FSI panel 'calibrates' its message

The interim report of the Financial System Inquiry, released at 8am this morning, shows the Inquiry panel is cautious about radical reforms to Australia's existing financial system.

The interim report contains "policy options" but no recommendations or "final views". It also puts forward a series of "observations" to which it wants responses.

David Murray's panel has thus given itself and the industry time to organise concerted lobbying to advance favoured outcomes.

On the key issue of prudential supervision, the panel does not seem poised to make radical changes.

The interim report says the system generally performed well during the global financial crisis. And its main focus is on changing a national perception that banks will be bailed out during a crisis.

However, the Inquiry's interest in "ring-fencing" of retail banks -an agenda common in Europe - will concern the major banks. So will its interest in a "further increase in the capital requirements on the financial institutions considered to be systemically important domestically" - essentially, the Big Four banks.

The big bank agenda, centred on angst over Basel III, gets some sympathy from the FSI panel, though.

The interim report proposes to:

- Calibrate Australia's prudential framework, in aggregate, to be more conservative than the global median. "This does not mean that all individual aspects of the framework need to be more conservative", the report said.

- Lessen "national discretion" for APRA and "calibrate system safety through the setting of headline requirements".

- Develop public reporting of regulator-endorsed internationally harmonised capital ratios with the specific objective of improving transparency.