A APRA’s Independence from the Executive and Legislature

The first case study focuses on the conflict between the IMF’s financial sector assessment recommendations and the Commonwealth Government over the legal framework establishing and regulating the powers of APRA as Australia’s prudential regulator. FSAP reports have consistently criticised the Australian Government about APRA’s insufficient operational independence from the executive. Successive FSAPs have assessed Australia as non-compliant with at least one of the Basel Core Principles for Effective Banking Supervision. In its turn, the Commonwealth Government has repeatedly rejected this criticism and has taken no steps to change the legal framework establishing APRA to follow this recommendation.

The IMF’s February 2019 FSAP report assessed Australia to be ‘materially non-compliant’ with Principle 2 of the Basel Committee’s Core Principles for Effective Banking Supervision relating to ‘independence, accountability, resourcing and legal protection for supervisors’.^{Footnote 66} Material non-compliance means that there are ‘severe shortcomings’ in the implementation of international standards.^{Footnote 67} Principle 2 requires regulators to have ‘operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy, and adequate resources’. While observing that APRA had operational independence, was generally free from government and industry interference and had sufficient discretion to take supervisory action,^{Footnote 68} the 2019 FSAP found that APRA’s legal framework was non-compliant with principle 2 because of two features of APRA’s relationship with the executive and legislature.^{Footnote 69} The first concerned independence from the government because of a power granted to the Treasurer under the Australian Prudential Regulation Authority Act 1998 (Cth) (‘APRA Act') to issue directions to APRA. The FSAP Report recognised that the directions power had never been exercised and was conferred to deal with exceptional circumstances, but it also emphasised that the ministerial directions power is not expressly limited in this way. As a result, in circumstances where APRA’s and the Treasurer’s views conflict, the directions power would allow the Treasurer to interfere with APRA’s decisions. The report further suggested that an extreme scenario could occur in which the minister prevents APRA from introducing prudential standards, constraining it from carrying out its functions relating to financial stability and limiting APRA’s independence.^{Footnote 70}

A second concern related to APRA’s relationship with Parliament, given the Commonwealth Parliament’s disallowance powers regarding prudential standards.^{Footnote 71} The disallowance powers are also not ordinarily used to prevent APRA’s adoption of transnational standards and are a feature of the general checks on regulation-making powers in Australia. The FSAP suggested that such powers could constrain APRA in achieving its primary supervisory objectives.^{Footnote 72}

The foregoing concerns had been expressed in prior FSAP reports,^{Footnote 73} followed by the Commonwealth’s failure to change APRA’s operational framework. The 2019 Report suggested that the issue regarding APRA’s independence from the legislature was a lesser concern^{Footnote 74} and APRA itself has stated that it accepts parliamentary overview of its formulation and implementation of prudential standards.^{Footnote 75}

On APRA’s relationship with the executive, section 12 of the APRA Act provides that the ‘Minister may give APRA a written direction about policies it should pursue, or priorities it should follow, in performing or exercising any of its functions or powers’. It also requires notice to be given to APRA that a direction is to be made and an opportunity be given to APRA’s chairperson to discuss it. Such a direction must be made formally, as it must also be published in the Commonwealth Government Gazette and tabled in Parliament.

The above provision was introduced in its current form in 2003 to replace a provision for consultation between the Treasurer and APRA in case of disagreements regarding policy issues. This provision empowered the Treasurer acting alone to issue a direction to APRA on policy matters, turning it into a personal power of a minister rather than a direction of the government collectively as was the case before 2003. The 2003 amendments were intended to align the government’s powers with respect to APRA with provisions that apply to other independent statutory agencies,^{Footnote 76} including the equivalent provision applying to ASIC under section 12 of the Australian Securities and Investments Commission Act 2001 (Cth). In other words, it appears that the ministerial directions power in APRA's governing Act reflects a common template provision in Commonwealth legislation applying to independent statutory authorities^{Footnote 77} and to the decision-making powers of Commonwealth government officials more generally.^{Footnote 78}

