With the Government set to announce a new inquiry into the financial system, Professor Ian Harper, a panel member of the 1997 Wallis inquiry into the financial sector, has given some sensible thoughts on the direction such an inquiry should take. From the AFR:
…the Coalition’s pending “son of Wallis” should avoid creating a structure “so moribund and lacking in innovation” that it drains the economy.
“Stability isn’t the only game in town, particularly when you’re looking to find innovative, productive new ways of growing. Will we sit there cowering in the corner [showing] aversion to everything and steady as she goes?” he told The Australian Financial Review.
He said there was a need to reconsider how the superannuation system met the demands of an ageing population and to deal with issues such as foreign investment, including into the ASX.
“It needs to be broad-ranging and turn over a lot of rocks, and some of those rocks will be put back in place, others will call for nuanced thinking about how we trade off stability and risk against return, competition and innovation,” Professor Harper said…
Professor Harper urged the government to appoint a chair from outside the industry, effectively ruling out someone like former Future Fund chairman David Murray as a candidate…
The new inquiry may need to consider behavioural economics.
“If it really is true that people make decisions based on non-rational criteria, then suddenly that opens the door to more interventionist regulation . . . of making more paternalistic decisions.”
Professor Harper is on the right track in his thinking.
It is essential, in my view, that the inquiry take a “warts-and-all” approach, rather than being narrow in focus. A frank and honest assessment is also more likely if the the panel is filled with commissioners that are unencumbered with the past and free of conflicts. Otherwise, we are likely to get more of the same.
Finally, any inquiry also needs to address the build-up of moral hazards that have occurred ever since the Government first guaranteed the banks’ wholesale borrowings and deposits in the wake of the GFC, and the RBA stepped-up its repurchase agreement operations, providing the banks with substantial liquidity support. The wholesale borrowings and deposit guarantee, in particular, went against the recommendations of the 1997 Financial System (‘Wallis’) Inquiry, which explicitly stipulated that the Government should never provide a guarantee over the banking system.
Perhaps of greater concern, the measures heightened the expectation that the authorities would support the banks as required going forward, which the ratings agencies have acknowledged provides the banks with a two-notch ratings upgrade.
Ultimately, the Australian banking system, as it currently stands, has departed in a fundamental way from the recommendations of the Wallis Inquiry. Moral hazard is now entrenched, transparency and accountability is lacking, and there has been little to no public debate or consultation about what system is appropriate going forward, or the long-term implications of using the Government’s balance sheet as role of guarantor of last resort.
The new financial system inquiry, therefore, needs to examine these and other financial stability issues. At the very least, it will place all the issues on the table, facilitate public discussion and scrutiny, and provide greater accountability of Australia’s regulators and financial system policy.
