Professor Ian Harper, an architect of the Wallis inquiry's 1997 redesign of the financial system, says the Reserve Bank and APRA will need to formalise a much closer working relationship for the post-crisis world.
In an interview with Banking Day, Professor Harper said the changing shape of prudential regulation meant that "if the regulators are to remain separate, they will have to be joined at the hip".
"We need to develop mechanisms that will ensure a much closer relationship between the two institutions," he said.
Professor Harper said the issue would remain less pressing while the two institutions were led by Glenn Stevens (RBA) and John Laker (APRA). The two were originally RBA colleagues and have a strong working relationship.
The link would have to be stronger than the existing Council of Financial Regulators, which co-ordinates between RBA, APRA, the Australian Securities and Investment Commission (ASIC) and Treasury.
The Wallis inquiry recommended changes to unite prudential supervision of banking, insurance and other elements of the financial system within the new APRA. That move has generally been regarded as a success, and has been claimed as one factor in Australia's relative stability through the global financial crisis.
Professor Harper said he was not calling for prudential supervision to be brought back within the RBA - although "if we knew then what we know now, we may not have separated them with the same enthusiasm".
But Harper said the crisis had shown that the nature of financial system risk had changed: it was now about markets rather than individual institutions.
The Basel III reforms to be introduced from next year strengthened the case for the RBA to have more involvement in prudential supervision, he said. "The whole tenor of the Basel requirements is to engage monetary policy and prudential supervision more closely." The RBA would expect to be consulted if APRA changed the "counter-cyclical buffer" proposed under the Basel III rules (see Banking Day's
Basel III backgrounder).
Professor Harper renewed his call for a new inquiry into the financial system, a call that has been supported by leading economists and banking experts including Joshua Gans, Nicholas Gruen, Christopher Joye, Stephen King and John Quiggin.