Speaking at a forum for banking supervisors in Toronto, Australian Prudential and Regulation Authority (APRA) general manager David Lewis said risk-based supervision is his organisation’s “religion”.
“It’s inherent in our mission and values, and it’s ingrained in our supervisory approach. It’s in our DNA,” said Mr Lewis.
He separated the activities of prudential regulators into reactive supervision, proactive supervision and forward-looking supervision.
“Most enforcement action is inherently reactive. But, if this is all we do, we will be forever fighting fires and failing to take preventative action,” said Mr Lewis.
APRA’s ‘hands-on’ approach to market supervision is one of the three factors that allowed Australia to emerge from the global financial crisis (GFC) “relatively unscathed”, he said – along with the resilience of the Australian economy and the country’s ‘four pillar’ banking structure.
“We were fortunate enough to have all three occur at the same time. Should any one of these factors have been absent, Australia’s crisis outcome might have been much more serious,” said Mr Lewis.
Mr Lewis pointed to the Financial Crisis Inquiry Commission in the United States and the Turner Report in the UK, which found, among other things, that the regulators in those countries failed to take a proactive approach due to their faith in the “self-correcting power of markets”.
While APRA is not necessarily superior to regulators in other countries – in fact, Mr Lewis said there were some practices in overseas jurisdictions that are superior to those in APRA – the Australian regulator differs in that it is not simply constrained by a set of rules.
“To us, ‘regulation’ can be defined as the application of rules and ‘supervision’ as the oversight of the effectiveness of a firm’s risk management … At APRA, we do both regulation and supervision,” said Mr Lewis.
“APRA learnt early on in its history that it doesn’t pay to be timid. Since then, we frequently engage with entities on their risk management strategies and policies – taking a ‘devil’s advocate’ style of questioning,” he said.
The Australian regulator believes in “constant mild intervention” rather than the “light touch” regulation that exists in other markets, said Mr Lewis.
He advocated an interventionist approach, which involves “frequent interaction with regulated firms at both board and management levels”.
“Firms need to know that the regulator is looking over their shoulders,” said Mr Lewis.
In addition, prudential regulators must have “a capacity and a willingness to act when deficiencies are identified”, he said.