The Australian Government repeatedly disagreed with the FSAP concerns about risks to APRA’s independence, given that the governing framework for APRA is common to that for similar authorities that operate independently, but are subject to oversight. The Wallis Inquiry report into the financial sector, which recommended the establishment of APRA, endorsed the independence of each of Australia’s financial regulators.^{Footnote 79} The Treasurer accepted that APRA should be independent when the establishing Act was promulgated. The Explanatory Memorandum provided that:

The Explanatory Memorandum went on to point out that the Commonwealth Government has a legitimate interest in APRA’s policies and their application and that provisions were included in the Act to ensure the Government is informed and that it can intervene when it disagrees with APRA.^{Footnote 81}

The Government has repeatedly stated that the ministerial directions power enables APRA’s ‘operational independence’ while also facilitating the minister’s responsibility to ensure agencies implement parliament’s policy intentions,^{Footnote 82} points reiterated following the 2012 and 2019 FSAP reports.^{Footnote 83} By contrast, on the question of its relationship with the executive, APRA has aligned with the FSAP assessment, criticising the Government for maintaining a ministerial directions power into APRA’s legislative framework. In the subsequent 2014 financial system inquiry, APRA submitted that,

It follows that APRA preference would be to limit the Government’s power to direct with respect to systemic matters regarding the structure of the financial industry, while giving APRA sole independent role to develop and implement prudential policies. The ministerial directions power under s 12, by contrast, enables the Treasurer to intervene in prudential policies as well.

This persisting conflict between transnational peer recommendations and Australian domestic practice takes us to the heart of the operation of independent regulators within a Westminster parliamentary democracy. In particular, under Australia’s system of responsible government Ministers have formal responsibility to oversee regulatory agencies, even when established as independent regulatory authorities. One reading of this conflict might be that, while transnational recommendations favour the autonomy of independent regulators and seek to more fully disembed them from domestic political controls, the Australian government insists on the power to oversee regulators for which it is ultimately accountable to both Parliament and the electorate. At the same time, however, this persisting conflict is illuminating about the function and form of regulatory independence,^{Footnote 85} as well as the efficacy of domestic oversight of independent authorities in the Australian context in at least three respects.

First, with respect to the function and form of prudential authority independence, the relevant Basle core principle requires that the prudential regulators’ discretion should be exercised free of ‘interference that compromises’ its judgment.^{Footnote 86} This specifically includes political or industry influence on the regulator’s decision-making. However, neither the transnational standard of independence, nor the reviews that assess its implementation, reveals much about the reasons that such independence is desirable for the promotion of financial stability or how such independence should be implemented. The latter question is particularly important, given that any decision-maker — even if independent — requires input from, and coordination with, other actors to be able to regulate effectively.^{Footnote 87} Further, independent agencies should in principle be subject to domestic constitutional requirements of oversight and accountability.^{Footnote 88}

With respect to the purpose of agency independence in regulatory capitalism, Gilardi explains that independent authorities have been implemented principally to improve credible policy commitments when liberalising and privatising public utilities, including to reduce political uncertainty about the legal framework resulting from changes in government.^{Footnote 89} On this view, to encourage substantial investments by private firms necessary to enter sectors such as telecoms and energy, independent regulatory authorities constrain subsequent arbitrary public action that could effectively expropriate or devalue such investments.^{Footnote 90} However, even if we accept this argument with respect to network utilities, it has been suggested that the same rationale does not apply in financial regulation given that financial institutions are much more flexible and their investments are not necessarily specific to a particular activity or jurisdiction.^{Footnote 91} Accordingly, the independence of regulatory institutions for prudential supervision has been contested and needs to be supported by a different rationale from the one in utilities regulation.^{Footnote 92}

Furthermore, a key objective of financial regulation is to supervise financial innovation in novel and complex products that may appear to satisfy the needs of customers, but may also lead to financial instability through excessive risk-taking.^{Footnote 93} The need to assess the effects of financial innovation as a threat to financial stability typically requires financial supervisory authorities to engage in closely collaborative relationships with financial institutions and iterative forms of regulation through on-going monitoring.^{Footnote 94} Both of these aspects of financial supervision suggest that ministerial intervention may be a lesser concern compared to the authority’s inherent lack of distance from the financial institutions that it monitors. In fact, as will become apparent, in Australia’s case the financial agencies’ proximity with the banks may be of much greater concern than the risk of political interference.

