Murray makes more encouraging noises


From the AFR:

“The ­post-crisis monetary ­settings have distorted asset prices again,” he said in a speech in Sydney on Thursday.

“That is going to cause a correction at some point, which will put more ­political pressure on financial systems.”

…Mr Murray suggested in his interim report last month the banks might need to hold higher levels of capital to protect the system from systemic risk created by their high leverage to housing.

…Mr Murray said Australia was in a regulatory “quandary” because it “didn’t appear to be damaged by the [2008] crisis” but “we now need to strengthen the system in some ways.”

…He said as a capital importer, ­Australia would not able to withdraw from the global regulatory push, even though some of the post-crisis ­regulation had been introduced without sufficient assessment of the costs.

Very good. Sweeps aside the Pasconomical bullshit that “we are different” that dominates Australiana. Also, yesterday, from Banking Day:

A band of banking analysts attempted a hijack of the Financial System Inquiry public forum in Sydney last night. Posing as “citizens”, CSLA’s Brian Johnson, UBS’s Jonathon Mott and Morgan Stanley’s Richard Wiles peppered Inquiry chairman David Murray with questions about bail-in proposals, the economic cost of additional capital buffers and appropriate tier one capital levels.

Murray’s general point was that, as an economy dependent on foreign capital, Australia could not ignore rules formulated elsewhere.

He said: “If you look at the political response to the crisis, it was that this must not happen again. Regulators were told to do what they must to ensure that outcome.

“It is very difficult for us to tell the rest of the world that they should use our standards but not use theirs.”

Murray said the bail-in idea was that, if certain debt holders were at risk of loss in addition to equity holders, then the capital buffer could be extended. He said bail-in debt would not necessarily be converted to equity.

His aim was to make it less likely the taxpayer would be “dragged into the next crisis”.

He also wants a system where it would be unlikely a government guarantee would be called, with the result that “the issue of moral hazard goes away”.

On the issue of Australia’s relatively high tier one capital ratios, Murray said the country’s resource based economy made it more volatile and slightly more risky.

Very good again. But much more difficult to deliver. Bail-in is good in theory but is problematic in practice. If you’re a small nation and capital importer you have to foist losses onto bond holders even though you’re still trying to borrow from those same sources. In Cyprus this didn’t work at all and resulted in losses being forced up the bank-lender value chain, where depositors got reamed. That may be why Murray is looking at ring-fencing as well.

There is one more problem too. Murray can do this to big banks but if he doesn’t spread the capital importing function to other sources then he’s talking about a revolution in the Australian economic model. That is the best case outcome and hence doubtful. If not, Murray will have to push mid-tier banks forward by giving them similar capital discounting privileges enjoyed by the big four and/or push some kind of government guaranteed non-bank regime that can weather wholesale market freezes.

The former could be OK so long as the line of convergence is capitalised well above where the big banks are now. But the notion of guaranteeing Mark Bouris and the cavaliers of credit is nauseating, as well as completely self-defeating if removing moral hazard from the system is the goal.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. David Murray is right to prepare all of our banks for what may be coming. As the Telegraph suggest this morn “… it may be impossible to reverse deflation in the Western economies by any normal means, in which case we are in trouble.. … We may be deluding ourselves in thinking that companies will soon be confident enough to let rip with a fresh burst of spending and investment. …If this is broadly true, it means that any use of fiscal stimulus will be neutralised by the countervailing actions of taxpayers, and may even be a net negative. Deficits become “deflationary”, contrary to standard textbook theory or populist assumptions, and threaten a self-fulfilling effect that becomes almost impossible to stop over time.”

    • “ may be impossible to reverse deflation in the Western economies by any normal means, in which case we are in trouble….”

      It is worth remembering that the forces of deflation are generated by abnormal means. Deflation is to be expected when the debt /money creation process slows and stagnates and ideology prevents an alternative (government) from maintaining price stability.

      Though lets not get carried away – low inflation is not deflation.

      And if it does appear it is easily cured – providing we overcome a few urban myths and articles of blind faith.

      • “Though lets not get carried away – low inflation is not deflation.”

