Billion Dollar Bonfires: A Comparative Study of Regulatory Failure in the Non-Bank Finance Sector in Australia and New Zealand

This paper deals mainly with the demise of a number of non-bank finance companies and regulatory failure by both Australia and New Zealand. This particularly affected rural areas and was not considered by the Hayne Royal Commission.

[Extract]
Australia and New Zealand emerged reasonably unscathed from the Global Financial Crisis (GFC). As smaller economies, they were not parties to key derivative transactions which produced havoc in the United States and Europe. As financial systems they are closely linked by the dominance of the four major Australian banks in both markets. They shared some other common features:
•long periods of expansion and budget surpluses;
low government debt/ GDP ratios;
•substantial private sector overseas debt;
•elevated house prices and a concentration of assets in residential mortgage loans; and
•improving terms of trade due to world commodity price movements.

The banks did not lower their credit risk standards as much as overseas banks, but in both Australia and New Zealand, there were significant failures of finance companies. These supplemented the banks and operated outside the prudential regulated sector and under a trustee governance model overseen by the Australian Securities and Investments Commission (ASIC) and the New Zealand Securities Commission, with limited powers of enforcement.