Let banks fail: Stevens

Bank regulators need to be able to let banks fail, a view that must inform decisions and regulations on how complex banks are allowed to become, Glenn Stevens, governor of the Reserve Bank of Australia, said last night.

Stevens was giving the Shann Memorial Lecture at the University of Western Australia. He used the latter part of his speech to reflect on the crescendo of financial regulation that has emerged, or been proposed, in the wake of the financial crisis of 2008.

This trend, he said, was "understandable, and is entirely appropriate... My point is simply that we have been here before. If we think far enough back in history, there are things to learn about regulation and its cycle, just as there would have been - had people been more inclined to look - about the nature of private finance and its cycle.

"The objective shouldn't be to suppress finance again to the extent it was for so long in the past. There would be a cost to the economy in attempting this, and in any event the financiers will be quicker to figure out the avoidance techniques than they used to be.

"The objective should, rather, be to foster arrangements that preserve the genuine benefits of an efficient and dynamic financial system, but restrain, or punish, the really reckless behaviour that sows the seeds of serious instability."

These observations led Stevens to the key point in his speech: "Such arrangements surely have to include allowing badly run institutions to fail, which must in turn have implications for how large and complex they are allowed to become."

He went on to question whether "regulation per se, becoming more and more complex and widespread as it is, will be the full answer. A big part of the answer must come from practice, not just black-letter law.

"The finance industry, certainly at the level of the very large internationally active institutions, needs to seek to be less exciting, less ambitious for growth, less complex, more conscious of risk and more responsible about where those risks end up, than we saw for the past decade or two."