A world in economic crisis

Head of RBA calls for financial adjustments in Australia

Posted in Uncategorized by Aussie on March 1, 2010

Stevens calls for financial adjustments

The Reserve Bank governor, Glen Stevens has indicated that Australia could benefit from stronger capital and liquidity requirements in case funding markets freeze.

“It probably wouldn’t hurt for there to be a little bit more capital and more attention to liquidity and more attention paid to the possibility that important funding markets that banks rely on can seize up,” he told a business forum in Melbourne on Monday.

Mr Stevens said changes to the financial regulatory regime should be made despite the fact that Australia fared better than most other countries during the global financial crisis.

For Australia’s banks, absolute capital levels had not been an issue, although drafted proposals that banks should hold more government debt may be difficult to apply locally because of the scarcity of sovereign debt.

“Liquidity is going to be the issue,” he said.

“We will need the ability to tailor a set of principles in order that it works in Australia, and everybody knows what the issues are – there’s not enough government debt to literally hold as much as the draft principles that are put out will require.”

He said quantitative impact work needed to be done very carefully and it needed to be allowed time to be completed.

“The last thing we want is a rush to some ill-considered set of arrangements that have not been fully thought through,” he said.

Mr Stevens was speaking during a panel discussion on the global regulatory reform agenda at the Australian and Securities and Investments Commission’s Summer School 2010.

Mr Stevens said Europe, the US and Japan faced immense fiscal challenges in the wake of the global financial crisis but Australia has emerged stronger in comparison.

Mr Stevens said the challenge for those countries was to articulate a short-term path that would not knock economic recovery on the head, yet would be sustainable in the long run.

“That’s going to be very difficult indeed,” Mr Stevens said.

“From our point of view, of course, these things present as risks to the economic outlook of the nation.”

However, Mr Stevens said, Australia had not had to buy its banks, government finances were in terrific shape, the country had a strong regulatory framework, and it did not have to adopt very unconventional fiscal measures.

Mr Stevens said that regular measures applied liberally had worked.

However, despite the comments about the strength of the economy in Australia, it does seem a little bit strange to bring up the issue of liquidity. Could it be that Mr. Stevens is concerned about the level of Government debt? It seems that there is something that is being left out in the final assessment.

I have no doubt that Australia is in good shape and has emerged from the GBC without too much of a battering. However, we were shielded from most of the collapses in both Europe and the USA. On the other hand, most of the superannuation funds have taken a great hit during the height of the GFC with thousands being wiped out of our superannuation savings. This is very similar to the same kind of thing in the USA where the 401(k)s were hit rather hard by a wipeout in the financial markets.

On the other hand there are definite signs that Australia is recovering, for example projects that were put on hold because of lack of funding e.g. the new terminal at Canberra airport are now going ahead. This is good because it is a privately funded project. On the other hand, Australia could hit some problems further down the track when there is a reckoning for Australia’s own version of Porkulus (the stimulus package that was rushed through parliament). Already we are seeing the fallout from the foolishness of that package – the insulation debacle being one example of something that was ill-considered.

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