Second, even if there is a valid justification for technocratic delegation to an expert prudential authority, the Australian ministerial directions powers criticised in the FSAP reports offers some advantages over other forms of government intervention in the operation of regulatory agencies. Specifically, in reflecting on the institutional design of technocratic agencies charged with a well-defined dimension of the public interest (such as financial stability), Majone has suggested that elected officials in a democracy should have the power to override the policies or decisions of such agencies in specific cases that involve political considerations.^{Footnote 95} These are cases that have distributional consequences or involve trading off different public policy objectives. However, Majone also argues that to ensure that political interventions are limited to such instances, they should be transparent and require onerous formal procedures of justification that impose costs on the relevant minister as a political decision-maker.^{Footnote 96} The Treasurer’s directions power in the APRA Act appears to satisfy these criteria of transparency and deliberation.^{Footnote 97} As discussed, the law requires the Minister to give notice of a proposed direction, provide an opportunity to APRA to respond to the proposal, and if ultimately made, the Treasurer’s direction must be formally published and tabled in Parliament.

The third point that emerges from this contestation between the transnational and local levels relates to the effectiveness of oversight of statutory authorities in Australia. While, as both Finn^{Footnote 98} and Goldring^{Footnote 99} have pointed out, independent statutory authorities and boards have a long history in Australian administration at both federal and state level, the question of how to connect such authorities within existing structures of oversight through responsible government and judicial review remains open.^{Footnote 100} On one view, the doctrine of responsible government as enshrined in the Constitution ‘does not countenance the existence of government officials for whom no one is accountable or responsible in the Parliament’,^{Footnote 101} which is said to limit the power to create independent regulatory agencies.^{Footnote 102} The alternative view is that independent authorities are not ‘a challenge to the true principles of responsible government but a legitimate evolution in governance arrangements’, which the Constitution permits.^{Footnote 103} But even on the latter view — that independent agencies are constitutionally permissible — it is important to ensure that such agencies’ decision-making is subject to effective oversight by the executive, legislature and the courts.

In responding to the FSAP findings, the Commonwealth has highlighted that APRA’s powers are checked by politically legitimated actors through means that are common in Australian public law. These include the Commonwealth executive and legislative oversight of APRA’s powers to make prudential standards under s 11AF of the Banking Act 1959 (Cth) and the ministerial directions power under s 12 of the APRA Act. At the same time, however, the Commonwealth has also argued that the ministerial directions power has never been used and that transnational prudential standards are typically incorporated into Australian law through regulations made by APRA, notwithstanding the parliamentary disallowance power. This argument suggests that the formal public law mechanisms through which independent agencies are overseen by the executive and legislature in Australia do not have a particularly strong bite. In other words, as a practical matter, if APRA, or other independent regulators, are subject to constraints in the exercise of their powers and discretions, such constraints are more likely to arise from cultural values and practices of its officials,^{Footnote 104} APRA’s embeddedness into domestic^{Footnote 105} and international regulatory networks,^{Footnote 106} and through dedicated sectoral inquiries into financial regulation, such as the Wallis and Murray commissions of inquiry, or the more recent Banking Royal Commission.

B Regulating Domestic Systemically Important Banks

The global financial crises also brought into sharp relief the regulatory challenges posed by systemically important banks to financial stability at the domestic level, as well as internationally due to cross-border contagion.^{Footnote 107} Any bank failure can have systemic consequences by weakening depositor confidence in the financial system, however systemically important banks present a particular challenge because of their size and their significant local and global inter-connectedness.

