporation. (Commonwealth Bank, 2009) History & Development of the APRA APRA, the Australian Prudential Regulation Authority, is responsible for the regulation of prudential entities such as deposit institutions, insurance companies, and superannuation funds. APRA was a product of the Wallis Committee inquiry, which was initiated in June, 1996 at the behest of the Federal Treasurer to review and make recommendations for updating the financial regulation system of Australia. The Wallis Committee recommended a system of three regulatory agencies: the RBA, charged with managing the monetary and payments system; an Australian Prudential Regulatory Commission to oversee prudential regulation; and a Corporate and Financial Services Commission to regulate corporations and markets. (Lim, n.d.) APRA was formed along with the Australian Securities and Investment Commission (ASIC) with the passage of the Australian Prudential Regulation Authority Act of 1998. (Grant, 2005) Regulatory Role of the RBA The main regulatory function of the RBA is to manage Australia’s monetary policy. The central bank’s “charter” as it were is set forth in Section 10(2) of the Commonwealth Banks Act of 1959, and assigns the RBA three general duties: 1. Maintain the stability of the currency. 2. Promote full employment in Australia. 3. Support the economic prosperity and welfare of the Australian people. (RBA, 2009) The RBA manages its main responsibility, monetary policy, from the perspective of controlling medium-term inflation. (RBA, 2009) Forecasts and policy concerning inflation control are made by the Reserve Bank Board on a quarterly basis, and are made from the policy assumption that there will be no change in the inflation rate. (Edey, 2005: 12) This simply means that the objective of the RBA is to make policy adjustments to maintain inflation at as constant a rate as possible, as opposed to allowing the inflation rate to change while limiting policy changes. In addition to its responsibility for monetary policy, the RBA is also charged with maintaining the security and efficiency of the country’s payments system, manages the country’s foreign currency reserves, issues currency notes, and serves as the government’s banker. The RBA also provides banking services to Federal agencies, foreign central banks with interests in Australia, and other official institutions such as UN agencies or multi-national organisations. (RBA, 2009) Regulatory Role of APRA The major outcome of the Wallis Committee recommendations in 1997 was to separate regulation of the banking industry from the responsibilities of the RBA, and it was for this purpose that APRA was created. (RBA, 2009) APRA’s mandate is to regulate all deposit-taking institutions, a broad definition which includes not only banks, but also credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies (special-interest groups which maintain insurance or other funds for a limited number of members; for example, the Ancient Order of Foresters in Victoria), and most superannuation funds. (APRA, 2009) APRA’s regulatory authority is an example of an ‘institution-based’ regulatory framework, wherein the oversight of the government is based on the type of institution and not necessarily on the specific activities of the institution. This allows some potential for activities to “fall through the cracks” of the regulatory scheme; one good example is much of the derivatives market, which is not regulated directly, but rather falls under the purview of either APRA, ASIC, or the Australian Competition and Consumer Commission (ACCC), depending on what kind of institution is doing the trading. (Latimer, 2009: 12) In terms of the development of its regulatory program, APRA has been mostly reactive in its brief existence. When it was first formed, the basis of its regulation of the insurance industry, for example, was based on the Insurance Act of 1973. Indeed, the vision of the Wallis Committee was that APRA should be a “light-handed” regulator, aiming to increase efficiency among the prudential industry. (Grant, 2005) Then in 2001, insurance giant HIH collapsed, which seriously called into question APRA’s regulatory effectiveness. As a result, a number of changes were made to strengthen APRA’s authority, including (Grant, 2005): Strengthening APRA’s ability to protect insurance policy-holders with the General Insurance Reform Act of 2001, which, among other things, gave APRA an increased ability to make risk assessments of insurance companies to prevent difficulties in the future and raised the minimum capital requirement for general insurers. Introduced a superannuation licensing system with the Superannuation Safety Amendment Act of 2004, which allows APRA to judge superannuation funds against a strict set of guidelines, and prevent unstable ones from operating. Applied international financial reporting standards to APRA-regulated institutions. Set minimum capital requirements for banks at international standards in line with