The economy might be booming, but new Australian Prudential Regulation Authority (APRA) Chairman John Laker has warned that the economic upturn won’t see the prudential regulator relaxing. Reporting in APRA’s 2003 annual report, Dr Laker says APRA must remain alert to signs of any downturn in economic activity and any emerging stress in financial markets or industry sectors.

“On the one side, strong economic activity generally allows financial institutions to prosper and build up their financial strength,” he says. “On the other, continued prosperity can mask weaknesses in an institution’s business model or appetite for risks. APRA has been emphasising to supervised entities the need to maintain prudent practices and to ensure that their risk management processes are not just set for fair weather.”

He has also encouraged Australia’s financial institutions to avoid “chasing reductions” in cost, at the expense of proper corporate governance, risk management and internal controls.

Assessing the impact of the HIH Royal Commission’s recommendations, Dr Laker says APRA “broadly accepts” the commissioner’s account of its shortcomings in the supervision of HIH from 1999 to 2000. Royal commissioner Neville Owen said the key reasons for those shortcomings were a weak regulatory framework for general insurance, a shortage of experienced staff during APRA’s establishment phase and undeveloped internal processes within APRA.