In the aftermath of the financial crisis, concerns were expressed at the G20 about the contagion effects of bank failures, given the seizing up of the global financial system that resulted from actual or feared failures of large multinational banks. At the domestic level, the failure of a large bank also has significant consequences for financial system stability, and for the economy as a whole.^{Footnote 108} Given the potentially large systemic and economic consequences of their failure, these banks have come to be known as too-big-to-fail (‘TBTF’). In other words, to avoid catastrophic financial and broader economic consequences, there is an expectation that a national government would step in to bail out such a bank using taxpayer funds. Such bailouts lead to deterioration of the government’s net fiscal position, as happened in a number of European countries where national governments stepped in to salvage important local banks. A further negative effect of the expectation of public bailouts is the moral hazard problem, whereby systemically important institutions are incentivised to take excessive and unsustainable risks in their activities, thereby increasing the likelihood of failure and instability.^{Footnote 109}

For the above reasons, the G20 proposed developing a Globally Systemically Important Banks (‘G-SIB’) regime to impose additional capital requirements on large banks, above those required under the Basel III framework.^{Footnote 110} At the September 2009 Pittsburgh Summit, the G20 tasked the FSB with developing a policy framework to address the TBTF problem,^{Footnote 111} leading to an FSB interim report^{Footnote 112} and a proposal to develop concrete policies.^{Footnote 113}

As a result, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision (‘BCBS’), agreed that systemically important banks should have loss absorbing capacities beyond the generally applicable Basel III minimums.^{Footnote 114} By October 2010, the FSB published a recommended policy framework to address risks associated with systemically important financial institutions.^{Footnote 115} This framework recommended higher loss-absorbency capacity, a resolution planning system, further coordinated supervision, a timeline for further study, consultation and peer review. Yet another recommendation was that all FSB jurisdictions should develop a framework for managing domestic, not just global systemically important banks. Thus, while none of Australia’s banks (including the big four) are deemed sufficiently large and globally interconnected to be designated as a G-SIB, the G20 proposed a special regime for banks that — though not globally significant — could significantly adversely impact domestic, as well as neighbouring economies.

At the 2011 Cannes summit the G20 leaders tasked the FSB and the BCBS to report on extending the framework to domestically systemically important banks (‘D-SIBs’).^{Footnote 116} The April 2012 progress report to the G20 suggested a domestic framework that was complementary to the global one, allowing local authorities to assess and identify systemically important banks at the domestic level.^{Footnote 117} The BCBS final report of October 2012^{Footnote 118} set out the expectation that national authorities would introduce D-SIB requirements into domestic regulations by 1 January 2016.

Thus, the onus of assessing domestic systemic importance under the proposed framework was placed on local prudential authorities. The aim was to strike a balance by giving local authorities sufficient discretion, while ensuring minimum principles to avoid domestic turmoil spilling over to other economies.^{Footnote 119} The transnational D-SIB framework allows substantial discretion to local supervisory authorities as best placed both to identify domestically significant banks and to set the additional capital requirements for such banks. It does not specify a level or formula for the capital and loss-absorbency capacities of locally significant banks, but — consistently with the experimentalist approach outlined in Section II — sets out key framework objectives that must guide local decision-makers, including:

1. • The loss-absorbency requirement should be commensurate with the financial entity’s systemic importance;

2. • The domestic requirements should be compatible with the global requirements; and

3. • The loss-absorbency requirement should be met with Common Equity of Tier 1 (a measure of good quality, tangible and liquid capital).

