Half time for the Murray Inquiry: interim report looms

Financial centres, regulation, big versus small, non-bank competition. The cost of failure. The Murray Financial System Inquiry has been inundated with submissions in the run up to an interim report and these are the major themes. The question is how seriously the inquiry takes them. Some, inevitably, represent vested interests. But the “if it ain’t broke” approach must bear in mind things didn’t look broke in 2007 either.

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The FSI’s interim report will be released on Tuesday July 15 with inquiry chairman David Murray slated to address the National Press Club on the day to expand on the report. Following the release, the inquiry committee will undertake a period of consultation including a second round of submissions, sector briefing sessions, public forums and stakeholder meetings.

Ian Rogers, founder and editor of financial services industry intelligence sheet Banking Day has been closely following the inquiry and its submissions to date. He casts a critical eye on the concerns and wish lists.

Australia as a financial job centre

There’s an underlying tone of boosterism in many submissions to the inquiry, understandable given they are authored by system participants and their agents.

Many plans over the years have pitched the virtues of Australia as a centre of know-how and skilled labour in finance. Few seemed to drive the lasting impact their champions hoped for - grounded, as they often are, in unrealistic hopes for tax breaks for a few.

Even when the reports, such as the definitive Mark Johnson-chaired effort “Australia as a Financial Centre”, come with considerable gravitas, tax remains an enduring theme.

From this perspective, some imaginative tax ideas to attract financial services offices and capital flows are what many will be looking for to make financial centre dreams a reality.

Predators for the regulators

Many industry figures, perhaps unrealistically, are calling for restraints on regulation and even less powers for regulators. Watering down the post-GFC, Basel-supervised reshaping of global banking rules though, under Australia’s current regulatory structure, is not something the FSI is likely to pursue.

It may well, however, provide some grist or suggestions for the meeting of the G20in Brisbane later this year. A major theme for that forum is indeed a stock take on the cumulative impact of waves of new regulation and whether this regulatory impost and its complexity – and cost - is offsetting the benefits of greater security.

However, there is little indication in submissions from regulators themselves or those with the power to actually make change that an easing off in regulation is to be expected – even though Chairman Murray holds the view the regulatory agenda has been too stifling.

Handicapping big banks

For many – the big banks aside – the increased concentration of market share at the big end of town after the financial crisis reflects a market failure. Of course, the opposing argument is it reflects the market working: savers and investors have sought greater security.

For those in the former camp, a specific bank tax of some sort - on capital or profits - is on a lot of agendas. They can cite that the International Monetary Fund likes this idea and it’s already in place in some parts of Europe. And it's a pretty certain revenue earner.

A related – and equally disputed – campaign is to have the big banks pay a fee for a perceived higher quality government guarantee, the “too big too fail” insurance. Any tax would hit big bank interest margins and test their resilience and ingenuity but, the counter argument goes, would not necessarily enhance the competitive position of smaller banks because it would make big bank exceptionalism explicit.

Invasion of the body snatchers

An old, unlikely but oft-sequelled story is at the core of many FSI tales: someone, not a bank, will come into the market and do everything a bank once did, sucking out the profits. In the 2014 version, GoogleApple and PayPal often feature.

If not these giants, then thousands of IT companies have their own schemes to assume the identity of incumbent providers. Don't count on it and think about how often we've been here before – in the 90s version it was Microsoft and the telcos. Or monolines, many killed off in the GFC, which were the emblem of this notion in decades past.

History tells us new challengers have often failed or remained stuck in their opening niche or - in many cases - researched the market and never tried.

The cost of costs

The cost of financing Australia has emerged as a very big theme in submissions. Cost in parts of the financial services sector have been portrayed as "shocking", not least by Treasury, but the weight of these concerns rest in the superannuation system.

Given the self-improvement ethic of the whole FSI, we should expect considerable emphasis on not just costs but productivity in the sector.


Banking Day has been pushing a proper investigation of this theme. Four pillars should be appraised against three and two pillars. And if two pillars, why not one? Or five or more. This is the UK/EU intervention model.

Consolidation is a serious possibility but one which appears politically impossible. It deserves a more dispassionate assessment. However, most voices insist on continuing four pillars and the political tendency will be to leave it there.

A foreign invasion

Genuine barriers to foreign bank investment in Australia should be investigated and the FSI may recommend relaxation of impediments. Parochial interests rather than prudential concerns have made a foreign bank takeover in Australia pretty unlikely. Again, political reality and vested interests may prolong this protectionist attitude to banking in Australia.

But one or more Australian banks might command great interest if it were known they are for sale. However it may be a more acceptable option to tackle high industry costs and end what is in effect a protection regime in Australian banking.

Too big to try to fail

This is an elephant in the room. Many submissions come at the animal from different perspectives but the reality is savings deposits are sacrosanct in Australia and the FSI will not propose anything which reduces – or is even perceived to reduce – their privilege.

So while the inquiry is likely to respond to collateral measures like the cost of prudential supervision, the explicit nature of any non-guarantees or the structure of compensation schemes, it won’t shift the world on the assumed sanctity of deposits.

Australian history teaches, and recent Australian political practices demonstrate, that recovering lost savings is a prominent goal of public policy. No government will ever neuter this, a background force to which banks – and the FSI - must simply adapt.

The lessons of history

The robust performance in aggregate of the financial services sector in the GFC has allowed considerable papering over of genuine scares, not only during the GFC itself but throughout banking history in Australia.

Bank blow-ups, some fatal, some limited to shareholders’ wallets, are a persistent feature of the economy. In reality, the survival and solvency of institutions is challenged all too frequently.

Cambridge Credit in the 1970s is one signal moment. Then there was the failure of the Bank of Adelaide and others in the 1980s or the massive damage inflicted on tax payers by state banking debacles.

Banking institutions, if not banks, were still toppling in 2008, and the risk and cost of failure deserves to be a central theme of David Murray's interim report. According to media reports, at least half a dozen institutions had question marks over their viability in 2008, a terror mostly assuaged through the government guarantees.

Foreign banks too, some of which sold out of local operations – such as HBOS’ BankWest sale to Commonwealth Bank – were under pressure. There was pressure too in the mutual sector which has continued since.

So for Murray, the great dependency on central bank support at critical periods must be a major focus. At least the system worked last time but Australia can’t afford a situation where a rush for help by a large institutions could threaten the viability of the whole.

The value of the sector

Setting aside those submissions which have criticised the productivity, lack of customer focus or cost of credit creation in the finance sector, one fundamental substrate is the sheer scale and importance of the financial services. Will the FSI engage in the debate over whether the sector is simply too big? This is an elephantine subject.

Ian Rogers, Banking Day editor. Ian Rogers appears courtesy of WorkDay Media.

Illustration: Chris Kelly. Corporate caricatures & illustrations.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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