David Murray
The Financial System Inquiry's interim report mainly suggests that David Murray (pictured) and his panel are struggling to find nation-changing banking reform recommendations. We'll probably face the next banking crisis with roughly the same system we have now.
In the hours after the interim report's release, the media was full of statements about how the interim report of the Financial System Inquiry is "a brave and forward looking document", that the financial system could be "shaken to the core", and of course that David Murray thinks there is "no room for complacency". This seems inevitable: it's easy to think that since the 1979 Campbell Inquiry was a big deal, and the 1997 Wallis Inquiry was a big deal too, then the Murray Inquiry must be equally big.
But the reality of this interim report suggests a different possibility: that the Murray Inquiry may never birth any huge banking reforms. Grandchild of Campbell and child of Wallis it may be. But while it may yet surprise, in its teens it shows little sign of growing up to be as influential as its predecessors. It looks incremental, not revolutionary.
The real message from today's 460 pages is the
absence of many big new directions for the banking system.
This comes through clearly in the report's treatment of prudential supervision. Prudential stability is at the heart of this inquiry; it is supposed to be, above all, the Inquiry Into Preventing The Next Huge Australian Financial Crisis.
On this issue, Murray's declaration of "no room for complacency" is instructive. That's because our current system for preventing financial crises - the existing prudential regulatory system - is already run on the notion of "no room for complacency". APRA might as well have the Latin
Non est locus complacentia engraved above its front doors.
If the best you can say is that there is no room for complacency, what you're really saying is that the existing prudential system works as well as any.
That's a legitimate message. Decades of reform have left Australia at or near world's best practice in many areas of regulation.
It
is a problem if you want to be remembered as a reformer in the Campbell mold. And David Murray wants exactly that. He wants to lay down a Campbell-style blueprint for the financial system into the 2020s.
Murray made noises earlier this year suggesting a major change to the direction of the prudential regulation system. He said in May that "regulation cannot and should not ensure that all financial promises are kept".
"Government responses after the financial crisis were that 'this will never happen again' and that has coloured a very intense regulatory response," he said.
Yet the interim report itself shows little deep criticism of the Australian response. Indeed, it mostly canvasses additional regulation, not deregulation. Murray may have deregulatory instincts, but the really radical reform proposals in the field - like retail ring-fencing - are all in the direction of greater regulation, or at least markedly different and disruptive regulation.
And so it is that many of today's most reported findings are useful but known: financial crises are inevitable; repeatedly cutting regulators' budgets eventually raises risk; prudential regulators should look out for the next crisis; and that crisis may come from outside Australian shores.
The Inquiry's most useful observation - that superannuation fees are high by world standards - owes a heavy debt to work already done by the Cooper Review and the Grattan Institute. (There's also an unexpected endorsement of the existing FoFA reforms.) By republicising superannuation issues, the Murray Report may have some lasting impact - but in the field of superannuation, not banking. That's not what anyone really expected when this thing started up.
Perhaps Murray's most interesting prudential observation is not about regulation at all, but about
perceptions of prudential regulation. Most Australians think - partly because of the "too big to fail" label - that our big banks will be bailed out if they fail.
The reality of our system is that the RBA and APRA have always said household investors will be protected; larger bank creditors, however, are on their own. That was not the case in many jurisdictions during the GFC.
It's this perception of a willingness to bail out which the report usefully observes should be torn down. In essence, the interim report says, our system is less likely to bail out big lenders than most people reckon.
The message to the average Australian, then, is actually "the system works better than you think".
This wouldn't sell many newspapers. It won't make David Murray a historic reformer. It smacks a little of complacency. But it's not necessarily wrong.