The report also proposed to monitor implementation of the domestic bank measures through a transnational peer review process, combining it with the BCBS’ Basel III regulatory consistency assessment programme (‘RCAP’).^{Footnote 120} By September 2013, the FSB released a progress report noting that the BCBS was developing a peer review program for the D-SIB to commence by mid-2015,^{Footnote 121} though Australia has not been peer reviewed within this framework thus far.^{Footnote 122}

In Australia, the above global framework led to an APRA announcement regarding local requirements for the big four banks and a December 2013 information paper on D-SIB regulation. It identified ANZ, CBA, NAB and Westpac as domestically significant banks and imposed an additional one percent capital requirement to be met from 1 January 2016.^{Footnote 123} This was at the lower-end of the 1% to 5.5% range imposed in other countries implementing similar measures.^{Footnote 124} APRA’s information paper noted that proactive supervision is likely more effective at managing the risks posed by domestic big banks than higher capital requirements, observing that the BCBS itself had emphasised the importance of other policy tools such as supervisory monitoring.^{Footnote 125}

APRA’s introduction of the above requirements coincided with the government’s announcement of the second Financial Services Inquiry (‘FSI’) led by David Murray, which was tasked to consider this issue as well.^{Footnote 126} The Murray Inquiry invited local financial market stakeholders to make their own submissions on regulating Australia’s big four systemically important banks. In a recommendation that was ultimately endorsed by the government, the Murray Inquiry suggested implementing ‘minimum loss absorbing and recapitalisation capacity in line with emerging international practice’.^{Footnote 127}

To understand the nature of local deliberation in Australia on this key regulatory question, it is worth pointing out that in its July 2014 interim report, the Murray FSI specifically invited submissions on increasing capital requirements for domestic big banks.^{Footnote 128} From among local stakeholders, the principal submissions on this issue were made by financial institutions providing two opposing perspectives:

1. • The big four banks, such as ANZ^{Footnote 129} and Westpac,^{Footnote 130} submitted that they had enough capital and further increases in capital requirements would ultimately be passed on to customers in the form of higher banking costs.^{Footnote 131}

2. • The smaller regional banks, such as Bendigo and Adelaide Bank, Bank of Queensland, ME Bank and Suncorp Bank, in a joint submission, argued that the big four banks receive a two-notch credit rating upgrade from implicit government support due to their size. The regional banks argued that additional requirements for large banks should be set at a level that eliminates their competitive advantage.^{Footnote 132}

APRA’s submission explained the process and reasons for its decision to impose an additional 1% capital requirement on the big four banks in December 2013 as follows:

In its final report, the FSI referred to the G20 and FSB initiatives and concluded that ‘[a]s a small, open, capital-importing economy, Australia cannot stand outside international practice’.^{Footnote 134} Its findings reiterated the importance of removing the perception of an implicit government guarantee to avoid market distortions and improve competition in the banking sector, as suggested by the regional banks’ submissions.^{Footnote 135} As such, it recommended that the government ‘[i]mplement a framework for minimum loss absorbing and recapitalisation capacity in line with emerging international practice, sufficient to facilitate the orderly resolution of Australian authorised deposit-taking institutions and minimise taxpayer support’.^{Footnote 136}

While the FSI final report highlighted the policy and distributional trade-offs involved in choosing different mechanisms for ensuring stability of domestic banks, it did not provide any specific recommendations as to what specific rules should be adopted and how the balance should be struck. In its response, the Commonwealth Government also did not provide any further detail. It simply endorsed the FSI’s recommendation and suggested that ‘APRA as Australia’s prudential regulator’ should ‘implement this recommendation in line with emerging international practice’.^{Footnote 137}

As such, it was left to APRA itself to determine the details of Australia’s D-SIB regime in consultation with market stakeholders and taking into account the practices of international peer prudential authorities. APRA published a further information paper on the additional capital required for the Australian banking system to be ‘unquestionably strong’.^{Footnote 138} While there was speculation that APRA could further increase the domestic bank requirements, no changes were made immediately. In November 2018, APRA released a discussion paper dealing with the FSI’s Recommendation on this point. Among the envisaged regulatory proposals was to increase the total capital requirement of D-SIBs by four to five percentage points within four years, with the increase to be satisfied predominantly by Tier 2 Capital.^{Footnote 139}

Once again, the submissions to APRA on increasing capital requirements for domestically significant banks came only from the Australian banking sector.^{Footnote 140} The big four banks' position was that additional capital requirements are onerous and unnecessary.^{Footnote 141} Smaller banks, by contrast, expressed the view that APRA should require more Tier 1 (rather than Tier 2) capital from the big four banks.^{Footnote 142} Notably, from a total of seven submissions to APRA, three were designated as confidential, which is somewhat puzzling given that these deliberations were a prelude to public rule-making.

