Bite Size Advice. Paul J. Thomas

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       Posting Date: 13 February 2012

       Regulation gone mad

      Is Australia becoming a police state? Do we have too many rules and laws? Has common sense been replaced with legislation? Is the level of regulation unnecessarily burdening business? In answering these questions, let me begin with three examples.

      First, my parents have lived in the same house for 52 years and there has NEVER been a car accident outside their home. But that did not stop their local council from erecting a “No Standing” sign in front of their home a few years ago. When my father and his neighbours complained, they were told the bend in the road where they live had been classified as a dangerous blind spot.

      Second, at lunch times I swim in a private pool in the city. Last year, following a periodic routine health and safety inspection of the pool by the city council, the gym manager was forced to erect a “No Diving” sign. The new inspector decided that the pool was too shallow for diving, even though there has NEVER been an injury at the pool in its entire 29 year history caused by someone diving into the pool.

      Third, earlier this year, the Gateway Credit Union team celebrated the end of the financial year with a night out at Sydney’s Luna Park. We had a great time and, for me, it brought back happy childhood memories. But the unsupervised fun I used to have as a youngster was replaced by safety inspectors on every ride. Even the more sedate rides in Coney Island now attract a watchful eye from the ride attendants.

      So, let’s recap. I can’t park outside my parents’ home, I can’t practise my dive starts at the pool and I can’t be too adventurous at amusement parks. Frankly, I’m staggered that I’ve managed to live as long as I have given my “reckless” childhood. I slept in a cot adorned with lead paint, rode a bike without a helmet and travelled in a car without seatbelts.

      Risk is inherent in everything we do but it should not paralyse us from doing things. I compete in ocean swims even though I could get eaten by a shark, stung by a blue bottle, dumped by a wave or caught in a rip current. Please don’t tell the authorities or ocean swims might also become heavily regulated – or banned completely!

      The serious point I am trying to make here is that it’s impossible to go through life or run a business without taking risks. Indeed, it’s unhealthy to even try as you’ll risk stagnation. Companies which can see beyond risks to the opportunities they present are much more likely to prosper. But what is an acceptable level of risk appetite for a business?

      Well, if you are in the business of financial services you cannot adopt a cavalier attitude to risk. In fact, the business of banking is all about managing risk. One of the lessons of the Global Financial Crisis (GFC) is that it’s not enough to manage risk within individual banks. Risk needs to be examined on a system-wide basis.

      Around the world regulators and governments agreed to restructure the approach to risk in the financial sector. The cornerstone of this global initiative to contain risk is an international accord – Basel III – which contains sweeping new regulatory standards for banks on capital adequacy and liquidity.

      Basel III was primarily intended for internationally active and systemically important banks. But the same regulatory standards are being applied to smaller institutions in a one-size-fits-all approach, putting smaller players with fewer resources at a competitive disadvantage. The new requirements will drive the cost of regulatory compliance to potentially unaffordable levels for credit unions and building societies (mutuals). This represents a risk to competition.

      The efforts by regulators to bolster financial system stability and to avoid a repeat of the GFC turmoil are laudable. Few would challenge the goal of a more resilient banking sector. But care must be taken not to punish those, like mutuals, which did not engage in the reckless behaviour that contributed to the GFC.

      At the end of the day, most regulation is a reaction to the last big disaster and, as I noted in an earlier post, Global banking laws, no set of rules can ensure the solvency of the banking system or its resilience in a crisis. Like driving a car, banking involves risks which can’t be totally eliminated. Let’s not unnecessarily burden mutuals with legislation that will diminish competition.