Wallis on, Wallis off

Alan Kohler offers a confused take on the prospect of a new Wallis inquiry today. First, he argues rightly that:

The big problem lies not with the banks and “collusive price signalling” as Joe Hockey calls it, but with the refusal of politicians to acknowledge that 40 per cent of bank funding comes from offshore. This applies to Labor and Coalition alike.

One of the easiest political press releases to dash off is one that warns the banks not to put up interest rates ahead of the Reserve Bank, as if that’s the only determinant of banking funding costs.

... The question of whether the banks are sufficiently well regulated in light of the fact that they are “too big to fail”, and had to borrow the government’s AAA credit rating for a time, is another matter entirely.

But then royally confuses the issue himself trying to put the boot into the Shadow Treasurer:

Joe Hockey has called for a “Son of Wallis” – that is another financial system inquiry like the one headed by Stan Wallis in 1996-97.

Hockey’s point is that Wallis’ thrust was deregulatory, based on the “efficient markets hypothesis”, which we subsequently learnt was false. We need another one, he says, to reverse the incorrect thrust of that one.

Actually that was discovered pretty quickly, thanks to the collapse of HIH in 2001 and the NAB foreign currency scandal of 2004.

The Wallis Report established the Australian Prudential Regulatory Authority as a separate bank regulation to the Reserve Bank. The idea was to separate monetary policy from bank regulation.

In the end Wallis was more a regulatory consolidator than deregulator, and in any case whatever Stan Wallis thought, APRA was not an instrument of deregulation – in fact it was turned into a tougher regulator than the RBA had ever been by the collapse of HIH and then by NAB’s loose governance that resulted in its loss of $360 million through unsupervised Forex trading three years later.

Remember, APRA was crawling all over Australia’s banks at the same time as American banks were being let off the leash by the repeal of the 1933 Glass-Steagall Act in 1999, allowing them to combine commercial banking and investment banking for the first time. It was the repeal of that law that set the scene for the sub-prime mortgage and housing bubble that led to the crisis of 2007-08.

It was also around the time that the banks began accumulating huge offshore debts. So, politicians deserve scorn for failing to recognise the banks' offshore borrowing addiction, but APRA (and the Wallis architecture) are not inadequate for failing to address the same problem.

Moreover, Kohler concludes:

... it would be a good idea to do something about the liquidity of the mortgage backed securities market, which remains comatose, although what, exactly, is not clear ... But another Wallis Inquiry?

Well, yes, precisely that. As this blogger has pointed out before, the efficient market hypothesis part of the Wallis architecture applied largely to the RMBS market. So it has clearly failed there too.