Promoting Responsibility through Internal Transparency: Evidence from Australian Prudential Regulation

Thursday, 2 July 2015: 2:15 PM-3:45 PM
TW1.1.02 (Tower One)
Seung-Hun Hong, Australian National University, ACT, Australia
Reciprocity pervades regulation. We often observe that regulators’ forbearance gives regulatees a chance to reciprocate with reform or compliance. Citizens’ obedience to the law or regulation is reciprocating legitimate regulation as well as fellow citizens’ conformity to the regulatory regime. Just as there are many direct and indirect forms of reciprocity in ordinary social exchanges, so do diverse ways of reciprocation abound across regulatory space. However, ways in which reciprocity works in regulation remain largely unexamined in the regulatory scholarship. This paper aims to elaborate reciprocity as a way of promoting responsibility of agents involved in regulation. It explores the extent to which diverse species of reciprocity are harnessed in regulatory space and the effects they have on regulatory outcomes, by focusing on frontline supervision of the Australian Prudential Regulation Authority (APRA). Which sorts of reciprocity would contribute to making agents responsible? What are the systematic tools APRA adopts to prevent and redress regulatory capture that may be caused by reciprocal relationships?

Specifically, three works are conducted in this paper. First, I examine classical as well as contemporary writings on reciprocity and identify two ways of direct reciprocation according to underlying motivations. In calculation-based reciprocity, people would be willing to reciprocate if the expected return was greater than the cost of reciprocation. But as empathy-based scholarship points out, people may have a desire to justify their claims to those with whom they must cooperate. This would drive them to care about their own morality and what others do, displaying a strong tendency to make their own contribution even without recourse to material incentives. In addition, this tendency will be reinforced if their performance is observed by their peers and subject to a process of reflective revisions. Second, I explore APRA’s pursuit of being a responsible prudential regulator, with an emphasis on reciprocal relationships and strategies prevalently harnessed and fostered by frontline supervisors. It will be revealed that APRA's frontline supervisors adopt different types of direct reciprocity as a response to the financial institution’s receptiveness and subsequent risk profile. The way principles-based approach is implemented in practice features a lot of empathy-based reciprocity. Third, I analyse APRA’s systematic device preventing reciprocal regulator-regulatee relationships from capture. By analyzing 37 unstructured, in-depth interviews that have been conducted face-to face and one-on-one with frontline supervisors and professionals in regulated entities, I argue that, unlike the conventional understanding of transparency that requires an institution to open and share its operation and performance with external stakeholders, internal transparency will contribute to promoting institutional integrity and responsibility of the institution.