The Claytons Inquiry


It’s the Wallis Inquiry you’re having when you’re not having a Wallis Inquiry.

And Stephen Bartholomeusz outlines it today:

Earlier today Suncorp’s chief executive, Patrick Snowball, made a considered contribution to the debate, noting that since the crisis all the banks had diversified their funding and reduced their dependence on offshore wholesale funding markets.

“This change in the funding mix is important for Australia and a step in the right direction. It does not change the facts that the costs of this funding mix are higher; international debt and equity markets remain stressed; local supplies are not unlimited and funding is the key structural issue for Australia’s financial system,” he said.

“This funding issue cannot be addressed quickly or without a comprehensive and non-partisan review. Broadening the range of competitively priced funding options would be the most effective way for the government and regulators to increase bank competition.”

Snowball said that funding reforms lacked the immediate political appeal of regulating rate rises and bank fees but were vital rather than optional and would improve competitiveness.

Snowball is right. The crisis exposed the vulnerability of our system to the closure of offshore wholesale markets and it shut down our securitised debt markets.

Responding to that revealed vulnerability ought to be the priority and the primary focus of policymaking – and the probable need for greater government intervention in domestic capital markets tends to suggest a formal inquiry is required.

Hockey’s suggested terms of reference are broader than they need to be, but it would also be worth asking an expert committee to consider the implications of the explicit government guarantees provided during the crisis and the implicit guarantees that continue.

There isn’t a need for another big Wallis-style inquiry into every aspect of the system including its regulatory architecture but a focused investigation of the funding risks for the majors and the lack of access to funding of their competitors and the distortive and potentially dangerous longer term effects of the guarantees might produce some valuable insights and reforms.

Whether it did or didn’t, it would produce the major benefit of shutting the populist politicians up and preventing them from continuing their dangerous meddling in affairs they generally know little about but whose functioning and stability – and profitability – is vital to the economy.

Any regular reader of this blog will know that it is in complete agreement with Bartho’s focus. He’s one of the only other analysts out there that has consistently given thought to liabilities.

However, one has to ask, how exactly can you isolate an expert examination of financial system funding issues without fundamentally addressing Australian financial services architecture?

The Wallis structure of securitisation-funded entities competing with deposit and wholesale funded entities is the fundamental design created by Wallis. A Claytons Inquiry is a great way to pretend to address the many funding issues like excessive offshore borrowing, unstable marketable securities, moral hazard etc. before just reshuffling government guarantees.

But if you really want to get to the bottom of the risk and give it back to the banks, then you may well need new architecture. You certainly don’t want to rule out the possibility before you’ve started.

We need a full-flavoured, overproof Wallis Inquiry.

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