Why Did Regulation Save Australian, Canadian and Japanese Banks but Not the US, UK and German Banks During the GFC?

As the world’s attention shifts from financial rescue to financial reform in the post-GFC era, when and how financial regulation works deserves close attention. It is widely accepted that national institutional failures in financial regulation/supervision is among the causes of the GFC. This view fails to offer explanations for several empirical puzzles: In regards to prudential regulation, it is interesting to note that all advanced market economies had Tier One capital ratio and prudential capital ratio substantially higher than minimal Basel II requirements of four per cent and eight per cent, respectively. Banks of these countries should have entered the GFC in a sound position and could have been resilient to the crisis due, in part, to this stringent capital regulation. However, it is puzzling that some of the American, British and German banks, which faced higher capital requirements than Australian and Canadian banks, have not weathered the GFC. Similarly, literature is silent on why formal institutional arrangements such as a ‘twin peaks’ approach worked well in Australia but not in the Netherlands, an integrated approach worked well in Canada and Japan but not in the UK and Germany. Apparently, the regulatory failure issue is less to do with bank regulation or the regulatory model adopted by a nation. Drawing on the Australian evidence examined in a comparative perspective, this paper argues that the efficacy of financial and competition regulation/supervision is more likely when complex interactions among interdependent structural and institutional complementarities and agency-level enabling conditions reinforce one another for prudent borrowing, lending and investment practices in banking.