Banks too circumspect for Treasury chief

Cheap credit will assist Australia's economic restructuring, John Fraser said on Friday, in his first speech as secretary of the Treasury.

Speaking to the Committee for Economic Development of Australia, Fraser touched on a number of banking themes in a talk centred on the need for greater austerity in the federal budget.

"The importance of strengthening competition was a theme of the Financial System Inquiry," he reminded his audience.

"The inquiry concludes that competition and competitive markets are at the heart of the philosophy of the financial system and the primary means of supporting the system's efficiency," he said.

"We must ensure that our banking and financial system more generally are more competitive."

Providing an outsider's perspective, Fraser observed that: "we did not emerge from the global financial crisis unscathed.

"Our economic growth has been below its long run average in five of the past six financial years, weighing on job creation and contributing to a gradual upward drift in unemployment.

"Critically important for Australia's near term growth prospects is that we must now secure stronger growth in non-mining business investment as the resources investment boom fades," he said.

"Cheap credit, lower fuel prices and the depreciation of the exchange rate will assist, although weak demand is weighing on confidence and current investment plans.

"This is reducing the preparedness of businesses to invest in future capacity and take on additional workers."

Fraser said that Treasury's forecasts were "for the Australian economy to grow at a below-trend rate over the next two years, making significant inroads into unemployment difficult."

Banking sector policy was relevant here, he noted.

"In my view, one factor not fully recognised as constraining growth - both in recent years and in the future - is the tighter regulatory requirements on major global and some national banks, as well as the more conservative risk appetites of global financial institutions.

"During the 1990s and first half of the 2000s, the balance sheets of global financial institutions expanded at a rapid pace," he said.

"This was an important driver of the strong growth in real GDP and employment experienced by most major advanced economies prior to 2008.

"But at the same time, it also drove a significant increase in private sector indebtedness and far greater risk in the financial sector. This was unsustainable."

Fraser said the tighter regulatory and capital rules introduced since the global financial crisis would "lead to a more stable financial system over time but they have resulted in financial institutions becoming more circumspect.

"This has made it more difficult for businesses to gain access to bank balance sheets, weighing on investment to the detriment of potential growth."

On the other hand, Fraser talked up the availability of credit.

"My assessment is that the key to solving Australia's infrastructure challenge is far more to identify projects with a demonstrated high rate of economic return," he said.

"Where such projects exist, there is no shortage of private sector financing."