Moral hazard still has Murray simmering

Bernard Kellerman
The chair of the Financial Services Inquiry, David Murray, has kept the debate simmering over the adequacy of how bank capital is measured.

Setting the scene for the final session of ASIC's annual forum in Sydney yesterday, he pointed out the Australian economy had been a user of foreign savings for nearly all of its existence, leaving it with a vulnerability to external conditions.

"The issue of resilience in the system has to be clearly addressed," he said.

Not only that, the factors that worked in Australia's favour at the start of the financial crisis - a budget surplus, no net debt and a major trading partner growing at double-digit rates - are unlikely to apply next time around, Murray warned.

This made it essential for the Australian government to demonstrate the high quality economic management needed to sustain that position and to keep confidence among creditors. It also meant the banks had to play their part.

"We indicated the banking system should operate in the top quartile of its peers globally. The debate is now about 'this is too hard to measure'. We can't just walk away from the problem because it's too hard," Murray said.

In response to a question from the ABC's business editor, Peter Ryan, on what single item he'd really like to see take place, Murray said: "There has to be a recognition that the Commonwealth [Government] stands behind the country's banking system and it stands behind the states, and that when you use foreign capital as much a we do, there must be very tight settings on the institutional framework, the quality of economic management, and the quality of the Commonwealth government's balance sheet.

"What bothers me most is that we're not allowed to have a debate about how debt and deficit should work their way through the cycle, given the character of our economy."

He said that far from being too hard, the cost of a strong capital structure for the banking system, versus the community cost of a crisis is "a fairly easy equation".

By his reckoning, a serious financial crisis costs, on average, about 63 per cent of GDP, or about A$900 billion of future growth, which in turn sets up 10 to 20 years of stagnation, and throws  an extra 900,000 or a million people onto the dole.

In addition, the Government remains directly involved through its guarantee of "at least half the depositors in the country" under the Financial Claims Scheme, he noted.

And when it came to financial sector regulatory regimes, Murray argued that where other jurisdictions had failed, Australia's and Canada's were highly regarded.

"There isn't a serious problem with the architecture - the Wallis architecture. The issue is whether the agencies themselves are held accountable and whether their enforcement and penalty regime is significant," he said.

"The penalty regime at ASIC is like being hit with a lettuce leaf - it's just not strong enough. Preparedness to enforce is not a cultural issue, it's a resourcing issue.

"ASIC is underfunded, there is no question of that."

Murray pointed out that unless ASIC is able to enforce stronger rules, companies prepared to toe the line will be disadvantaged against those that do not.