        Amen brother.

        and 3% GDP growth is not a recession

      • “..But 0% wage growth and continuous slide in hours worked is a recipe for misery…”

        Exactly, which is why action is required, but driving the economy with private bank debt that is dependent (pricing-wise) on the saving habits of foreigners attracted by government guarantees and claims on our future income is not the solution.

      • migtronixMEMBER

        @Pfh Indeed, my comment was in response to Patricians “3% growth isn’t a recession”, if that wasn’t clear.

      • Yes – it was clear – my comment was directed to readers who may fear that the current model of private bank debt driven activity is our only hope and your comment provided a suitable opportunity even though you were not suggesting that. 🙂

      • Yes thank you Pfh for pointing that out. Some readers here naively lap up the suggestion here that lower interest rates are needed.

        They need to actually think of the consequences a bit. HnH writes that “MB retains an easing bias” when no other economist nor the RBA have one.

        The argument is always incomplete and full of logical fallacies.

        People need to think for themselves a bit more.

      • Stevens said pretty much the same thing the other day. That is, there are limits to what monetary policy can do. The BIS agrees. Even the ECB, in a weird way, is using monetary policy to try and force structural change.

        The only way you can improve the long term outlook for Australia is via structural reform. But that is painful because it alters the STRUCTURE of an economy from one dependent on interest rates to something else, which takes time and unemployment while resources and capital are redeployed.

        But this is exactly what politicians don’t want to do because they have spent the past 20 years convincing the electorate they can ‘do something’ about any problem that arises.

        And for the past 20 years, this ‘something’ has been lower interest rates and more debt.

        But we’re a few years away from getting to the end of the line on that front. Which is why deflation looms as an ever greater force. Too much debt simply means too much future consumption has already been brought forward.

        Without a restructure of debt and a restructure of the economy (via tax reform, for a start) the threat of deflation will only loom larger.

      • One thing will give confidence to business, no matter what.

        Workers with a fistful of dollars due to high wage share and true Keynesian policies.

        Not this appalling masquerade of Friedman-esque policies that have appeared after 1971, and the likes the Austrians berate in their endless pit of ignorance.

        High paid workers have greater demand, aggregate demand, and has been displayed time and time again, demand drives supply.

        The decline of wage share means wages offer less and less.

        Either that becomes the new demand level, we produce less and we shed jobs… or we maintain that demand and make up the shortfall with debt and speculative gain.

      • @RP

        +10000. We also need to make sure that the money does not en masse go into unproductive enterprise like housing bubbles.

      • @melb yes I take a lot offense to that call by MB because it basically encourages/supports theft from savers (i.e. me). I’ve learnt to not let this totally spoil the experience of the site.

      • RP,


        Will businesses become more confident by paying workers a higher wage? Where does the productivity come from to pay the wage increase?

        Higher labour costs will depress profits, which depresses investment.

        Labour/wage rates (in aggregate) have had a tremendous run in Australia this past decade, which by your reckoning should mean sky high confidence.

        Where is it?

      • migtronixMEMBER

        Greg the confidence evaporated when wage growth did or didn’t you notice ding dong?

        We’ve had record corporate profits, why didn’t it drive UE to 0?

      • Mig, record profits are not the same as record profitability. Return on capital and return on equity is what counts in terms of businesses investing and employing. That’s why it ‘didn’t drive UE to zero’.

        My point was that you cant just increase wages and expect rainbows and lollipops. Genuine demand and wages growth comes from productivity growth, something that is badly lacking in this country. All other demand comes from debt, which is just future consumption brought fwd.

        Where does productivity come from? structural reform.

      • migtronixMEMBER

        record profits are not the same as record profitability

        Stupidest thing I’ve heard in a while. That’s why they’ve been returning those profits as dividends instead of reinvesting is it? Or is because wages aren’t low enough? Sheesh

      • I used to know as much as you, too

        Mig, what would you prefer: $1 of profits on $10 of capital or $1.50 of profits on $100 of capital?

        You want higher profit, or higher profitability?