Given the lengthy process of rule-making described above, Australia was one of the last industrialised countries to implement a regime for domestically significant banks following the FSB’s recommendations. APRA ultimately decided to require the big Australian banks to hold an additional 3% of capital and has been criticised for not disclosing the motives for its decision given that the ultimate requirement is less than APRA’s original proposal (4–5%), and that it also does not follow the additional capital thresholds adopted in Europe.^{Footnote 143}

C Ex Ante Deposit Insurance versus Ex Post Bailouts for Bank Failures

The final case study is based on a conflict over another stability mechanism intended to deal with bank failures, namely deposit insurance. Such insurance is regarded as one ‘of the most important components of a credible financial system safety net for preserving financial system stability’ by protecting depositors from losses on their bank deposits.^{Footnote 144} The IMF has long criticised Australia for not establishing a deposit insurance scheme that is funded ex ante. The point was repeated in the 2012 and 2019 FSAP review reports, which highlighted that Australia relied on ex post taxpayer funded measures to address bank failures. While successive Australian governments have considered the FSAP recommendation favouring ex ante funded deposit insurance,^{Footnote 145} they have ultimately maintained pre-existing arrangements. In maintaining the existing arrangements, governments have arguably acted consistently with the views of the banking industry against the recommendations of both transnational peer assessments and domestic regulators.

Beginning with the transnational perspective, the FSAP reviews rely on the standards elaborated by the International Association of Deposit Insurers (‘IADI’) in the ‘Core Principles for Effective Deposit Insurance Systems’ (October 2014), as well as the FSB’s ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ (October 2014). The IADI report explains that the global financial crisis highlighted the important role of deposit insurance in maintaining depositors’ confidence in crisis circumstances.^{Footnote 146} The Core Principles were motivated by the concern that while deposit insurance as a safety net supports financial stability, it does so at the risk of moral hazard if the scheme is poorly designed.^{Footnote 147} One purpose of the Core Principles is to support the design of deposit insurance schemes that mitigate against banks' moral hazard.^{Footnote 148}

Unlike most other FSB members, Australia still does not have an ex ante funded deposit insurance scheme.^{Footnote 149} The existing ex post funded scheme was introduced into the Banking Act 1959 (Cth) following the global financial crisis in 2008 through a reform of the bank insolvency and resolution provisions. While depositors were already given priority in bank resolution processes, it was recognised in 2008 that such processes are likely to be protracted and that timely access to deposits is particularly important in times of crisis to bolster confidence and avoid systemic contagion.^{Footnote 150} The solution was to provide depositors with an advance payment funded by the government and administered by APRA. APRA would then recover the amount through the liquidation process from the assets of the failed bank.^{Footnote 151} The problem arises if there are insufficient funds obtained from the liquidation of the failed bank’s assets. While the government can impose a levy on other banks to recover such funds, this levy will necessarily exclude any failed bank. As such, the Australian arrangements contain an implicit government guarantee that leads to the concern about moral hazard stimulating excessive risk-taking by banks, potentially imposing a cost on Australian taxpayers in cases of insolvency.

By 2017, the Government did impose a major banks levy on the five largest Australian banks, with liabilities over the threshold amount of $100 billion.^{Footnote 152} The Government explained that the purpose of the levy was for ‘budget repair’ and to ‘contribute to strengthening the structural position of the budget for the long term — providing greater fiscal capacity to accommodate shocks such as those seen in the global financial crisis’.^{Footnote 153} Notably, this levy did not constitute an ex ante funded insurance deposit scheme as the levy payments were not designated for a special fund to compensate depositors in case a participating financial institution fails.

