After 10 months of deliberation, the Federal Government has released its response to the Final Report of the Murray Financial System Inquiry (FSI), which endorses all but one of the FSI’s 44 recommendations.
On bank capital, the Government agrees with the FSI’s recommendations that capital levels should be “unquestionably strong” and supports measures to increase bank capitalisation. These include narrowing the gap between mortgage risk weights by raising the average internal ratings-based (IRB) mortgage risk weight so that it more closely aligns with the higher standardised risk weights, along with introducing a leverage ratio that acts as a backstop to ADIs’ risk-weighted capital positions.
In a similar vein, the Government also agrees that steps should be taken to reduce any implicit government guarantee and the perception that some banks are too-big-to-fail, along with implementing a framework for minimum loss absorbing and recapitalisation capacity.
On superannuation, the Government has agreed to enshrine the objective of the superannuation system in legislation in order to help align policy settings, industry initiative and community expectations. It also agrees that the super system is fragmented, costly, complex and suffers from a lack of member engagement.
Importantly, the Government will immediately task the Productivity Commission to develop and release criteria to assess the efficiency and competitiveness of the superannuation system. It will also immediately task the Productivity Commission to develop alternative models for a formal competitive process for allocating default fund members to products.
The one area where the Government has objected is to the FSI’s recommendation that superannuation be banned from borrowing for investments (e.g. into residential property). The Government instead argues that while “there are anecdotal concerns about limited recourse borrowing arrangements, at this time the Government does not consider the data sufficient to justify significant policy intervention”.
The Government’s refusal to ban superannuation leverage (mostly by SMSFs) does not just run counter to the FSI, but also the RBA, which raised concerns about SMSF leverage in its recent submission to the House of Representative’s Inquiry into Home Ownership:
Another change in the landscape since 2003 is that superannuation funds are now able to borrow. Some self-‐managed superannuation funds have taken advantage of this by adding geared property into the fund portfolio, both residential and, in particular, commercial property. At the margin, this has increased the population of potential investors. Although the share of the housing stock owned by these funds is small, it has grown quickly (RBA 2013). The Bank has previously observed that leverage in superannuation funds may increase vulnerabilities in the financial system and therefore supports limiting the scope for leverage in these funds (RBA 2014c).
The architect of Australia’s superannuation system, former Treasurer and Prime Minister Paul Keating, has also previously called for curbs on SMSFs using leverage to invest in Australian residential property, arguing that it “is making it nearly impossible for younger people, owner-occupiers, to afford to house themselves” and arguing that “we can’t persist with the position where our children cannot afford to house themselves and that is where we are now”.
However, the Government has at least left open the option of tightening rules around superannuation leverage, noting that it will commission the Council of Financial Regulators and the Australian Taxation Office to monitor leverage and risk in the superannuation system and report back to Government after three years. The agencies’ analysis will then be used to inform any consideration of whether changes to the borrowing regulations might be appropriate.
Superannuation leverage aside, the Government has done well to endorse the FSI’s recommendations.
