Financial Institutions Management and Regulation

REPORT TOPICS - Theories of Regulation

You may choose any one of the following topics for your report (ORif you prefer, you can choose a report topic from one of the other lists of report topics posted on iLearn). Your report should be no more than 1000 words, and will be worth 8% of your marks for this unit

Please read the "Instructions for ACST834 Reports" before you start writing your report. The Instructions set out the due dates, the method of submission, and the criteria which we will apply in marking your reports.

Competition in the Australian Banking System

Regulation has both costs and benefits. Under normative theories of regulation, regulation should be "in the public interest", and ideally should be designed to maximise the benefits and minimise the costs to the public. But how can this be achieved? How can we weigh up the costs and benefits of each new regulatory proposal?

In Australia, there is currently a debate about banking regulation.

Australian prudential regulators naturally want to ensure that we have a stable financial system, so that there is a low probability that any bank will become insolvent. As a result, in recent years Australian regulators have increased regulation of banks, aiming to make Australian banks "unquestionably strong".

But some people believe that the prudential regulators have gone too far - their rules are reducing competition and thereby having some negative effects on Australian customers.

Your report should:

• Explain why APRA thinks it is important for banks to be "unquestionably strong".

• Describe some of the ways that prudential regulators (APRA) has tried to make banks safer.

• Describe some of the negative side-effects of such regulatory action.

References:

Competition in the Australian Financial System, Productivity Commission Draft Report, January 2018 available on www.pc.gov.au

The Consumer Financial Protection Bureau (USA)

Regulation has both costs and benefits. Under the "public choice"theory of regulation, there is an ongoing tussle between different groups of stakeholders in the market.Different stakeholders will have different beliefs and different objectives, and each group will try to influence the legislative process in accordance with its own beliefs and objectives. So legislation is the result of a political process. As a result, regulations are constantly changing.

The history of the Consumer Financial Protection Bureau in the USA provides an example of this struggle.

After the Global Financial Crisis, the US government decided to create a new government agency, called the Consumer Financial Protection Bureau (CFPB). This bureau was created because some people thought that large financial institutions were treating their customers unfairly - and even defrauding their customers sometimes.

Some organisations in the financial services industry were displeased by the creation of the CFPB, and took steps to limit the activities of the CFPB. These activities have been more successful over the last year, because President Trump has a policy of reducing regulation and rolling back many of the regulations introduced by President Obama.

(a) Describe the purpose of the CFPB - refer to CFPB annual report for a description of their activities.

(b) As an example of CFPB activities, investigate the Wells Fargo case - how did the CFPB take action to protect Wells Fargo customers?

(c) Some organisations oppose the CFPB. Set out their objections. What steps have they taken to reduce the power of the CFPB.

(d) The role of the CFPB has changed recently, since President Trump appointed Mick Mulvaney to be head of the CFPB. Describe the changes in the CFPB's role.

Reference: You can start by using the Factiva database of newspaper articles. Factiva is available on the library website. You might also like to look up some Congressional hearings - Congress often holds hearings on controversial regulatory matters, and invites people to present their views.

Shadow Banking in China

Regulations often inspire innovation. When regulation prevents people from attaining their objectives, people often find a way of getting around the rules or finding a loophole in the rules.

For example, in the past (1950s and 1960s), Australian banks were very tightly regulated. The rules made it difficult for banks to lend money to risky customers, or to lend money for home loans.

As a result, new types of financial institutions sprang up (finance companies, building societies, and so on). These new financial institutions were not so tightly regulated.

They were able to make the loans which the banks were unable to make. These institutions grew rapidly, while the banks suffered a decline in market share. Eventually the Australian government decided to deregulate banks - and then the banks regained their market share.

In China, banks are tightly regulated and this has led to the growth of shadow banks. In recent years, many people have become concerned about this.

(a) Explain how Chinese banks are regulated.

(b) Explain what we mean by shadow banking. Why has shadow banking grown so rapidly in China?

(c) Do you think shadow banking is creating any risks for the Chinese economy?

(d) Do you think the government should try to regulate or control shadow banking?

References:

Reforming Shadow Banking in China, Douglas J. Elliott, Yu Qiao, Brookings Institute, May 2015. Shadow banking in China: A primer Douglas Elliott, Arthur Kroeber, Yu Qiao, The Brookings Institution, March 2015.