RBA argues for active supervision
Reserve Bank of Australia head of financial stability Luci Ellis yesterday spelt out that tough supervision will be a continuing part of the official response to the global financial crisis.In a speech to the CPA Congress, held in Brisbane, Ellis said that the changes in the Basel III capital rules were not the only thing that needed to be done.Ellis focused on the importance of reducing the kind of errors made by financial institutions that led to the crisis. She used the metaphor of a road safety campaign:"Focusing only on capital would be like saying that all we needed to do to stop people being injured in car crashes was to ensure they all had big enough airbags... We also need safer driving... We need to look to the people behind the wheel... eventually memories will fade, and the reckless driving will start again... We need to encourage better driving, with diligent policing. For diligent policing, read prudential supervision." The broad supervision function, of course, goes well beyond enforcing regulations; it extends to examining institutions' management, culture and overall ability to stay solvent and liquid. Ellis said the Australian prudential supervisor, APRA, had heavily emphasised supervision.In support of her case, Ellis pointed to a recent IMF paper, "The Making of Good Supervision: Learning to Say 'No'". The IMF paper argues, essentially, that good supervision requires supervisors "willing and empowered to take timely and effective action, to intrude on decision-making, to question common wisdom, and to take unpopular decisions." Neither APRA nor the RBA wants to spell out just how Australian supervisors have intruded, questioned and taken unpopular decisions in recent years. But Ellis's comments confirm the events of the past three years have made prudential supervisors more confident about taking an active role.