Twin Peaks Model in Australia and Netherlands

Part A: Twin Peaks Model in

Australia and Netherlands

Table of Content

Executive Summary        3

Part A Twin Peaks Model        4

Part 1.1 Twin Peaks Model in Australia        4

Part 1.2 Twin Peaks Model in Netherlands        5

Part 1.3 The Influence of GFC on Netherlands        6

Conclusion        7

Executive Summary

The Twin Peaks Model means that there are two different financial systems which work independently. The model was first used in Australia with the purpose of surviving the Global Financial Crisis (GFC). It is also adopted in other countries such as Netherlands. The paper would analyze the difference between Netherlands and Australia in adopting the Twin Peaks Model.

Part A Twin Peaks Model

Part 1.1 Twin Peaks Model in Australia

The Twin-peaks structure, which has been adopted and applied in Australia firstly, aims to regulate the market based on market conduct integrity, consumer protection, prudential regulation and financial system stability. The separate regulator pushes the development of each objective (Barth, 2006). As a result, the name‘twin peaks’ was adopted. In 1997, the twin peak structure was used in Australia. The Twin Peaks Approach guided Australia to take the oversight responsibilities related to conduct-of-business regulation. The Twin Peak Model has been adopted by the countries all around the world (Brunnermeier, 2009). The approach is famous for the two peaks: the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA).

The Australian Prudential Regulatory Authority (APRA) makes the regulation about the extent of deposit-taking institutions such as banks, building societies, credit unions, and insurance companies (Cooper, 2006). The role of APRA is important, for it is not the same as the central bank and it is regarded as one of the regulators for the safety of the entities. APRA has a close relationship with the Reserve Bank of Australia (RBA), the main responsibility of which is to help to tackle the issues that some institutions could not handle. It would ask help from the central bank if it is necessary. One of the goals for APRA is to promote the financial stability in Australia. Other responsibilities for RBA include promoting the financial responsibility and maintain interest rate and payment systems. The authority needs to make sure that the securities and derivatives are consistent with financial stability.

The other business regulator in Australia is the Australian Securities and Investments

Commission (ASIC) that takes responsibility for the market integrity and consumer protection. However, it is not similar to APRA, for it is not so prudential. The duties of ASIC include making the regulations for the companies, financial markets, financial service organizations and market professionals. Other duties of ASIC include issuing guidelines and codes of conduct. The authority has the enforcement powers (Brunnermeier, 2009).

Part 1.2 Twin Peaks Model in Netherlands

Since Australia behaved relative better than other countries when the Global Financial Crisis (GFC) arrives, lots of other countries started to take the decision to the model including the UK, the New Zealand and South Africa. In a word, under the Twin Peaks Model, one peak, APRA is responsible for the financial system stability while the other peak, ASIC takes charge of protecting the right of consumers. At the same time, the Reserve Bank also takes responsibility for the financial system stability. Both of the regulators are equal, but they could not replace the position of others. The advantages of the model are obvious. The model brings about a clear remit and greater certainty as to their jurisdiction.

Similar to Australia, Netherland also adopts the Twin Peak Approach to make the financial service regulation. However, the central bank in Netherland (DNB) plays an important role in guiding all kinds of services including banking, insurance, pension funds, and securities (Brunnermeier, 2010). Unlike the central bank in Australia which is an independent institution, DNB has made the regulation of all kinds of financial services. The other authority named Financial Markets (AFM) takes the responsibility to supervise the code of conduct. The main purpose of AFM is to promote the transparency during the business transaction and protect the rights of consumers. Both of the AFM and DNB have the enforcement powers. Before the 1990s, the Netherland has always adopted the method of Institutional Approach to supervise the financial institution. The traditional method was used to divide the institutions. However, the approach was abandoned, for different sectors of Netherland was going to consolidate, and one company would manipulate different sectors. Since the concept of cross-sector elements appears, the Twin Peak Approach was adopted. In Netherlands, if the potential failure in the financial transaction appears, the Ministry of Finance would help to tackle the issues (Fischer, 2009). The DNB would help to tackle the crisis management while AFM would not play a role in crisis arrangement.

Part 1.3 The Influence of GFC on Netherlands

Netherland is one of the largest investors in the United States, and it is one of the financially interconnected countries. In this way, the financial crisis would have a severe influence on the economy of Netherlands. The issues such as plummeting global demand, problems with bank balance sheets, and the decline in producer and consumer confidence would have a greatly negative influence on the economy of Netherlands. For instance, in 2008, the global crisis brought great economic recession for Holland. As the total foreign claims occupy 300 percent of GDP on Dutch Banks, the GFC would bring about the catastrophic disaster for the Dutch banking sector. In contrasts with vanilla in Australia, the Dutch banks were always exposed to the international market. Similar to many advanced countries, the financial sector has increased dramatically in Netherland every year. In other words, the Dutch market is influenced by the international countries. In 2008, the country was forced to nationalize the banks named ABN AMRO and Fortis banks under the influence of GFC. The large bank-insurer (ING) needs the support of the state aid, and two small insurance companies were taken over during the GFC. The other small bank Friesland Bank survived by taking over by the large bank. In 2011, the size of the banking sector in Netherlands had decreased to 469% of GDP. The crisis led to the concentration and consolidation of banks in Netherland. For instance, the collective share of three major banks in Netherland has occupied 78 percent (Kremers, 2003). Besides, there was a significant change in the nature of banking sectors. The tasks and responsibilities of the bank have changed. In the past, the traditional activities of banks include deposit taking, lending, securities underwriting and trust services. But after the GFC, the activities have changed to market making activities, brokerage services, and own account trading. The activities of the banks in Netherlands has a more close relationship with a mortgage. The change of the role of banks in Netherland indicates that the Twin Peaks Approach was proved a failure for Netherland. It is claimed that Australia has a different investment profile as Netherland, the same model may have a different effect on different countries. But the GFC also indicates that some areas within the Twin Peaks should be increased to realize the full benefits for Netherlands. In the past, the macro-supervision in Netherlands always tend to use the moral suasion to deal with the GFC. The other areas that the bank sectors need to change are to improve the prudential supervision for internationally active LCFIs such as ING Group. Those companies should consider their international market activity. Though the Twin Peak Structure was designed to cope with the GFC, the resources of the model are limited. In other words, the ability for the Twin Peak Model to handle GFC is not enough.