Essays on Necessity of Australian Prudential Regulation Framework Case Study

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The paper 'Necessity of Australian Prudential Regulation Framework" is an outstanding example of a finance and accounting case study.   This paper looks at the Australian Prudential Regulation Framework. Secondly, it explores the necessity of this framework. Lastly, it looks at the role of the Reserve Bank of Australia in managing the effects of the Global Financial crisis in early 2008. The Australian Prudential Regulation Framework Australia’ s prudential regulation framework gives the Australian Prudential Regulation Authority (APRA), the authority to oversee the functions of financial institutions to gauge whether such institutions are in need of restructuring, capital investment and or a change in the management.

Formed in 1998, APRA is the regulator of the Australian financial service industry. It was brought into existence by the enactment into the legislation of the Australian Prudential Regulation Authority Act of 1998. The mandate of APRA canters on supervision of several financial institutions such as credit unions, reinsurance, general insurance, the superannuation industry, building societies, life insurance and other financial institutes. Above all, the responsibility of the APRA is to ensure that these financial institutions live up to the promises that they make to investors (RBA, 2012; APRA, 2012).

APRA is fundamentally concerned with the management of risks by investors in financial institutions. Henceforth, the APRA is also concerned with minimising the risks where they are unavoidable (APRA, 2012). Under the Australian Prudential Regulation Authority Act of 1998, on evaluating the status of financial institutions APRA can take either of the following actions. First, it may withdraw licences, replace members of the management or specific service providers, it can also merge a financial institute with another, and restrict business activities until certain concerns are addressed or alternatively run-off the existing businesses altogether.

Further, the APRA has authority to quarantine assets, appoint an inspector, a judicial manager or a provisional liquidator to shed light into the dealings of the financial institution. In addition, the APRA can also issue directions for sanctions or place the company into receivership also known as liquidation (APRA, 2012). According to APRA (2012), in 2002 the financial oversight authority introduced assessment and supervisory response tools dubbed Probability and Impact Rating Systems (PAIRS) and a set of supervisory oversight and Response Systems (SOARS).

The PAIRS are meant to assess actions that the APRA can take in a given situation while SOARS provide crucial information on how supervisory concerns based on PAIRS are determined. Hence, the APRA is tasked with ensuring that financial organisations operate under the sound financial status that is reflective of sustainability. ARPA has authority within its jurisdiction to halt the operations of a financial institute that it deems is operating in contradiction of certain stipulations. Also, the ARPA can delegate the administrative responsibilities of a failing financial institute to another that is far better performing.

The International Monetary Fund (2006), points out that the ARPA has the powers to initiate court injunctions and generally power to assess the fitness of financial institutions. The central objective of the APRA as earlier mentioned is concerned with risk reduction and it does this by collaborating with financial institutions to develop appropriate solutions to financial challenges facing such institutions (IMF, 2006). The Banking Act of 1959 spells out the obligations of the APRA framework in terms of liquidity requirements and capital adequacy.

First, on Authorised Deposit-taking Institutions (ADIs) are expected to hold capital as a buffer against unforeseen losses due to unpredictable market trends. ADIs include credit unions, banks and financial institutions that are incorporated locally. Moreover, the ADIs are required to operate with a minimum balance of capital adequacy ratio maintained at 8% at both stand-alone and consolidated levels. APRA, therefore, must ensure that ADIs meet these two fundamental requirements in their operations (Australian Government: The Treasury, 2013).

References

Australian Government: The Treasury (2013). Appendix 3.1: Australia’s Prudential

Framework. Retrieved on July 9 2013

Australian Prudential Regulation Authority (2012). Supervisory Oversight and Response

System. {Online} www.apra.gov.au/CrossIndustry/.../SOARS-062012-External-version.pdf.‎

Cusbert, T. & Rohling, T. (2013). Currency Demand during the Global Financial Crisis: Evidence from Australia. Research Discussion Paper 2013-01. Retrieved on July 9

International Economic Conditions and Financial Markets (Oct 2009: 5) [online]. Queensland

Economic Review. Retrieved on July 9 ISSN: 1038-3182.

International Monetary Fund (IMF) (2006). Australia: Financial Sector Assessment Program Detailed Assessment of Observance of Standards and Codes (EPub). Washington DC: IMF.

The Gold Coast Bulletin. (2011, Nov 24). RBA's liquidity facility set to help banks stay afloat. Retrieved July 9 2013 from

Reserve Bank of Australia (RBA) (2012). Australia's Financial Regulatory Framework. Retrieved on July 9 2013< http://www.rba.gov.au/publications/annual- reports/cfr/1999/aus-fin-reg-frmwk.html>

Reserve Bank of Australia (RBA) (2013). About the RBA. Retrieved on July 9 2013

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