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BFCSA: Government will ignore Son of Wallis Murray Report. Consumer Backlash on the way

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So bankers don't understand how finance works? 


Combine that with Murray not understanding how criminal service calculators and rigged computers work.......?  But Hockey chose him because he was a Banking Engineer.


Murray's work to shape our financial world for years to come

Banking and Finance

Date December 5, 2014

Clancy Yeates


What you need to know about the Murray inquiry

If history is any guide, David Murray's financial system inquiry will shape the landscape of banking, superannuation and insurance for years to come.  Its final report, to be published on Sunday, follows in the footsteps of inquiries that have had profound legacies for consumers, businesses and the entire economy.

The 1981 Campbell inquiry paved the way for a wave of deregulation, and the 1997 Wallis inquiry recommended Australia's modern system of market and banking regulation.There have been seismic shifts in finance since Wallis: a six-fold rise in the $1.9 trillion superannuation pool, a sharp increase in the share of bank loans going to housing, and a shift towards greater concentration in banking.

Depending on what the government decides to do with Murray's recommendations, it has the potential to affect just about everyone in Australia.  But as we learnt during the global financial crisis, finance can be so complex that even many bankers do not truly understand it. With that in mind, here's our guide to the topics that matter most.

Bank capital

The biggest fear among bank investors is that Murray will increase substantially the amount of equity capital the big four must set aside. This would make banks more resilient but also dilute returns, and possibly raise costs for customers.  Bank capital acts like airbags in a car. It is a buffer that can absorb losses during times of financial stress, thus making the entire system more resilient to economic shocks.'

Australian bank capital levels were not threatened during the global financial crisis, but Murray's interim report spooked investors by saying their equity capital levels were at the middle of the pack compared with banks overseas. This is a risky proposition for a country that depends heavily on foreign funding, the argument goes.

At the same time, global bank regulators are grappling with the market perception many lenders are "too big to fail" and would be bailed out by taxpayers if needed. This not only gives giant banks access to much cheaper funding than others, it also gives them a perverse incentive to take more risk.

One way to address this is by forcing "domestic systemically important banks" (the big four) to set aside more capital as a share of their assets, the majority of which are home loans. These D-SIBs will already have to boost their capital buffers by 1 percentage point by 2016, but Murray is expected to call for more action.

It is argued this would also give second-tier banks a better chance of competing with the Commonwealth Bank, Westpac, NAB and ANZ in the $1.3 trillion mortgage market.

However, being safer might also come with a cost. Deutsche Bank says if the big banks needed to raise another $40 billion in equity capital, it would reduce return on equity by about 1.5 to 2 percentage points. This might be passed on to shareholders through lower dividends, or to the big four's millions of customers.

Risk weights

Little understood by non-bankers, "risk weights" are models used to determine the riskiness of lending. They are inextricably linked to bank capital, and this is another way in which Murray might clip the big banks' wings.  This is how they work. If a bank gives a loan a "risk weight" of 15 per cent, it assumes only 15 per cent of its funds are at risk. For a bank to meet a capital ratio of 10 per cent under this scenario, it needs to hold only $1.50 in equity capital for every $100 in home loans.

CBA, Westpac, NAB, ANZ and Macquarie have average risk weightings of 18 per cent on home loans – compared with 39 per cent for other lenders. This is because the biggest banks have more sophisticated risk systems and have been given "advanced accreditation" by the Australian Prudential Regulation Authority.

Murray's interim report noted the regional lenders' argument that this makes the playing field uneven, and there is an expectation risk weights for the major banks will be raised, perhaps to a "floor" of 20 or 25 per cent.  Any such move would serve to reduce the big bank's leverage, lowering returns.

Banks have threatened to pass these extra costs on to customers through higher interest rates or lower returns on deposits. But there is a question mark over their ability to do so, meaning shareholders would probably also take a hit.

