Here are some of the changes that Chris Joye likes in the Murray Inquiry document (with lot’s of criticism too)
- A full-frontal assault on the crazy “risk-weighting” system, which allows Australia’s major banks to literally hold less than half the capital (and thus twice the leverage) of their competitors when lending against housing, which is the cornerstone of their comparative return-on-equity advantage;
- Addressing the likely need to develop a formal government policy in relation to assuring the liquidity of the residential mortgage-backed securities (RMBS) market, which the government did on a once-off basis during the global financial crisis, and the possibility of allowing AAA-rated RMBS to be treated as “high quality liquid assets” as they are overseas (but not in Australia);
- Repeated requests for more information on the dysfunctions that arise when the major banks and other large institutions use their cost of capital advantages to “vertically-integrate” horizontal industries like financial planning, funds management, superannuation, insurance and platform administration;
- Overturning the myth propagated by bankers that Australia’s banks are much better capitalised than peers overseas and should, therefore, be shielded from further capital imposts;
- Recognising the unprecedented moral hazards induced by the introduction of taxpayer guarantees during the global financial crisis and the presence in Australia of “systematically important” institutions that should arguably carry additional capital and less leverage than smaller peers to both mitigate their too-big-to-fail financial market subsidies and reduce the risk of collapse.
If the inquiry fulfils its current promise it will be bad news for the larger, vertically-integrated institutions that have profited so handsomely from a competitive and regulatory playing-field that historically rewarded size and scale. It will be good news for everybody else, including competitors, consumers and taxpayers.
With respect to my learned colleague, putting the tax-payer on the hook for non-banks as well as banks is not of benefit to them.
The risk-weighting inquiry is encouraging but is hardly “full frontal” given one of Murray’s principle suggestions to allow all banks to use it. We need to see the outcome of that first.
The additional capital impost arising from D-SIB status does absolutely nothing to address too-big-to-fail if it simply assumes a government guarantee for offshore borrowing at no charge. Since when was banking only about assets and not liabilities?
The reforms may inhibit big bank growth a little and promote alternatives, and in that sense benefit consumers too, but the tax payer is being treated like a pig’s trough.