The Political Economy of Prudential Regulation in Australia

On 2 March 1996, the Liberal Party won its first federal election after 13 years of ALP rule in Australia. On 30 May 1996, one of the first acts of Peter Costello, Treasurer of the Howard Coalition government, was to establish the third major financial system inquiry (FSI) to review the Australian financial system (later known as the Wallis Inquiry).1 The Wallis Inquiry was important in the new era of financial regulatory change in Australia because it aimed to address the issues of whether, and if so how, the supervisory and regulatory arrangements at the time should be reorganised to address future challenges. One year later, on 18 March 1997, the Wallis Committee submitted its 700-page final report containing 115 recommendations to the government. Two of the more controversial recommendations of the Committee concerning prudential regulation were numbers 31 and 32. The former recommended the creation of a single prudential regulator to replace the RBA, the Insurance and Superannuation Commission (ISC) and the Australian Financial Institutions Commission (AFIC) while the latter said that this agency should not be the RBA. Following the government’s adoption of these recommendations, Australia became the first country in the world to adopt a functionally-based financial supervisory/regulatory framework, the so-called ‘twin peaks’ model.