        Companies are paying out increased dividends (via increased payout ratios) because the market rewards it (in its desperation for income). Market isn’t rewarding companies that retain profits.

      • migtronixMEMBER

        Oh so it’s ok for the income of shareholders to increase but not workers? You’re an idiot!

      • Mig mate,

        you change your argument/point more than you change your avatar.

        nice series of straw man responses.

      • migtronixMEMBER

        1) How is that a strawman? Its what you told me.

        2) I’ve not even expressed an opinion, I was just showing yours to be utterly inconsistent…

      • Greg…don’t waste your time. We’ve been over and over that same argument about capital structure together with the effect that the economic structures that we ourselves have voted for and still desire, have on wage share. You will be pilloried for simply making rational observation.
        It’s getting to be the way of things in these pages…unfortunately.

      • migtronixMEMBER

        Indeed we have, the outcomes with you lot are always: those got in early, are over 50 have far more ability to earn income from investment than labour should be first in line and collect all the goodies. Now because they are already done with most of their lifetime binge — at the expense of foriegners saving habits and their children/children’s children — its time for everyone else to stop being so damn overconsumptive – and WORK DAMMIT! We want to retire on a good wicket FFS….

      • migtronixMEMBER

        @greg if you didn’t quite gleam the point from my response to flawse I’ll be clear: we don’t have a market, we have a central bank accommodating desperate politicians and asset owners at the expense of everyone else. It’s all very nice for you to say, well the these asset owners are demanding income because they get sh#t in a bank deposit and that’s why employment can’t go up. Until these guys think their assets will be more “productive” *cough* they’ll take cash in hand — thanks!

        Great for you who started a business 30 years ago and milked the ensuing credit mountain, but if you think i’m going to buy your line that markets are functioning and its just “structural reform” (read: lower wages!) holding us back you are fuddy duddy

      • flawse…i hear you mate…

        mig…i’m younger than you think. i haven’t benefitted from the credit binge at all and have (mistakenly) been waiting for all this to go pear shaped for many years.

        you mistake my rational observation for how things are for endorsement of the status quo.

        if you want to engage in rational debate here, fine…i’m up for that. But if you want to fly off the handle and assume i’m saying something entirely different then, well…my wife takes care of that already. 🙂

      • migtronixMEMBER

        That’s fair, I’m sure I pale in that contest anyway. Your wife is welcome to you.

        Though do humour me, other than the gender bias what’s irrational about the consequences of what I wrote?

        How do you explain “market is rewarding cash” while simultaneously arguing cash in workers hands is disastrous? I’m perfectly willing to accept I’m wrong, but show me don’t offer glib homilies about your domestic life Greg, I don’t need to know you that we’ll….

  2. migtronixMEMBER

    I particularly enjoyed the “weather the freezes” allusion, and yes it is encouraging, I guess, if you can put out of mind the fact we’ve been on the “banks need to hold more capital” merrigoround for 5 years…

    Still no growth, still no capital buffer.

  3. sheltie

    August 21, 2014 at 6:50 pm

    Rally and March in Melbourne on Sunday August 31 @ 1pm, State Library of Victoria. March to Parliament.

    Design and wording for Placards are now completed. Thanks to those people who made wording suggestions. They were very helpful.
    There are 12 documents available with the Negative Gearing and Housing Affordability theme. These are available to download now in PDF form by clicking on the links below. Documents are in A4 size. You can copy them on to a disk or USB stick, take it to Officeworks where they can print them out to any size. I would suggest A2 size, (420 x 594). A1 would be even better but the printing on the blow up would be faded a bit, although this could be darkened up with a black marker pen. You can then stick or tape them on to a stiff backing / placard.
    For anyone who is not able to make their own Placard, we can supply them. Just contact us by email below. You could also print up lots of A4 copies and distribute them as flyers.
    I would urge as many people as possible to get involved. Even downloading these documents and sending them on to friends or whoever will be helpful. Someone may print and distribute a heap of them.

