Macfarlane calls for a new regulatory regime

The era of deregulation in the global financial system had been invalidated by the current crisis and a process of re-regulation needed to be undertaken, the former governor of the Reserve Bank, Ian Macfarlane, said yesterday.

Delivering the Lowy Institute lecture in Sydney last night, Macfarlane said that by his reckoning the era of financial deregulation had resulted in eight "significant shocks" and the current one was the worst of them.

The majority of these shocks, which include the US savings and loans crisis, the Asian financial crisis, the emerging markets debt crisis and the tech boom, were characterised by excessive lending.

Macfarlane said that, while the short-term goal was to get the financial markets working again, the longer-term goal was a better regulatory structure.

He said Basel II was a regulatory system designed to stop banks going broke but did nothing to protect economies. One way for banks to protect themselves was to stop lending, which was the current experience and which led to economic crisis.

"When it is time to rebuild the regulatory system it will have to be more all-encompassing."

He said moves had to be made to reign in the shadow banking system - the over-leveraged speculators in dubious assets.

"Non-bank financial institutions have a role to play but they should not own illiquid assets funded by large liabilities."

The risk inherent in management reward policies should be addressed in regulation. The pro-cyclicality of risk management should be looked at.

Derivative instruments have to be brought onto exchanges so they can be priced openly and their risks measured.

Fragmented regulatory regimes, particularly in the United States, have to be brought together.

"There are four regulators of banks in the United States. The monoline insurers were supervised by state regulators.

"There should be more international co-operation on economic policy and regulation."

Macfarlane is now a director of ANZ.