Financial crisis management under the Twin Peaks model of financial regulation

Abstract

This chapter explores the operation of the Twin Peaks model of financial regulation in the context of financial crisis management and compares the model in Australia with the model in the UK. The comparison reveals significant differences in terms of each jurisdiction’s approach to financial crisis management. In Australia, the legislative framework does not make specific reference to financial crisis management and essentially involves collective responsibility on the part of the regulators for managing a financial crisis. Further, financial stability is generally addressed through microprudential regulation. The framework in the UK, on the other hand, contains detailed provision as to ‘who is in charge of what, and when’ and vests primacy responsibility for financial crisis management in the Bank of England. Each approach has its advantages and disadvantages. The Australian approach is heavily dependent on having the right culture of coordination and, some might argue, has not yet been fully put to the test. By comparison, the UK approach provides an overarching framework for macroprudential regulation, under which systemic financial stability is elevated as a primary regulatory objective and mechanisms are in place to ensure that this objective is achieved.