    The type of people at these marches have many different grievances. Probably not many of them know what Negative Gearing is, or how it takes money out of their pockets. We need to convey to them, one major subject at a time, starting with Negative Gearing, and how it is affecting Housing Affordability. By carrying these Placards and distributing these flyers through the marching crowd and the spectators, a lot of them will come away with more knowledge about Negative Gearing. In the next march or rally a lot of them may put down their save the whale, or whatever placards, and pick up Negative Gearing placards.
    We also intend to write a 1 page flyer to explain what Negative Gearing actually is (in as simple terms and hard hitting form as possible) and have this available for distribution.

    Click on these links to download Documents.!3638&authkey=!AIxJiO7oNjwdTHs&ithint=folder%2c

    [email protected]

  4. The relative size of Australia point is though why we have come through the GFC relatively unscathed.

    20 million people is 0.2%
    5% of the world (though for international readers know that most of it has no water but it has stuff you can dig up and ship to people who do have water).

    All you need is porous borders and a non-accounting for the effect on all of us on those cashing, or something we all benefit from, and you don’t have to be Einstein to see that little trends internationally irrespective of an overall world trend can move us easily.

    But maybe I’m missing something, I’m just from here, just know here, you know I’m not an “x” “Australian”, or “y” “Australian”, or maybe like those hyphenated surnames I’m an “Australian Australian”.

    Though let’s shorten it to AusAusy.

    Others will get it this has been going on for generations but the linkages have become more instant and borders more porous over time.

    It’s just maths mate, isn’t it?

  5. The discussion by Murray appears to me to be about currency stability. A most worthy point given the extent of our national foreign indebtedness.

    If the average punter understood that a run on the AUD could see their tax ‘minimization’ strategies turn toxic I am sure they would tread more carefully.

  6. “That is going to cause a correction at some point, which will put more ­political pressure on financial systems.”

    If Murray foresees an asset price correction, however vaguely stated, pressure (read distress) will be much wider that mere political resistance to bailing out the finance sector.

    I have been in Perth this week, and commercial vacancies are staggering. I estimate at least 1/3 of all commercial buildings are vacant and marked for lease, with fresh construction proceeding with energy.. The only people making a quid are the sign writers. It is eerily reminiscent of Melbourne 1989-91 and many speculators must be facing erasure. The vast majority will be geared to the gills on non-income producing assets just as the mining investment boom ends.

    Don’t Look Down!

    • It would be good to get an idea of how the slow down in Perth will impact other capitals. Was the equity rise in Perth leveraged into Melb, Syd and Brisbane?

      • innocent bystander

        fwiw more than half of people who I know who have IPs have some interstate, mainly Melb, one in Adelaide ffs. That is in addition to their Perth one(s) I might add. The others have just loaded up on Perth.
        They are laughin at me at the mo’ cause I am getting kicked out of my rental (and finding it difficult to get something suitable cause of desired area).
        We’ll see who gets the last larf.

    • in Perth this week, and commercial vacancies are staggering.

      This will be great for builders who can convert the empty commercial premises into home units.

    • Yes David, pretty hard to interpret “post-crisis monetary settings have distorted asset prices again,” and “That is going to cause a correction at some point” any other way.

      I am still trying to get my head around this whole Bail-in scenario. I’ve read the nexusmagazine ‘Cyprus Template Bank Deposits at Risk’ article ( and some related BIS & APRA documents plus scanned the Interim Murray Inquiry report.

      Not ‘dragging the taxpayer into the next crisis’ seems code for the government not wanting to fund the bail-in with taxpayer monies. Fair enough. But have main-street savers been adequately warned?

      From the BIS and Basel Framework 2012:
      “APRA acknowledges that the Basel requirement for non-CET1 capital instruments to convert, and for new shares to be issued, prior to any public sector support of a troubled institution, has not been replicated verbatim. This was done deliberately, and within the spirit of the Basel Framework. Public sector capital support for a banking institution is virtually unprecedented in Australia” (not occurred for over a century), “and APRA does not wish to create moral hazard by using language suggesting that such support may be forthcoming for any ADI.”

