In case you’ve been living under a political rock for the past few months, the Coalition Government instituted its new Financial System Inquiry, dubbed the ‘son of Wallis’ after its 1997 predecessor. Considering the world has endured two financial crises since the last inquiry one could argue it is high time for a re-evaluation of Australia’s financial sector!
As one would expect, the inquiry has caused Australia’s major banks to leap into action, calling on the inquiry to leave their enormous market shares alone. On the other hand, the inquiry has opened up the possibility for panel members to make some real and far-reaching recommendations about improving levels of competition across Australia’s banking sector, as well as dealing with some of the industry’s modern challenges.
What will it be investigating?
The terms of reference for the inquiry, announced in December last year, will generally consider Australia’s development since both the 1997 inquiry and the global financial crisis, including:
- How Australia funds its growth: speculated to involved increased investment from the nation’s burgeoning superannuation fund sector and infrastructure projects;
- Domestic competition and international competitiveness: namely concerning the dominance of the four major banks and their weight in increasingly global markets; and
- Developing issues such as new technology, international integration, corporate governance structures and evolution of the payment system.
It is also speculated that the inquiry will consider the regulations currently imposed on banks through APRA and its implementation of new capital requirements as mandated by Basel III, something that appears to be causing both large and small banks alike a significant amount of concern.
It should however be noted that the terms of reference do not include consideration of Australia’s $1.7 trillion superannuation system in and of itself, instead preferring its indirect inclusion as a source of capital.
Who is doing the investigating?
As the name would suggest, former Future Fund chairman David Murray has been appointed to lead the reporting panel. Whilst Murray has been previously criticised for his position as a leading climate change sceptic, he has also been heavily involved in the Australian banking system since the days of Paul Keating, taking charge of the privatisation of the Commonwealth Bank. Some commentators have questioned Joe Hockey’s ‘poor choice’ [1] in naming Murray to head the investigation, instead preferring someone with no existing links to the industry.
Murray will be supported by a four-person support panel:
- University of Melbourne and Monash University (represent!) Professor Kevin Davis, who also serves as a Research Director at the Australian Centre for Financial Studies;
- Craig Dunn, the former chief executive of AMP;
- Carolyn Hewson, a former Schroeders Australia investment banker and board member of BHP Billiton, Stockland and BT Investment Management; and
- Brian McNamee, fomer CEO of biotech business CSL.
What does everyone think about this investigation?
As for what the banks are seeking, this depends really depends on the kind of bank in question. Obviously, the major banks are interested in retaining their market share, and have been considerably spooked by suggestions that their inroads into the wealth management sector will be limited (not unlike the United Kingdom’s new ringfencing system). Meanwhile, smaller banks are pushing for the levelling of Australia’s banking playing field, particularly in terms of costs of access to capital.
The other main concern remains the imposition of more requirements on capital, following the implementation of the local version of Basel III by APRA over the last couple of years. Whilst the Federal Government has confirmed that it will place a three-year moratorium on the imposition of any new rules pending the outcome of the review, many fear that the threat of systematic failure will overcome Australia’s previous performance in the field.
Economists have touted the inquiry as providing a chance to increase consumer protection and develop better disclosure standards for retail investors, given the high market share of the nation’s largest banks and the increasing complexity of products on offer. One of ESSA’s favourite economists, BoAML’s Saul Eslake, has also suggested that some products should be disallowed from promotion to retail investors.
There has also been a push to increase the amount of regulation in Australia’s mortgage market, in order to prevent another dreaded United States-style sub-prime crisis – Monash’s Jakob Madsen has suggested a minimum deposit requirement of between 20% and 30% to protect borrowers from a property market slump. However, the practicality of such a high deposit ratio could be considered as unrealistic, given the nation’s declining housing affordability statistics.
Overall, the vague terms of reference for the inquiry have opened up a number of possibilities as to the future of the local financial system. One of the main pitfalls however, is that the wide-reaching terms of the inquiry are also creating uncertainty, for small and large banks alike. It is worth questioning, is this a justifiable price to pay for what may end up being negligible systematic change?
What would you like to see from the inquiry?
If you’re keen to delve further into the nitty-gritty of the inquiry itself, visit the Federal Government’s official website at www.fsi.gov.au.
[1] Andrew Cornell, ‘Murray not good choice for finance system inquiry’, the Australian Financial Review, 21 November 2013.
