Why Did Australia Fare So Well in the Global Financial Crisis?

Not all jurisdictions around the world suffered the effects of the so-called “global” financial crisis equally. Even among common law countries, which are routinely bundled together in much academic literature, the impact of the crisis varied significantly from jurisdiction to jurisdiction.

The crisis proved dire for some common law countries, such as the United States and the United Kingdom. Others, however, including Australia and Canada, were considerably more fortunate. Although there were over fifty government-sponsored bank bailouts around the globe during the crisis, including in the United States and the United Kingdom, there were no such bailouts in either Australia or Canada.

For many, the stock answer as to why Australia fared so well during the crisis was that it was “lucky”. This appears to be code for the view that Australia’s economy was buoyed by China’s seemingly insatiable demand for resources. My recent chapter, “Why Did Australia Fare so Well in the Global Financial Crisis?”, which was published in the 2013 Cambridge University Press book, Ferran, Moloney, Hill and Coffee, The Regulatory Aftermath of the Global Financial Crisis, explores the adequacy of this account of Australia’s performance during the crisis.

The chapter argues that, although strong trade links with China undoubtedly form a piece of the puzzle in this regard, there are a number of other relevant, but under-appreciated, factors which differentiated Australia from other common law jurisdictions and potentially contributed to the country’s resilience.

For example, although Australia’s regulatory regime shares many features with other common law jurisdictions, there were interesting structural differences between its framework and the pre-crisis regulatory systems in the United States and the United Kingdom. Australia operates under a “twin peaks” model of financial regulation, which was introduced in the late 1990s in accordance with the recommendations of the influential Wallis Committee in 1997. Under this “twin peaks” model, one regulator, the Australian Prudential Regulation Authority (APRA) is responsible for prudential regulation of financial institutions, including deposit-taking, general insurance, life insurance and superannuation/pension institutions. Another agency, the Australian Securities and Investments Commission (ASIC) is responsible for business conduct and consumer protection. The Reserve Bank of Australia (RBA) essentially constitutes a third peak in the regime, controlling monetary policy, systemic stability and payments systems.

This regulatory system contrasts strongly with the complex and fragmented US framework for financial market regulation and, equally, with the UK reliance on a single super-regulator in the pre-crisis era. The crisis has prompted reconsideration of the basic structure of financial market regulation in both the United States and in the United Kingdom (where a major overhaul is now underway), however, this did not occur in Australia.

In addition to the issue of regulatory structure, there are other important factors, which arguably contributed to Australia’s economic performance during the crisis. These include monetary and fiscal policy; regulatory history; corporate governance; and the structure and history of banking (where there are close parallels between Australia and Canada). Australia’s experience of the global financial crisis is a reminder that financial markets do not operate in a vacuum, but rather form part of a complex economic, legal and regulatory ecosystem.

In spite of its good economic performance, Australia implemented a variety of regulatory responses to the global financial crisis. These included reforms relating to: deposit and wholesale funding guarantees; covered bonds; short selling; executive remuneration; and retail investment protection. Australia also introduced a large economic stimulus package, which Joseph Stiglitz has praised in terms of its size, design and timing. The chapter assesses these reforms and initiatives, raising questions concerning the extent to which they addressed international or national problems.

An abridged version of the chapter can be found here.