The banking system generally works, but the superannuation system has big problems. Those are the messages so far from the first full-scale examination of Australia's financial system since 1997.
Panel members
- David Murray, chairman of the government's Future Fund board until 2012 and CEO of the CBA from 1992 to 2005.
- Professor Kevin Davis, professor of finance at both the University of Melbourne and Monash University, and research director at the Australian Centre for Financial Studies.
- Craig Dunn, CEO of AMP until 2013.
- Carolyn Hewson, professional director, BHP billiton board member and a former Westpac director.
- Brian McNamee, CEO of CSL until 2013.
Further information
Overview
The Financial System Inquiry has so far taken a cautious path, flagging issues but suggesting it does not favour radical change to banking regulation.
July's interim report was the first product from the Inquiry, panel headed by former CBA CEO David Murray. In each area examined, it discusses several options, including leaving the system as it currently is. It puts up a number of interesting reform suggestions but does not commit itself to any.
This approach has left the industry and outside observers guessing. If you want reform, some of the report's options will appeal. If you want to retain the status quo, there's enough in the interim report to discomfit you - for instance, the report's interest in "ring-fencing" retail banks.
Murray Inquiry infographic
What we've seen to date does not give the impression that panel members are so convinced by any of them that they will substantially shake up the banking system. The superannuation system is more likely to be targeted for change.
The panel does seem keen to ensure its banking reforms mesh with the global system.
The panel made its interim report in July and will present its final report in December.
Approach to regulation
For the past 15 years our system has favored disclosure over restriction.
But the interim report says disclosure has its limits, and suggests we may need more restrictions. Murray's view is that disclosure (even when combined with the promotion of financial literacy) does not give consumers sufficient protection. He wants to look at the enforcement powers of regulators and at ways to align the interests of product manufacturers and distributors with the interests of consumers.
Banks have read his comments as suggesting that Basel III and international consistency on regulation are here to stay.
The surprise of the inquiry so far is that while David Murray personally started off as a deregulator, he now shows signs of wanting more regulation. The interim report does not show any interest in radical deregulatory options.
Impact of the global financial crisis
Financial stability in a crisis is an issue that looms large in the Inquiry's thinking - not surprising in the wake of the global financial crisis.
"The financial crisis has changed the way we think about vulnerabilities," Murray told the National Press Cluib in July.
"By that I mean that the financial crisis highlighted the long-term economic damage that is caused by banking crises, including their impact on household wealth.
"In Australia, the financial crisis produced a sharp fall in economic growth and an increase of nearly two percentage points in the unemployment rate."
Banking
The banking regulatory system is working, the interim report says. The main points:
Prudential system
- The banking system performed well during the global financial crisis and there are no obvious huge improvements that could be made. We'll probably face the next banking crisis with roughly the same system we have now.
- One key aim aim is to make it less likely the taxpayer would be "dragged into the next crisis", as Murray told a public forum in Sydney in August 2014. Australians should not think big banks will be bailed out if they fail.
- We need to follow international standards, the interim report says. "It is very difficult for us to tell the rest of the world that they should use our standards but not use theirs," Murray told the Sydney forum.
- The report also says bankers' complaints about the costs of prudential regulation don't hold water.
- The report does list several possible radical reforms aimed at the "too big to fail problem", and which worry the major banks:
- A proposal for "ring-fencing" of retail banks - an agenda common in Europe -
- A "further increase in the capital requirements on the financial institutions considered to be systemically important domestically". The banks are hitting back on this. "There is no evidence of market-based pressure from international investors for Australia to implement idiosyncratic measures to further address 'too big to fail', said Westpac in its second submission to the inquiry.
- "Bail-in" requirements for wholesale debtors when a bank's capital is threatened.
The banks want minimal change and are concerned by the panel's interest in meshing with the global regulatory system. The Australian Bankers Association argues that "structural and regulatory differences in Australia that mean international proposals ... may not be relevant at all." They are also concerned at the panel's interest in ring-fencing.
Consumer outcomes
The Big Four banks are not gouging consumers.
Superannuation
The superannuation regulatory system is not working well, the interim report suggests. The main points:
- We need change to make sure the Big Four banks do not exploit their position with consumers. The panel appears to agree with finance legend Robert Merton's view that "it is simply unrealistic to expect people to make decisions about strategies that challenge even seasoned investment professionals".
- Superannuation fees are high by world standards.
- Competition is not strong enough to drive prices down.
- The five largest platform providers - the Big Four plus AMP - now hold almost 80 per cent of primary planner relationships.
- More retirement income needs to be delivered as income streams, such as annuities. Right now, the government takes all the "longevity risk" - when people outlive their super, they end up on the pension.
Other issues
- Banks have been favored over other channels of capital distribution, such as corporate bond market and securitisation.
- Small and medium businesses sometimes struggle to access loans, but there's no easy fix for this.
- Little attention has been paid to insurance. The report does note a greater vitality in retail brand competition in insurance, something the banks faced in the 1990s but which is far less prevalent now.