APRA and credit creation regulation: Economic secret business

It is that day of the month when the RBA board meets to pluck some wings off bats, boil them with eyes of newt and distil the resulting mixture down to an interest rate decision.

Across the nation thousands pay close attention to every aspect of the


deliberations and complete secrecy is maintained to ensure that everyone gets the news at exactly the same time.

But what about APRA and its regulation of credit creation by the Australian Banking sector?

Good question because while the RBA has a spotlight on every action it takes, APRA engages in regulation of economic activity, that has equally important effects on the Australian economy, in almost complete darkness.

The regulation of credit creation by the private banks is one of the most important economic levers in the economy and yet it is conducted effectively in secret.  When it comes to APRA, economic commentators often have no idea whether APRA has changed credit creation regulations,  what those changes were and whether the changes are being enforced.  If APRA feels like it, they sometimes release copies of the ‘letters’ they sent to ADI /Bank credit creators or give hints in speeches of what they discussed in private meetings with their banking sector ‘clients’.

Why is APRA allowed to issue instructions and write private letters, on the hush hush and the QT, to those with banking licenses i.e. the privilege to create credit that is treated as if it were issued by the public sector?

When APRA decides to send a private communication to “Club Bank” or specific members of “Club Bank” telling them to cut the supply of credit to particular industries or APRA relaxes previously issued instructions those decisions have real and significant impacts right throughout the economy.

APRA even has a special word “suasion” to describe how it conducts its economic “secret business”.

Why is credit creation regulation allowed to be conducted in secret when great efforts are taken to ensure that RBA interest rate regulation is conducted absolutely in the public eye?

APRA does not even call it credit creation regulation.

Instead they use the vague and obscure (to the general public) term – Macroprudential regulation.

Macroprudential regulation sounds fancy but basically it boils down to regulation that restricts when, how and to whom the Authorised Deposit taking Institutions (aka banks) can create credit.

It is likely that the term macroprudential has been adopted because calling it what it really is – credit creation regulation – would be a big flashing light drawing attention to one of the great failures of neoliberal economics.

Time to stop the secrecy and come clean APRA

Both the RBA and APRA have the capacity to significantly affect the economy and the value of assets in the economy.

  • RBA fixes the prices of a specific interest rate that has an impact on a raft of other interest rates and thereby the demand for credit
  • APRA regulates when, why and how the banking sector responds to the demand for credit

Effective immediately APRA should be made subject to a similar regime as that which applies to RBA interest rate announcements.

EVERY change that APRA makes to the regulations and rules regarding ADI / bank credit creation should be released by a public announcement so that everyone has equal access to the information and can adjust their affairs and investment decisions accordingly.

Changes to credit regulation by APRA that have the effect of limiting credit to particular industries or particular borrowers or particular regions would be available to all members of the Australian community at the same time rather just some select banking sector insiders.

So why is it secret anyway?

One explanation as to why APRA works in such a stealthy manner is that enforcing a regime similar to that which applies to the RBA interest rate decisions would alert the public to the significance of “credit creation” regulation as a tool of economic policy.

If the public were so alerted they might start asking questions about the nature of “credit creation” by the banking sector and what makes it special.  They might then start asking why APRA is regulating credit creation when the government is usually expected to take responsibility for the regulations that apply to different sectors of the Australian economy.  They might expect those regulations and changes to them be the subject of political debate and discussion so the costs and benefits can be assessed.

More importantly they might start asking question about how the power of private bank credit creation is currently exercised.    They might start asking why that massive economic lever has been allowed to be directed to pumping up a massive bubble in the prices of the existing housing stock rather than expanding the productive capacity of the economy in the form of new housing, new infrastructure, new schools, hospitals and other public assets that are in short supply.

As it is the actual explanation for APRA’s secretive ways when it comes to credit creation regulation is fairly simple.  Accordingly to neoliberal economic ‘theory’ APRA should not be interfering in the credit creation decisions of private banks at all as a ‘deregulated’ banking sector will allocate credit to only the best and most productive purposes.     One need only read some of the RBA and APRA speeches over the last few years to see that this ‘belief’ is almost holy writ in both institutions.

The problem for the RBA and APRA ideologues and their obsessions with “deregulated credit creation” is that the GFC demonstrated beyond doubt that their theories are a complete failure and what actually happens, most of the time, is that “deregulated credit creation” results in speculation and asset price bubble blowing on a massive a scale and crumbling rates of productive investment.

Slowly but surely over the last few years we have been listening to APRA and even the RBA retreat from the ideological extremes they inhabited, regarding the need for credit creation regulation.  Which of course is a good thing but it is time to start talking about the political decisions that are inherent in credit creation regulation and how they are made.

Credit creation by the private banks is the dirty little secret of Australian economic management and it is about time a big bright spotlight was turned on it and those responsible for it – APRA and the Reserve Bank of Australia.

Further reading

For an excellent read on the significance of credit creation by Professor Richard Werner see the link below.

Towards a new monetary paradigm: a quantity theorem of disaggregated credit, with evidence from Japan

And for those that prefer the visual – a documentary based on Professor Werner’s book the “Princes of the Yen”

Categories: Macrobusiness

2 replies »

    • Thanks Andrew,

      Yes Richard Werner is excellent on this subject.

      It is a real mystery how Australian economic commentators can spill gallons on ink on the RBA interest decision yet almost completely ignore APRA’s direct influence on credit creation by private banks.

      No doubt that is in part because APRA go to great efforts to try to conceal what they do, and what they could do, when it comes to regulating credit creation by the private banks.

      They (and the RBA ) like to try to preserve the fantasy that there is something non-political and scientific about private bank credit creation that does not require regulation. Which is absurd now APRA is openly directly the banks how they should create credit.

      A remarkable joke after 20 years of failure with private bank credit creation overwhelming directed to inflating the prices of existing assets rather than the expansion of new productive economic capacity in the economy.

      But then, for all their bluster and condescension, most of our economic commentators are an unquestioning and gutless bunch and criticising the role of the private banks in our monetary system might upset some of their industry / policy mates and put their ‘insider’ status at risk.


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