In making the recommendations in this chapter, the Inquiry has been guided by the following principles:
- Responsibility for sound governance, robust risk management and adequate financial soundness rests primarily with a financial institution’s management and its board. Financial institutions have a responsibility to operate with integrity to build and protect trust and confidence in the financial system.
- Instability in the financial system imposes large costs on individuals, the economy, Government and taxpayers. Minimising the risk of instability, or its impact where unavoidable, is a worthwhile investment. The wellbeing of the Australian community depends on the financial system being able to continue to provide its core economic functions, even in times of financial stress.
- Government should not generally guarantee the ongoing solvency and operations of individual financial institutions. However, there may be instances — particularly where system-wide failure is threatened — where public sector support of the basic functions of the financial system is warranted, such as liquidity support by the Reserve Bank of Australia (RBA). In determining whether to intervene in the event of a failure, Government should be guided by the anticipated effect of failure on the wider economy and seek to minimise taxpayer exposure.
- System stability should be promoted while giving due regard to the importance of balancing potential reductions in competition and efficiency. Where possible, regulation should be risk-based, as this helps ensure measures taken to establish stability are applied efficiently. Financial regulation should aim to be competitively neutral and not favour one type or class of institution over others, unless there is a sound public policy reason. An approach that combines strong regulatory and supervisory frameworks and market-based disciplines will deliver the best balance between financial stability and economic efficiency.
- In implementing regulation, Australia should build on global frameworks while reflecting features of the Australian system.
- The CFR has a shared responsibility for the stability of the financial system and monitoring systemic risks, while the member regulators retain ultimate responsibility and accountability for their respective mandates.