Independence and GFC the keys to David Murray’s bank inquiry

There was a view held among many in the industry that David Murray’s role in leading the Financial System Inquiry would reflect his roots as a born-and-bred company banker – a man who as a teenager followed his father to the Commonwealth Bank and rose to its highest rank.

What fewer people understand about Murray is that he is a fiercely independent thinker, whose views can often polarise opinion but they are never hidden.

He is an ideologue who is never reticent to express an opinion on a wide range of topics and who would consider himself well beyond any notion of being a handmaiden to those running Australia’s four large banks.

His assignment appears to have been more coloured by improving the operation of the system from the perspective of the consumer and the community rather than a desire to maintain the status quo.

Indeed, to the extent his views on the financial industry seem to have been shaped by more recent history, it would have been during his time as head of the Future Fund. From this perch he gained a bird’s eye view of the shape of the superannuation industry and the many pitfalls that have developed as a result of its massive growth over a relatively short period of time.

From a banking perspective Murray admits that the recent experience of the global financial crisis has greatly influenced his thoughts on that industry. The focus of the inquiry and its ultimate recommendations would have been very different had it been undertaken in 2007.

However, the report suggests that there may be a case for government and regulators to do more to reduce resultant disruption and the size of the potential call on taxpayers in the event of a failure of banks. Options for change include higher regulatory capital requirements to further reduce the risk of failure; prepositioning arrangements and increased capacity of regulators to impose costs on an institution’s creditors rather than taxpayers.

These sorts of comments will not sit easily with the banking industry, particularly the large banks, which have argued that post-GFC the prudential regulation pendulum has swung too far. Murray seems to be unconvinced of this. Nor is he a fan of the moral hazard that accompanies a view that the government (or taxpayers) will foot the bill for banks that are perceived to be too big to fail.

Murray has not set out to frighten the banks with the report’s commentary and, in a general sense, he appears to take the view that the banking system operates pretty effectively – albeit a bit lopsided when it comes to a competitive disparities between the large and smaller institutions.

To the extent that the interim report is a guide to recommendations for change, it is the superannuation industry that should be bracing itself.

Murray said on Tuesday that superannuation had been viewed by the inquiry through the lens of financial stability: ”That is the soundness of the system.”

The super funds house a rising tidal wave of funds, which actuaries predict will hit $5 trillion in 30 years.

Murray is clearly concerned about the potential and the potential missed opportunities that arise if these funds are not appropriately allocated.

”We believe the existence of a large, unleveraged pool of funds played a valuable role during the financial crisis in offsetting the risk of disruption within the leveraged banking system,” he said on Tuesday. ”Reflecting this view, the report raises some concerns about the potential for superannuation to become more leveraged in the future,” Murray said.

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