Australian inquiry suggests ring-fencing retail banking
An interim report by Australia’s Financial System Inquiry (FSI) has opened up a discussion of ring-fencing the retail activities of the country’s larger banks from their other banking operations.
The report suggests that ring-fencing measures could help address the costs of too-big-to-fail institutions by creating simpler internal bank structures, in which the existence of already separate core activities would soften the blow of any future crises.
It says ring-fencing could allow the Australian government “greater ability to limit support to only the core aspects of the business, reducing the associated perceived implicit guarantee”.
The report also suggests that by separating different types of activities an institution’s approach to risk appetite, including remuneration structures which affect risk-taking, may become more appropriately aligned to those activities.
The FSI stated that implementing ring-fencing now would be costly, but less costly than if it were introduced at a time when banks were engaged significantly in both ring-fencing and other activities.
Often referred to as the Murray Report, the FSI establishes a direction for the future of Australia's financial system. Its goal is to lay out a 'blueprint' for the financial system over the next decade.
The FSI is examining a number of issues critical to the financial services sector including: Australia’s capacity to fund its future economic growth and prosperity; the availability of sources of funding and capital for all lenders to encourage even more competition; ensuring regulatory barriers don’t impede innovation driven by customers’ ever-changing needs; ensuring there’s a level regulatory playing field for all banks; and the opportunities and challenges that rapidly changing technologies present.
Previous financial system inquiries in the country, including the Campbell Report in 1981 and Wallis Report in 1997, were the catalysts for major economic reforms in Australia. The Campbell Report led to the floating of the Australian dollar and the deregulation of the financial sector. Whilst the Wallis Inquiry led to streamlined financial services regulation, the creation of the Australian Prudential Regulation Authority (APRA), and the current form of the Australian Securities and Investments Commission (ASIC).
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