the Basel II Accord. The new and improved regulatory powers of APRA were tested in 2003-2004 by the National Australia Bank foreign currency trading scandal, which resulted in losses of about $360 million. While APRA was criticised for perhaps – again – not monitoring an institution closely enough, there was a clear record of APRA’s attention to the matter beginning in 2002 long before the bank began to suffer losses. NAB’s response to APRA’s preventive efforts was wilfully resistant; reports APRA gave to NAB detailing their concerns were not passed along to the NAB board, and agreements the bank made for remedial action by certain deadlines were not honoured. Thus, APRA could not really be blamed for the eventual crisis. (Grant, 2005) Organisation & Governance of the RBA The RBA is governed by two boards, the Reserve Bank Board and the Payments System Board. The Reserve Bank Board is responsible for the management of the monetary and banking systems policies, while the Payments System Board concerns itself only with that aspect of the RBA’s activities. The Governor of the Reserve Bank is the Chairman of both boards and in cases of conflict between the two boards (which are rare), the decision of the Governor resolves the dispute, with precedence generally given to the policies established by the Reserve Bank Board. (RBA, 2009) The present Governor of the RBA is Glenn Stevens, whose current term expires in September 2013. The Reserve Bank Board comprises nine members, three of whom are ex officio members, the Governor, Deputy Governor, and the Secretary to the Treasury. The six external members are appointed by the Treasurer for terms of up to five years. Directors, officers, or employees of any deposit-taking institution described by the 1959 Banking Act are prohibited from serving on the Reserve Bank Board to prevent the obvious conflict of interest. (RBA, 2009) The Payments System Board has eight members, with the Governor of the RBA serving as Chairman. Another member of the RBA Board or management is appointed by the Governor, and serves as Deputy Chairman. APRA provides one member from that institution – at present, APRA Chairman John Laker – and up to five external members are appointed by the Treasurer in the same manner as the Reserve Bank Board. The organisation of the RBA is divided into 10 groups or departments, with most of the Bank’s work being carried out in its Sydney headquarters. The production of currency notes and other related products is carried out by a subsidiary of the RBA, Note Printing Australia Ltd., in Craigieburn, Victoria. (RBA, 2009) Organisation & Governance of APRA In contrast to the RBA, APRA is not governed by a board of directors but rather an Executive Group consisting of three to five members. The change from a board-governed to an executive-governed structure was made as part of the refinements to APRA following the HIH collapse. (Grant, 2005) At present, the Executive Group comprises three members: Dr. John Laker, who as noted above also serves on the Payments System Board, Ross Jones, and John Trowbridge. All members of the APRA Executive Group are appointed by the Treasurer for a term of five years, which is renewable. In addition, APRA also has a four-member Risk Management and Audit Committee with two external members, one member of the Executive Group, and one other executive from within APRA. (APRA, 2009) APRA is organised into five divisions: a corporate administrative division, divisions that oversee diversified and specialised institutions, a supervisory support division, and a policy, research, and statistics division. These are spread among offices in Sydney, Canberra, Brisbane, Melbourne, Perth, and Adelaide, with the headquarters functions generally being carried out in Sydney. (APRA, 2009) References Australian Prudential Regulation Authority [APRA]. (2009) “Who we are”. [Internet] Australian Prudential Regulation Authority, 2009. Available from: . Commonwealth Bank. (2009) “History”. [Internet] Commonwealth Bank of Australia, 2009. Available from: . Edey, Malcolm. (2005) “An Australian perspective on inflation targeting, communication and transparency”. In: Monetary policy in Asia: approaches and implementation. Bank for International Settlements Papers No. 31, December 2006. [Internet] Available from SSRN: . Grant, Richard. (2005) “Australia’s corporate regulators—the ACCC, ASIC and APRATitle”. Parliament of Australia Parliamentary Library Research Brief 16 2004-05, 14 June 2005. [Internet] Available from: . Latimer, Paul. (2009) “Regulation of over-the-counter derivatives in Australia”. Australian Journal of Corporate Law, 23(1): 9-25. Lim, G.C. (n.d.) “The Wallis Report, Prudential Supervision and Monetary Policy”. [Internet] University of Melbourne Dept. of Economics. Available from: . Reserve Bank of Australia [RBA]. (2009) “History of the RBA”. [Internet] Reserve Bank of Australia, 2009. Available from: . Read More
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