A former member of the 1990s Wallis Committee, which led to the formation of APRA, has called for a new inquiry into the Australian financial system.

Professor Ian Harper, one of Australia’s leading economists, who recently left Melbourne University for a new role at Access Economics, detailed the history behind APRA at a conference last week held by the Paul Woolley Centre for Capital Market Dysfunctionality.

The Federal advisory committee headed by businessman Stan Wallis, which included Professor Harper, recommended the formation of a new body – APRA – to be spun out of the Reserve Bank of Australia to concentrate on regulating non-bank financial institutions.

Despite opposition from the Reserve Bank and Treasury, the Howard Government followed the recommendation with the formation of APRA in 1997, leaving trading bank regulation with the Reserve Bank. However, Professor Harper said the recommendation reflected the trend for increased securitisation of lending and financial instruments with new players and insurance companies actively involved.

"The only central bank in the world which also regulated insurance companies was New Zealand, which did not give us a lot of comfort," Professor Harper said.

But with the recent crisis, the financial services sector was moving back towards "good old balance sheet banking". "I think we need another inquiry now," he said. "Canada has an inquiry every five years and I think they’re right." He said the Government needed to rethink the system and decide whether securitisation was a long-term model to follow or whether it would never recover from the current problems.

"Even if this is just a cyclical problem, it is far more severe than anyone thought could occur," he said. "If we end up regulating investment banks as we do commercial banks or we collapse them into commercial banks, we may punch such a hole in the innovative capacity of the financial system that I just don’t know the consequences." The conference, organised by the Finance Department of the University of Technology Sydney, had about 90 invited delegates including both academics and funds managers.

The Centre was established by former GMO funds manager Paul Woolley in London in 2006, to enable research on capital markets at the London School of Economics, University of Toulouse and UTS.