Koala Bank stillborn: still a case for an inquiry

Six prominent economists released an open letter to the Prime Minister and Treasurer last week. Included in the letter was a question that asked whether there might be a role in Australia's financial system for a publicly owned bank "akin to Kiwibank in New Zealand" that could offer basic savings, payments, and wealth management products and leverage off unique government infrastructure such as Australia Post, the ATO and the government bond market.

The proposed bank was dubbed Koala Bank by some. As it was, Koala Bank went off quicker than a dead dingo. Given the recent demise of the Australian Business Investment Partnership (and dubbed RuddBank by the media) this was hardly surprising, although if it had been dubbed RuddBank MkII it may have received some initial support from the government.

However, while Koala Bank may have been a dozy idea, it was what the media picked up on, somewhat overlooking the real thrust of the letter, which set out why Australia needs a comprehensive financial system inquiry. The Koala Bank question was the ninth among 14 that were suggested for examination by an inquiry.

Given that we are in the midst of the GFC, which has devastated the global financial system; the US and UK are reviewing their own financial systems; we will soon be confronted with recommendations from the G20 on the overhaul of the global financial system; and that the last inquiry we had was the Wallis inquiry completed in 1996; such an inquiry would seem to be a very good idea - much has changed in the last 13 years.

Political leaders at the Federal level appeared to be supportive of the call for an inquiry, but not the government. Presumably, they are happy with the policy that they have made on the run and the unintended consequences that have flowed from it (such as having to guarantee just about everything that moves in the financial market), and have more important matters to deal with.

Events may move ahead of the government anyway, with Graeme Samuel threatening to hold his own inquiry into the financial system, if he receives another bank merger proposal. Such an inquiry into the competitive position of our financial system would likely address many of the questions that have been put forward anyway.

But added to the list of questions could be added one on why we have failed to develop a viable corporate bond market in Australia. All the necessary infrastructure is in place with supportive legal, regulatory and taxation environments, and we have a sizeable corporate sector and institutional funds management industry.

Yet for the last half of this decade our market has looked more like a wholesale bank deposit market, denying institutional investors the opportunity to demonstrate their credit risk assessment skills, and now the market is morphing into a government bond market.

Many academic studies have pointed to the usefulness of well developed corporate bond markets in mitigating the effects of a credit crunch.

But the big question, which is beyond the scope of an ACCC inquiry, is what is the post G20 restructured global financial system going to look like and do we want to have a say in this or have it thrust upon us? For those who believe we have or will have no influence in the G20, the question is irrelevant: don't worry about it.

For the rest of us, an inquiry would have us better prepared to meet the challenge. We are also in the fortunate position of being able to review our financial system from a position of strength.