The Australian Prudential Regulation Authority (APRA) has become the second regulator to independently investigate the Commonwealth Bank of Australia. Experts say the inquiry puts the regulator in the tricky position of being tough on bank scandals but juggling its close relationship with the government and the CBA.

The inquiry follows civil proceedings launched against the bank for being complicit in money laundering.

“APRA cannot leave this deterioration in the public’s trust and confidence in our banks to fester for any longer,” says Eliza Wu, from the University of Sydney.

The investigation will be run by an independent panel, appointed by APRA. It will run for six months after which the regulator will receive a final report, to be made public.

The inquiry focus will be on governance, culture and accountability frameworks at the CBA. APRA Chairman Wayne Byres said:

A key objective of the inquiry will be to provide CBA with a set of recommendations for organisation and cultural change, where that is identified as being necessary.

The inquiry will have the power to compel CBA employees to provide information at its request, notwithstanding anything to the contrary in a confidentiality agreement. But it will not have the power to compel witness statements from people outside the organisation, which a royal commission would have.

“The fact that the inquiry is proposed to be independent is critical. That has potential to inhibit the potential for any ‘capture’ of the regulator to flow through into the conduct, findings and outcomes of the inquiry. For this to be the case, it is critical that those leading the inquiry are genuinely independent of mind, appearance and have the support necessary to conduct the inquiry effectively,” says Suzanne Le Mire, from the University of Adelaide.

The government has come out in support of the inquiry. But the timing of the response has raised questions about whether the regulator should have acted sooner.

“Morrison has stated that APRA is independent, and that this is APRA’s decision, not his. But the timing raises questions in light of the Treasurer’s obvious pique, motivated no doubt by the political capital that the Turnbull government has expended resisting a royal commission - no mean feat for a government with a one seat majority and trailing badly in the polls,” says Andy Schmulow, from the University of Western Australia.

APRA’s ability to prosecute the CBA relies on prudential standards which set out minimum foundations for good governance. But Schmulow says APRA has had many opportunities to investigate this, since its introduction in 2015.

“The question is whether APRA’s announcement of an inquiry should have come earlier - possibly years earlier - and if so whether APRA’s announcement today is mere coincidence, or whether it is responding to pressure from the Treasurer,” he says.

Academics agree that APRA is the best agency to run an inquiry on the CBA, due to the agency’s close relationship with the banks and knowledge of the industry.

“APRA is really the only agency which could do it. It already has a team focused on each of the banks. None of the other agencies has any deep knowledge of how banks work,” says Rodney Maddock, from Monash University.

“The banks and the regulators are involved in regular two-way conversations. Such interaction is essential to the way Australia supervises its banks, rather than launching legal cases at each other. Most countries regard our regulatory model as one of the best in the world.”

The CBA has faced a series of scandals involving its insurance and financial advice and planning arms and most recently for not complying with the Anti-Money Laundering and Counter-Terrorism Financing Act.

The inquiry puts the regulator in a difficult trade-off in dealing with threats to financial security and creating unfair competition, if its perceived to be focusing too much scrutiny on one bank.

“If APRA is not seen to be asking serious questions into how this could have come about and to conduct a critical evaluation of CBA’s risk management framework and the checks and balances that are meant to be in place, there is a danger that depositors may start pulling out their savings… we end up with a liquidity drainage out of our banking system and a major disruption to credit supply,” Eliza Wu says.

CBA is the largest bank in Australia by total assets and by the amount of deposit funding that it has.

The inquiry might also have ramifications for other cases yet to be launched by international regulators against the bank.

“Reports indicate that Hong Kong and Malaysian authorities are requesting information from CBA about cross-border anti-money laundering and counter terrorism failures. What would be of even greater concern is that any transactions that involve US dollars would have to go through and be cleared in New York, and in the past the US authorities have taken steps against, among others, Australian entities for illegal conduct. This includes conduct that went nowhere near the US. So this potentially opens multiple battle fronts for CBA both foreign and domestic,” says Andy Schmulow.