Following the 2012 FSAP report noting that Australia’s arrangements were inconsistent with best practice and recommending an ex ante scheme, in 2013 the adoption of such a scheme was supported by Australia’s Council of Financial Regulators.^{Footnote 154} Given national regulators’ alignment with transnational recommendations, the then Labor Government announced it was considering the establishment of an ex ante scheme.^{Footnote 155} Again, however, this consequential policy choice for financial stability was apparently not an issue of political or parliamentary contest. Instead, the Treasurer of the subsequent Liberal-National government submitted the question of whether to establish an ex ante Financial Stability Fund for consideration by the above-mentioned FSI chaired by David Murray.^{Footnote 156}

Contrary to the views expressed in transnational reviews and by national regulators, the FSI ultimately recommended against the establishment of an ex ante deposit insurance fund.^{Footnote 157} Such a fund was said to involve on-going costs for all financial institutions (and their customers), whereas the existing ex post funded regime only involves levies if liquidation of a failed financial institution is insufficient to recover sufficient funds to compensate depositors. The FSI also reasoned that other measures in the Australian financial system reduced both the risk of bank failure and the need for establishing an ex ante funded scheme, without explicitly addressing the FSAP concern about moral hazard. Following the FSI’s recommendations, the Government decided that it would not go ahead with an ex ante funded scheme.^{Footnote 158}

Notably, the Murray Inquiry’s recommendation against an ex ante scheme again drew on submissions made by the banking industry. On this issue, all banking industry representatives aligned against the proposal. The Australian Banking Association, representing the major Australian banks (including the big four banks), argued that the existing ex post scheme was sufficient, that there was no justification for introducing an additional measure which would add to banking costs, and that the costs of such a scheme outweigh its benefits.^{Footnote 159} The Customer Owned Banking Association, representing credit unions, mutual banks and building societies, made similar arguments, pointing out that an ex ante funded scheme would affect smaller financial institutions more heavily that the large institutions, further reducing their competitiveness.^{Footnote 160} As in the previous case, there were apparently no submissions to the Murray Inquiry from more dispersed stakeholder interests, such as depositors or other bank customers (including borrowers), let alone the wider community that could be affected by the introduction of an ex ante funded scheme or by financial instability (such as taxpayers).

The 2019 FSAP of Australia noted the FSI’s recommendation, emphasising that Australia’s ex post scheme continues to ‘fall short; of the Deposit Insurance Core Principles and Key Attributes’.^{Footnote 161} The report went on to state that:

This case study involves another key policy mechanism for ensuring financial stability and controlling excessive risk-taking by financial institutions. As Chan, Godwin and Ramsey point out, deposit insurance has a consumer protection objective (to conserve depositors’ interests), as well as a financial stability objective^{Footnote 163} (in turn protecting many other dispersed interests negatively affected by financial instability).^{Footnote 164} On this issue, we observe an alignment in the position of the national financial regulators and their international peers in favour of an ex ante funded deposit insurance scheme, which would both reduce moral hazard and ensure sufficient funds were available to compensate depositors of a failing bank, thus ameliorating contagion effects of financial instability.

The position of the national regulators and their transnational peers apparently protects dispersed interests, including Australian depositors and even taxpayers. However such a scheme can also lead to an increase in banking costs, thereby potentially increasing prices for bank customers, including depositors or borrowers, especially in a concentrated banking sector such as the Australian one. Thus, as with the earlier case studies, the adoption of the scheme is not a purely technocratic issue as it involves distributional and policy trade-offs. And yet, it remains the case that the adoption of ex ante deposit insurance was never a matter of significant political contest either in the legislature or electorally. While it was treated as an apparently technical issue, it could not simply be delegated to APRA given the need for legislative change, so it was instead outsourced to the sectoral Murray Inquiry, where submissions were principally advanced by the banking sector. This allowed the government to hide behind the cover of the FSI recommendation for not introducing an ex ante funded deposit insurance scheme as preferred by the banking industry.