I know that I have given former Commonwealth Bank CEO, David Murray, a bit of curry over the years. Having described yesterday the capture of Australian financial regulators, I could also be accused of hypocrisy in endorsing a former bank CEO as a major political force.
But in all broken systems there are always outstanding individuals that rise above the general schlock and David Murray has proven himself to be one such character. Today, he could not be more clear, from Banking Day:
The chair of the Financial Services Inquiry, David Murray, has kept the debate simmering over the adequacy of how bank capital is measured.
Setting the scene for the final session of ASIC’s annual forum in Sydney yesterday, he pointed out the Australian economy had been a user of foreign savings for nearly all of its existence, leaving it with a vulnerability to external conditions.
“The issue of resilience in the system has to be clearly addressed,” he said.
Not only that, the factors that worked in Australia’s favour at the start of the financial crisis – a budget surplus, no net debt and a major trading partner growing at double-digit rates – are unlikely to apply next time around, Murray warned.
This made it essential for the Australian government to demonstrate the high quality economic management needed to sustain that position and to keep confidence among creditors. It also meant the banks had to play their part.
“We indicated the banking system should operate in the top quartile of its peers globally. The debate is now about ‘this is too hard to measure’. We can’t just walk away from the problem because it’s too hard,” Murray said.
In response to a question from the ABC’s business editor, Peter Ryan, on what single item he’d really like to see take place, Murray said: “There has to be a recognition that the Commonwealth [Government] stands behind the country’s banking system and it stands behind the states, and that when you use foreign capital as much a we do, there must be very tight settings on the institutional framework, the quality of economic management, and the quality of the Commonwealth government’s balance sheet.
“What bothers me most is that we’re not allowed to have a debate about how debt and deficit should work their way through the cycle, given the character of our economy.”
He said that far from being too hard, the cost of a strong capital structure for the banking system, versus the community cost of a crisis is “a fairly easy equation”.
By his reckoning, a serious financial crisis costs, on average, about 63 per cent of GDP, or about A$900 billion of future growth, which in turn sets up 10 to 20 years of stagnation, and throws an extra 900,000 or a million people onto the dole.
Bravo, Mr Murray. Those are the exact words that should be issuing from the collective mouths of the RBA, APRA, ASIC, Treasury and the government. Note as well Murray’s tone of frustration as all bury their heads in the sand.
Here is the smoking gun, the one killer chart that illustrates the total regulatory failure that will trigger the next external shock for Australia, the offshore borrowings of the banking sector:
The great disleveraging of the post-GFC period is over and the next leg up in national risk is well underway with the banks leading the way in lifting short term borrowings. Note how both took off once the rate cutting cycle kicked in. This is how the Australian housing bubble works, it leverages commodity income by borrowing offshore and dumping the money in houses. But there is a classic term mismatch in the short duration liabilities versus the long duration assets creating liquidity risk. So when trouble strikes offshore bank refinancing, the clean Budget backstops the banks with guarantees. Except, now, the commodity income is retrenching and the Budget is no longer clean…
The system and its growing cracks are as plain as the nose of David Murray’s increasingly irascible face.
