Financial regulators want more power to seize banks

Financial regulators may be worrying that their legislative toolkit to intervene in the event of financial crisis - reformed twice in the last ten years - warrants another makeover.

The RBA's latest Financial Stability Review discloses that the Council of Financial Regulators (comprising the RBA, APRA, Treasury and ASIC) has recommended changes "that would give a statutory manager appointed by APRA additional powers, and provide APRA with greater flexibility in arranging a takeover by, or a transfer of assets and liabilities to, another ADI in a timely fashion."

The RBA didn't spell out the proposed powers or analyse the defects in the existing powers, themselves devised in the suite of reforms that followed the 1997 report of the Financial Services Inquiry (that led to the split of banking supervision from the RBA) and subject to tinkering following the collapse of HIH Insurance in 2001.

Local regulators have, however, studied the run on and subsequent nationalisation of Northern Rock in Britain.

One lesson is that the depositor insurance arrangements in Britain - that notionally required a 10 per cent haircut on deposits between £2000 and £33,000 and no insurance for larger deposits - contributed to the run. Britain's government of course changed the deposit insurance arrangements on the fly for a period of days at the height of the run.

The Council of Financial Regulators still, however, recommends a version of this scheme to Australia's new government (as it did two years ago to the old).

This comprises what the bureaucrats describe as an "early access facility" that would provide early repayment of up to $20,000 per depositor in a failed institution. The RBA estimates that this cap is sufficient to cover the entire deposits of around 80 per
cent of depositors.

Complainants over the level of this cap are bound to emergein any antipodean run. Plenty of upset customers will want enough to cover savings for house deposits, weddings, insurance payouts for chronic medical expenses or any of the other hard luck stories that are bound to pressure any Australian government into revising any insurance scheme under political pressure as Britain's Labour government did last year.