Superannuation fees, governance and financial advice

Australians paid $20 billion in superannuation fees last financial year, Rainmaker estimates. Submissions from the Reserve Bank and Treasury suggest this is too much, and Murray's interim report said there might not be enough competition. The final report is expected to propose ways of addressing this.

The headline-grabbing option floated in the interim report was to copy Chile and auction the right to be the "default" fund for members who don't make a deliberate choice. This would be a radical departure from the current system, in which default funds are set through the industrial relations framework.

Instead of such a dramatic change, industry sources expect Murray to suggest other options for lowering super costs. One is to select default super funds based on past performance.  He might also recommend industry superannuation funds are overseen by a majority of independent directors, a move designed to dilute the influence of unions in the $380 billion sector.

Closely linked to super, financial advice also looms large, especially after the recent scandals at the CBA and Macquarie. Murray's interim report said the quality of advice was mixed. Potential responses could include better education standards and a clearer division between what is "advice" and what is "sales".

Borrowing within self-managed superannuation funds

The amount held in self-managed super funds (SMSFs) has ballooned more than 15-fold to more than $550 billion since the last inquiry into the financial system by Stan Wallis in 1997. More than a million Australians now manage their own super, making it the biggest part of the superannuation system.

But the meteoric rise of do-it-yourself super is creating new risks as well as opportunities – and a big one is the popularity of leveraged property investment within super funds. Murray is expected to suggest this be banned, amid concerns from the Reserve Bank it is simply another way for people to speculate on house prices.

The argument is that Australians already have plenty of options to borrow against their investments, and one of the great strengths of the superannuation pool is its lack of leverage.  SMSFs' total borrowings are still relatively small at $6.2 billion. But the proportion of funds with debt has increased steadily, from 1.1 per cent in 2008 to 3.7 per cent in 2012.


For all the talk of big-bank dominance, the major lenders are also facing growing competition from new sources: think PayPal, peer-to-peer and the plethora of mobile banking apps.  These changes are good news for consumers – they bring added convenience and should drive down costs.   And plenty of other start-ups are keenly eyeing their cut of the more than $28 billion year the main banks make in annual profits.

But it's important that financial risks don't simply shift outside the view of today's regulations. The vast amount of data being generated also raises risks for privacy and security. How to balance these objectives is likely to be a key theme of Murray's report.

Expect Murray to stress the importance of having a regulatory perimeter that does not curb the competition that comes from new technology, but also keeps an eye on new types of risk.


Tax might not be front of mind when you think of an inquiry like this, but it plays a crucial role in determining where capital ends up.   The tax treatment of housing has undeniably helped to fuel lending for housing, which has surged from 47 per cent of all bank loans in 1997 to 66 per cent today. Indeed, Murray called the housing market a possible source of "systemic risk" in the interim report.

Dividend imputation also lurks beneath Australian funds' heavy weighting to equities, which is often cited as a weakness in our retirement saving system.   Murray has a reputation for being headstrong, and there's a good chance he will raise some curly tax issues for the government's tax white paper: think dividend imputation and negative gearing.

Damp squib?

When Treasurer Joe Hockey picked Murray to lead the financial system inquiry, even some bankers privately criticised the appointment of a man who worked at CBA for almost 40 years.   These complaints have been dimmed by the expectation Murray will raise bank capital levels and tackle some of the biggest problems in superannuation.

But could the final report follow in the tradition of other grand inquiries whose recommendations are largely overlooked – such as David Gonski's report into education or Ken Henry's tax review?   Banks and some analysts have been urging Murray recently to stick with "principle-based" rather than "prescriptive" recommendations. It is assumed this would allow regulators to them implement the changes more leniently.

It is also worth remembering that Hockey set out details for the proposed inquiry while in opposition, amid a fierce debate about banks moving home loan interest rates outside the Reserve Bank's changes.

Whether he has the will now to push through meaningful change in one of the country's most powerful industries remains to be seen.

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