David Murray addressed the National Press Club in Canberra today delivering a deep insight into the key drivers of his Financial System Inquiry’s (FSI) approach to their interim report, released this morning.
It was a masterclass in why the “miracle” Australian economy should not rest on its laurels and why even though the FSI found a competitive landscape in banking, changes need to be made to level the playing field and give all Australian banks a chance at competing on even terms, or as close to it as possible.
Murray highlighted that Australia’s economic profile hasn’t changed much through history, “that of a small, open commodity based economy, active and successful at investment but making extensive use of foreign capital.” But he pointed out that the GFC changed the way Australia needs to think about its vulnerabilities – specifically that, “the financial crisis highlighted the long-term economic damage that is caused by banking crises, including their impact on household wealth.”
Murray said the inquiry’s report underlined that “it is not possible to rule out the risk of failure”, nor of taxpayers having to bail out a bank.
As a result of this, the inquiry believes the government can do more to ensure the risk of a call on taxpayers is reduced in the event of failure.
The inquiry canvassed higher capital requirements and importantly the ability to “impose costs on an institution’s creditors rather than taxpayers”.
This last comment, the ability to “bail in” creditors is in keeping with where Canada and the EU have headed, but it will put downward pressure on the credit ratings of Australia’s biggest banks if the ratings agency approach taken in Canada is followed here in Australia.
Expect this to be vigorously resisted by the banks.
Murray highlighted he wants to reduce reliance on the very implicit guarantees that a too-big-too-fail situation brings about.
On superannuation it was clear in the report of the inquiry that the recent move toward leverage in some sectors of the superannuation industry troubled the inquiry panel, and Murray noted that the inquiry believed “the existence of a large unleveraged pool of funds played a valuable role during the financial crisis in offsetting the risk of disruption within the leveraged banking system.”
Clearly he sees the role of super less in leveraged property purchases and more toward alternative financial “sources of funding in the Australian system.”
Murray attacked fees on superannuation highlighting that Jeremy Cooper’s Super System review found that a 40% reduction in fees would deliver around $7 billion in additional investible funds each year.
That is a remarkable amount of cash being siphoned out of Australia’s savings pool in fees.
Murray also discussed the regulatory framework in Australia and was far from effusive about its effectiveness noting that the assumption of disclosure a consumer safeguard has been questioned by the inquiry.
Murray also highlighted that “we appear to have identified similar issues regarding ASIC’s mandate, skills, powers and funding model.”