Your point on ‘regulator competition’ entirely misses the point of bank regulation. The reason for state intervention into a market is market failure. In the banking sector, this stems from the incentive for bank managers AND shareholders to take extra risk due to performance remuneration and limited liability, respectively. This is true for all limited liability companies, but what sets banks apart is their level of interconnectedness – raising the risk of systemic failure if any given bank topples over – and their central role to the economy. This, in turn, raises the likelihood of remedial state intervention – explicit via deposit insurance, or otherwise – in case failure does happen, providing liquidity and precluding systemic failure. The possibility of remedial intervention creates further risk-taking incentive not only to shareholders and bank management, but also to creditors and depositors, as the cost of intervention is bore by the tax-payer – current, past and future. Hence, bank regulation exists as preventative intervention.

Thus, creating incentives for banks ‘to find a regulator that was well perceived in the market’ does not really address the issue of effective and efficient regulation, as ‘the market’ is only partly served by regulation. Giving depositors ‘a true choice’ does not address the issue either, as depositors are already protected to some extent by remedial intervention, and are ultimately the sole cost bearers of regulation, as remuneration of all other stakeholders are competitively priced (salaries, debt, equity and supplies are priced in competition with other industries).

This is my personal opinion, at least.

André Levy
Manager, Operational Risk
Australian Prudential Regulation Authority

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