      Bit late for warning the public of moral hazard after the event. I would have thought given the banks exposure to offshore debt, currency risks and volume of highly-leveraged Interest-only investor loans on balance sheet that APRA should be advising consumers on a regular basis of the danger of trusting the banks.

      So is it that APRA is keen to ring-fence the banks to protect taxpayers only, and that virtually throwing deposit holders under the bus is a bonus?
      When it comes to moral hazard, who does APRA intend to rest control of – savers or banks?
      Will the banks co-operate and pull back from their credit frenzy or is a bail-in now inevitable?

      Other things I find strange in the world of APRA and Basel reqs are:
      1. APRA’s treatment of investment loans – “Approximately one third of Australia’s internationally active ADIs’ residential mortgage exposures are non-owner-occupied mortgages. . . Accordingly the likely potential risk for capital understatement that could result from APRA’s current treatment of non-owner occupied mortgages was considered material.” (BIS)
      2. APRA’s treatment of SMSF (and commercial/retail funds) versus Industry super funds (mainly unions). Deposits appear not to be guaranteed in Industry/union super funds. Is this setting up Industry/Union super funds for a fall ?(see cuffelinks article ‘APRA helps SMSFs but large super funds left hanging’);
      3. In the stress scenarios applied to banks, model cash-flows used were based on flows only seen over the last 24 months – wtf. Why did they not use data covering the volatile GFC period if they want to understand what happens in stress situations?
      4. APRA has allowed the effects of currency movements, which are directly impacted by offshore borrowings seems to not be factored in calculations, again wtf?

      Given the new capital requirements kicks in Jan 2015, I can see why banks are out to push APRA off course – it saves on funding costs.
      However, it looks like retail bank deposit holders, and in particular employees paying into Industry/union super funds, are going to end up the meat in the sandwich.
      But then I wonder, whose agenda is being served?
      If part of the long term plan is to crush the unions and make them irrelevant, what better way than having one of the planned side effects of a bail-in be that Industry/union super fund assets get frozen prior to redirection to Federally designated projects or whatever ?
      Unions, as collateral damage, dinosaurs of the 21st Century. Win win for some.

      Point 1&2 above from following:
      1. Regulatory Consistency Assessment Programme (RCAP) – Assessment of Basel III regulations – Australia, March 2014
      2. APRA helps SMSFs but large super funds left hanging – By Graham Hand on April 2, 2013

  7. The very discussion of bail in is some what odd. Is he saying at present that somewhere in bond holder contracts it
    says bond holders cannot lose money and cannot be converted to equity no matter how insolvent the institution ?

    That’s odd I thought this was a capitalist country .

    Usually if you lend money to a business and they can’t pay it back you do your nuts but not with our mafia banks it seems they are above the law

    • that’s how it should be. But when you’re a capital importer you have to appease the foreign lenders otherwise you increase the risk of a run on the banking system.

      That’s what Murray is worried about.

      BTW, traditional capitalism is dead. It has been for a long time.

    • Even StevenMEMBER

      If a bank folded, yes bond holders would lose their money.

      However, the disastrous consequences of actually letting a bank fail means the government tends to step in (prior to the point that bond holders lose their money).

      The new regulations are seeking to change this arrangement such that the bank can continue operating as a going concern by converting bond holder debt to equity.

      • migtronixMEMBER

        Sure but if the debt-holders wanted equity they could have bought equity in the first place.

      • technically a bank ‘fails’ when it’s equity holders get wiped out. that’s before you even move up the liability part of the balance sheet.

        In such a scenario the bonds of said bank would obviously be trading at a pretty big discount.

        But this is where the govt would come in and wrap its big fat AAA rating around the bank to try and protect the equity holders as well.

        Who really thinks the govt would let CBA equity holders go to the wall? That’s about $130 billion of market value and $50 billion of equity capital gone? Anyone?

      • The great thing about it all is that current management more or less stays in place no matter what!!! They are in a supern position where they can drive the nation to the wall and impoverish our children, walk away with all their ill-gotten gains, and then continue on in employment earning even more money to ‘rescue’ our financial system. Bollocks!

