For Campbell it was profound deregulation: floating the currency and opening up the capital account. For Wallis it was redesigning the regulatory architecture in the process removing barriers in the system to more competition, much from other geographies and industries.
Both were fundamental changes to Australia’s place in the global economy.
For better or worse, the Murray Inquiry won’t be as significant, almost as a result of those two inquiries. Australia is now a client of the global economy and its currency, terms of trade and even financial system regulation are determined offshore.
The interim report of the Financial System Inquiry, chaired by Murray, recognises this reality and places welcome emphasis on the importance of integration with foreign markets and investors. It recognises too that in subordinating its regulatory practices to global ones, Australia actually improves its economic efficiency – through access to funding – in general terms.
Much as Murray and others have argued cogently before this report that the post-financial system regulatory reforms have been designed for a northern hemisphere crisis and unfairly impact jurisdictions like Australia, it’s hardly a shock the lead on global regulation is coming from the US and Europe given the ravages their financial systems suffered.
Nothing the Murray inquiry could reasonably suggest would improve either the Reserve Bank or – luckily – any government’s ability to determine the value of the currency.
Australia’s best chance of influencing global policy which in turn will apply domestically is actually via regulators like the RBA and the Australian Prudential Supervision Authority which have key seats around the table in agenda setting bodies – because Australia’s supervision (and a good dollop of luck) helped steer the country through the crisis.
The interim report rightly acknowledges this and indeed puts welcome emphasis on that process and how Australia might enhance internal regulation and supervision, probably by way of the Council of Financial Regulators which currently includes the RBA, APRA, the Australian Securities and Investment Commission and Treasury.
But this – vital – subordination of Australia to the global economy is why the fundamental theme of this inquiry should be delivering the financial system sufficient flexibility to respond to what goes on beyond the seas. In the capital and technological flows of financial services, Australia is very limited in deciding what will come to this country and the circumstances in which it comes.
The interim report then is spot on when it comes to its main focus on efficiency, stability and fairness: “the Inquiry considers that the financial system must satisfy three principles: efficiently allocate resources and risks, be stable and reliable, and be fair and accessible”.
That’s why superannuation is important because it is essentially about the most rational allocation of Australia’s savings and tax incentives to steer it. Distortions in the taxation system – desirable or not – need to be properly understood.
Superannuation comes under particular scrutiny and it may well be, almost by default, that the retirement savings pool – how it is generated, how it is allocated, how it is drawn down – will become the most significant long term outcome of the Murray Inquiry.
Super, as the report notes, is a massive and fast growing sector where costs are unacceptably high and outcomes still unacceptably uncertain. Super too, to the extent it will be at the heart of the Australian financial system, is crucial to our engagement with the region and the world.
Consider the global forces the Inquiry has to anticipate and about which it has no direct say: global banking regulation such as capital, liquidity and leverage measures; moral hazard and the too-big-to-fail debate; the potentially massive disruption of new technology; global funding flows.
Digital disruption has already devastated industries like film-based photography and print-based media, it can potentially have significant impacts on financial services, whether via new cyber-currencies, peer to peer lending or new savings products.
Murray is right to identify and argue the critical element is in adapting to this, it is not more prescription but more flexibility and efficiency. The interim report breaks its challenge down to anticipating future financial crises, the fiscal pressures largely from an ageing population, productivity growth, technology and international integration – particularly with Asia.
Moreover, if Murray can make a contribution on the domestic front that is the best defence in keeping Australia attractive to foreign investment – whether in capital stock or the debt required to fund growth. Indeed, a more efficient financial system that allocated funding effectively would lower the foreign capital needed by better utilising domestic savings.
This work of getting Australia’s house in order, even if we have no control over global economic weather patterns – let alone climate change – is particularly important as we enter what is likely to be a prolonged period of uncertainty and volatility.
As the Bank of England’s Andrew Haldane recently noted, even as real economies remain fragile and monetary settings abnormal, “global appetite for risk is, at present, voracious”.
“Measures of financial market uncertainty are at or below pre-crisis levels across a range of asset classes,” he said in a dinner speech. “Many asset prices have rocketed and spreads plummeted. Two years ago, yields on Italian and Spanish debt were around 5 percentage points above US Treasuries. Today, they are 30-40 basis points below.”
There is however one way Australia does carry weight in the global economy and that is with exports, especially to Asia the fastest growing region. At the moment those exports are iron ore, coal, LNG with education and tourism also significant.
So it is vital the FSI follows through its observation “although elements of Australia’s financial system are internationally integrated, a number of potential impediments have been identified. Financial system developments in the region will require continuing Government engagement to facilitate integration with Asia”.
This is a target, the exports of services from the financial sector. Not capital so much – although the bank I work for, ANZ, is obviously expanding in the region and has a close concern over regulatory imposts – as improving the opportunity to sell human capital and intellectual property.
One of the outcomes of the Campbell and Wallis inquiries is Australia has developed a wealth of expertise in businesses like funds management, securitisation, demutualisation, capital markets – the sorts of skills which will be in great demand as Asia deepens financially and ages.
These people, processes and the services they offer are a great opportunity. After all, in a global world exports are an important buffer to the vagaries of capital flows and domestic economics.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.