Prudential Regulation Authority (APRA) is responsible for the
prudential regulation (or as the Americans call it the "safety
and soundness") of the banking sector. Any company that
engages in "banking business" (which under the Banking
Act 1959 (Cth) means accepting deposits and making loans) must,
unless it is covered by an exemption, be authorised by APRA and
comply with its prudential standards covering matters such as
capitalisation and risk management. Two such exemptions are for
registered financial corporations (RFCs) and religious charitable
development funds (RCDFs).
The global financial crisis of 2007 – 2008 reminded
regulators of the need for prudential regulation to keep up with
financial innovation and to ensure that investors in financial
products with bank-like features are appropriately protected.
Australia's prudential regulatory framework proved its worth
during what many economists called the biggest financial crisis
since the Great Depression, as our regulated institutions sailed
through with very little stress. However, ripples were felt.
Banksia Securities was a finance company (and an RFC) that raised
funds from the public by issuing debentures, which it then loaned
out as residential mortgages across a large part of regional
Victoria. It collapsed in 2012.
Apart from the political and fiscal response by governments,
regulators around the world also responded to these events. In
2011, the international Basel Committee on Banking Supervision at
the Bank for International Settlements completed a review of its
1997 Core Principles for Effective Banking Supervision. In relation
to Australia, the Committee observed that the number and scale of
the non-authorised and non-supervised deposit taking institutions
is small but recommended that the exemption for RFCs be limited to
institutions that only raise wholesale funds. Both APRA and ASIC
responded with discussion papers.1
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
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