A banker no more: Former Commonwealth Bank head David Murray conducted the government-commissioned Financial Services Inquiry. Photo: Christopher Pearce
Treasurer Joe Hockey urges banks to co-operate with regulators
The Financial Services Inquiry is truly far reaching.
The new model former banker David Murray puts forward will affect every Australian. If you own a credit card, have a loan, a bank deposit, superannuation, an insurance policy or own shares in a bank, the tentacles will touch your financial position.
The massive overhaul of the Australian financial system is aimed to act as a bulwark to secure the system in the event of a future shock such as the global financial crisis.
It seeks to iron out many of the competitive inequities in the system that disadvantage smaller regional banks and acknowledge that the digital revolution is changing the financial landscape, ushering in new entrants that need to be accommodated within the regulatory framework
The inquiry has also exposed a structurally deficient superannuation system that is expensive for the consumer and lacks competition.
The new super system package recommended by the Murray inquiry has the potential to increase an average weekly earning-male by 25-40 per cent in retirement, according to the report’s authors. And changes recommended to credit card surcharges will see consumers pay lighter fees.
The price of bolstering the safety of the banking industry will come at a cost – particularly to the big four banks, Westpac, Commonwealth Bank National Australia Bank and ANZ – because they will need to carry a greater capital reserve buffer, one that will place it in the top ranks of their international peers.
It is a prospect the major banks have been aware of and on which they have already been mounting a rearguard action.
It has set Murray and the major banks on a clear collision course. If implemented by the government, there is a clear suggestion that banks will pass on higher costs either by increasing interest rates to borrowers, decreasing deposit rates, or reducing dividend payments to shareholders.
Murray recommends our banks should be in the top quartile when measured by international standards but makes no explicit target. However, he suggests the major banks are in a range of 10-11.6 per cent on a globally harmonised basis but this needs to go above at least 12.2 per cent to be in the top quartile.
The report says that if Australia experienced a shock that was in the range experienced overseas during the global financial crisis, it would be “sufficient to render Australia’s major banks insolvent in the absence of further capital raising”.
It could destroy 900,000 jobs and create large falls in the nation’s gross domestic product.
Based on international estimates, the cost to GDP of a crisis would equate to $300 billion to $2.4 trillion in Australia and further increase government debt..
The report said that while Australia’s resilience to the GFC reflected the strength of the financial service sector, many factors came into play including the government’s balance sheet and Chinese resource demand, that may not be present in the next crisis.
Murray’s view is that any banking system shortfall should not be funded by taxpayers
The risks associated with a crisis are further exacerbated by Australia’s highly concentrated banking system. “Disruption to the functioning of one major bank could be expected to impose significant costs to the economy particularly if it resulted in contagion to other Australian financial institutions.”
He said bank returns could be lower and still attractive to investors and generate sufficient return to promote economic growth. Thus Murray clearly thinks the cost on banks associated with ensuring systemic safety will be borne by their shareholders rather than their customers.