The Murray Inquiry's Push To End Too-Big-Too-Fail Has International Support

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The Murray Inquiry last week released its interim report which, among a long list of “observations”, has a clear theme that Australian banking needs to be overhauled to give smaller banks, building societies and credit unions a chance at competing with the majors.

Not dragging the majors down, just creating what the Murray Inquiry – and Finance Minister Mathias Cormann when talking about FOFA – calls “competitive neutrality”.

Part of the plan is also to end too-big-too-fail and in doing so address the risks to the Australian economy by ensuring a desirable level of economic biodiversity sits below the majors in the Australian financial landscape.

So the majors are likely to be asked to hold more capital for any given asset level than they do now.

It is a proposition which the big banks don’t like and barely 24 hours after the release of the interim report, ANZ CEO Mike Smith took dead aim at Murray, saying the suggestion banks hold more capital will be bad for the economy.

Equally however, what the Murray Inquiry is suggesting is that the creation of a competitively neutral environment for Australian banking will both limit the further concentration in banking around the majors, which has accelerated as a result of the GFC, and make the Australian banking system more stable.

It’s a situation that seems to make intuitive sense and it is a situation that has strong global support with the Financial Times reporting over the weekend that:

“Officials led by Mark Carney, the Bank of England governor, are attempting to bridge sharp differences among leading G20 countries as they prepare a landmark set of proposals aimed at tackling the problem of ‘too big to fail’ banks.”

It’s a result of the concentration in the banking sector and while not yet a done deal, because of national sensibilities, the hope is that the G20 Finance Minister’s meeting in Brisbane in November will receive a concrete proposal.

The majors may not like this move to make them hold more capital or empower their rivals. But these moves appear to not only have the support of senior global bankers but also of academic research conducted by Yasmina Lemzeri from the University of Lorraine, published in the Journal of Entrepreneurial and Organizational Diversity last month.

Lemzeri’s research, covering the period from 2002 to 2011 for Europe, asked the question if co-operative banks (effectively mutuals in the Australian context) “faced the financial crisis better than joint stock groups”.

What she found, in varying degrees, was that, yes, they did.

The differences depended on the amount of hybridization of the institutions which implies that it is Australia’s larger mutuals which benefit the economy most and bring more stability to the system than the majors.

But what her research also showed was that because the Australian mutual sector, at both the individual institutional level and as a sector, is well capitalised and closer to its clients if some of the measures to support competitive neutrality (like a convergence of capital requirements for mortgage lending and support for the RMBS market) are instituted then the Australian financial system would benefit.

This is because the mutual sector, all of the mutual banks, credit unions and building societies, would coalesce into something similar to what Lemzeri termed an “intermediate hybrid cooperative”.

These institutions in her research are unequivocally beneficial for the economy and more stable than joint stock banks such as Australia’s majors.

Disclaimer: Greg McKenna is a Director of Police Bank a Mutual Bank servicing the NSW Police and Customs Family.

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