Australian bank leverage bothers David Murray

The forensic scrutiny of the level and composition of the banking sector's core and total capital ratios may be misplaced, argued David Murray, head of the Financial System Inquiry, at an industry lunch yesterday.

"Banks have not changed their leverage ratios [and] not changed their business. Most of that build up is in the mortgage market; a concentration of risk," Murray told a lunch hosted by the Australian Centre for Financial Studies in Melbourne.

Murray also highlighted "more leverage in the super system," through "exposure to foreign markets."

The FSI chair was giving his first public talk on the inquiry's themes since the release of the final report from his panel late last year.

"The Australian context is that we have an economy [where] we cannot deliver to its full potential without high foreign investment in debt and equity," he said.

"The current account component is driven by net foreign liabilities. It means we remain dependent on that capital. That dependence brings vulnerabilities.

"The circumstance that applied in Australia [during the GFC] is highly unlikely to apply again," he said.

"The fact the government had to guarantee the banks was a real lesson for us. Moral hazard is alive and well for the government.

"We must look at that moral hazard. The financial claims scheme means [there are] liabilities of a very direct nature they [the federal government] didn't have before," Murray said.

"We felt the financial system should be managed in a way that didn't expose the taxpayer," he reiterated, repeating the formula that bank capital must be "unquestionably strong."

Murray described pundits who "say the GFC may never happen again" as "naïve."

His speech surveyed a list of risks to the banking system.

"The disconnect [may] be growth and assets markets that may bubble up, " he said. "Derivatives risk … sovereign risk … disclosure [or] a bad bank stress test.

"They always fall back on the taxpayer when it goes wrong.

"There are many ways in which credit and banking get political and it is not always healthy. That's why we [the FSI panel] tried to build trust and confidence in the financial system."