The Australian Government, in its formal response yesterday, offered a warm endorsement for all the steps taken by the banking regulator in the wake of the Financial System Inquiry.Australia's financial system "has a number of systemic features whichrepresent potential vulnerabilities," Treasury said in the response."Our banks source a considerable share of their funding offshore, reflecting Australia's position as a net importer of capital. Banks provide close to 90 per cent of the domestic credit that local firms and households receive," it said. Pointing to "some concentration of risk in the system" Treasury said: "for these reasons, Australia's financial sector regulatory framework needs to be stronger than those of comparable economies."The inquiry's focus on bank capital builds on the actions already taken to bolster bank liquidity arrangements in recent years. Both the content and timing of regulatory changes will take into account developments in the Australian economy and in international financial regulatory frameworks."The inevitability of the Australian Prudential Regulation Authority exercising its responsibility and conforming to international standards was, in effect, conceded by the Australian Bankers Association yesterday."We support the FSI's objective for Australia's financial system to be unquestionably strong," ABA Chief Executive Steven Münchenberg said in a media release that represented a shift in tone from the industry's reaction following the release of the final report of the FSI in late 2014.The government, in its formal response, explicitly endorsed work by APRA "to take additional steps to ensure our banks have unquestionably strong capital ratios" by the end of 2106. It said it expected APRA "to ensure our banks have appropriate total loss-absorbing capacity and leverage ratios in place" by 2017.