The last time the Coalition was in government, so much commodity revenue was sloshing through public coffers that it toyed with the notion of shutting down the Commonwealth bond market. The global financial system seemed to have perfected the machinery of cheap credit.
More than six years later, the country is grappling with how to fund future growth and fixed income markets are back in favour, to the extent that the Abbott government is being urged to fundamentally rewrite the tax rules to put bonds and deposits on a competitive basis with equities and property.
The authors of the 1997 Wallis Inquiry – the previous root-and-branch investigation of Australian finance – would have been incredulous that just 11 years after their report the Commonwealth would be forced to guarantee bank deposits, let alone that global credit markets froze or that major European governments teetered on the brink of default.
Life after the GFC
These global financial crisis (GFC) developments alone would be reason enough to take stock of how the nation’s financial system is placed.
But the Financial System Inquiry, commissioned by Treasurer Joe Hockey and headed by former Commonwealth Bank chief executive officer David Murray, also has to take into account the massive expansion in the superannuation system that has occurred since the Wallis Inquiry, as well as insurance industry vulnerabilities highlighted by the collapse of HIH Insurance in 2001, stricter bank capital adequacy and disclosure requirements (under the international Basel III agreement), and a fundamental shift in how the banks fund their lending.
From providing half of all funds in 2008, wholesale markets now account for just a third, while the share of finance coming from deposits has jumped from 40 to 56 per cent.
A tough equation
Australian banks might be well financed and profitable by international standards, but one of the big questions the Murray Inquiry is tackling is where the funds the country will need to grow will come from.
Murray said late last year that Australia had been “caught out” during the GFC by its exposure to foreign capital markets, and a more sustainable model of financing was needed.
“The object of this review is the right one, and that’s how do you fund the Australian economy and make sure that it’s done in a way that contributes to growth and productivity?” said Murray.
The answer will involve striking a fine balance between the competing demands of competition, regulation, efficiency, systemic stability and consumer protection.
Among regulators and policymakers, stability has been elevated to a virtue beyond all others following the near-collapse of the global financial system in 2008.
But Murray is among those who are wondering whether this has come at a heavy cost in terms of reduced competition, greater inefficiency and stunted innovation.
Loosening the red tape
For accountants, this issue will be a welcome focus for the Inquiry. The zealous implementation of Basel III standards by Australian regulators, particularly the Australian Prudential Regulation Authority, has been a source of concern for many.
The government’s instinct appears to be for deregulation, such as in its push to wind back aspects of the Future of Financial Advice legislation, which it claims is in the interest of reducing compliance costs and red tape.
All this suggests the government will want the Murray Inquiry to focus on ways to enhance the competitiveness and flexibility of the nation’s finance sector.
Murray himself is concerned about devising a financial system that allocates capital effectively and efficiently.
One likely area of action is to encourage the development of corporate bond and venture capital markets, most likely through changes in the tax treatment of bonds and fixed income assets.
The role of superannuation funds will figure large in the Inquiry’s deliberations. While mandatory investment requirements are unlikely, the rapidly growing financial heft of self-managed superannuation funds makes them an increasingly significant potential source of credit.
Then there is the use of technology to achieve greater efficiency. Advances in computing power enable the management of vast volumes of client data. But cyber security breaches and internet fraud show regulation is yet to catch up.
For Professor Fariborz Moshirian, director of the Institute of Global Finance at the Australian School of Business, the country risks being sidelined unless the Murray Inquiry eases some of the regulatory burden and fosters a more dynamic financial system.
Internationally, notes Professor Moshirian, the initial emphasis following the financial crisis on regulation has now given way to a more even-handed approach, and Australia needs to match this to make the most of our competitive advantage in financial services.
“The mood has changed,” he says, “and people are more interested in a deregulated environment.”