  8. When this was first announced I was expecting something along the lines of…
    Interviewer: Mr Murray, how can our banks lend so much money out?
    DM: Equity maaaaaate
    Interviewer: And how much equity is that?
    DM: maaaaaaate
    Interviewer: Can I have a number?
    DM: maaaataaate

    But no it looks like some good reform is on the cards. Here’s hoping. Great article & commentary, thanks.

    • Murray isn’t a complete douchebag. That’s why they didn’t get Aussie John or bouris to front the thing.

    • The Henry review was done by competent non-vested interests and came out with a comprehensive set of recommendations that would have done this country a lot of good.

      Look how far that got us. I just wish I could be optimistic about this banking review actually changing things but it seems like the politicians are just out of control now.

  9. “He said as a capital importer”

    You gotta love the neat obfuscation ‘ Capital Importer’ It’s like we import a car or something…What we have here is debt and the sale of the national resources we inherited but will not have any left to pass to our children. BS is what this all is!
    Why don’t these clowns say what it really is
    “Debt to Foreign entities and the sale of any and every mine, farm, business and house we can flog to foreigners just to fund our profligate wasteful irresponsible lifestyles!”

    We’ll know these blokes are serious when they start calling things the way they actually are. In the meantime it’s all just piss and wind!…..And I’m bloody sick of it!

  10. “His aim was to make it less likely the taxpayer would be “dragged into the next crisis”.”

    WTF? Savers aren’t taxpayers? Like savers aren’t citizens anymore just objects that need to be

    Sorry to be the bloke out on the limb here but this is all just plain BS no matter how you dress it up.

    Of note however is that the bail-in is now officially stated as the direction we are going to go! Geez…bloody wonderful. What a great nation!

    • Savers are the most shafted of all tax payers – we need to pay tax on trying to keep our purchasing power.

      • Savers are unaustrayan and deserve to be punished. If you aren’t balls deep in debt you aren’t pulling your weight for this great nation!

  11. Bail-in. Otherwise known as stealing and punishable by criminal law in any other context, unless it is the legislators and authorities doing the stealing.

    It appears we are stuck with fiat currency for the foreseeable future, and in reality almost every citizen requires at least basic transaction account functionality to live life in this country. At a minimum, anyone who is prepared to forego a return on their cash should be entitled to a place to store that cash, most of which is only a ledger entry anyhow, and a guaranteed return of the same amount. So-called deposit guarantees up to 250k don’t cut it either when even that is riddled with holes.

    We used to have an institution a bit like that. It was called the Commonwealth Bank, but don’t speak a word against it or be prepared to suffer the wrath of shareholders who look no further than the share performance and dividends to confirm what a wonderful business it is. While certainly not the only factor, privatisation of the CBA set us up for an extended sugar hit from which we only now risk coming down from.

    Ever, only, and always in this country the political thinking is short term. We can’t expect any better and no improvement while our current structure of government remains.

    • Thanks for the thoughts slambo (more rationally put!) However I really don’t think it is the structure of government that is the fundamental problem. I fear, indeed think, the fundamental problem is us We’ve voted for these treacherous bas…ds of all political colours and flavours for decades. Whoever promises us the most gets the votes and government. Simple!

      • You’re absolutely right Flawse. Indeed I’m sad to confess that my vote supported some of those clowns before I had a clue. And I suppose that is part of the problem. It was many years before I could see all the BS for what it is, and many of my peers and those older still don’t recognise there even is a problem.

        I think we have really shot ourselves in the foot as a country, and as much of a downer as it is, I have to agree with your oft repeated idea that we are too late – the answers lie back in the past. Whatever the future holds, it is bound to be something much less than it might’ve been.


  12. You’re absolutely right Flawse. Indeed I’m sad to confess that my vote supported some of those clowns before I had a clue. And I suppose that is part of the problem. It was many years before I could see all the BS for what it is, and many of my peers and those older still don’t recognise there even is a problem.

    I think we have really shot ourselves in the foot as a country, and as much of a downer as it is, I have to agree with your oft repeated idea that we are too late – the answers lie back in the past. Whatever the future holds, it is bound to be something much less than it might’ve been.