WE should be looking at David Murray as a witness to answer tough questions - not leading the evidence!

Hockey’s Financial Inquiry will pander to big banks

Posted by Unconventional Economist in Australian banksat 10:09am on January 13, 2014 | 

Macrobusiness

By Leith van Onselen

The AFR’s Chris Joye has delivered a detailed critique of the Coalition’s “Son of Wallis” Financial System Inquiry, which he claims will maintain the status quo and be friendly towards the big banks at the expense of taxpayers:

Anyone with exposure to Australia’s $450 billion banking sector should understand the threshold policy issues the inquiry will traverse, and start formulating probabilities on the outcomes. A careful analysis suggests it is unlikely to champion radical changes that will disrupt the status quo. This would be good news for investors in the majors, and bad news for everybody else – including their competitors and, more significantly, taxpayers…

The Reserve Bank of Australia and Treasury have historically been resistant to initiatives that disrupt the stability of the four oligopolists in the name of enhancing competition.

Both advised Kevin Rudd and Swan against assisting the liquidity of the securitised home loan market that smaller lenders relied on. Both also initially opposed the 2009 calls for a Son-of-Wallis inquiry as unnecessary. And both are fond of alleging a trade-off between competition and financial stability. (I’ve never received a response to the retort that a chair with eight legs is stronger than one with four.)

Only a conspiratorial mind would insinuate that the Treasury and RBA’s big-bank bias has anything to do with the fact that Treasury secretaries Ken Henry and Ted Evans and RBA governor Ian Macfarlane have all recently served on major bank boards.

Hockey’s appointment of the assertive former chief executive of CBA, David Murray, to run the inquiry was the first win for major bank investors. In 2012 Murray, who spent 39 years at CBA, told 7.30 Report , “I’m known to be a supporter of banks.”

Two of the remaining four panel members are also career bankers. Craig Dunn, the retiring boss of AMP, was previously head of AMP Bank. Carolyn Hewson, an investment banker with Schroders for 14 years, served for a decade as a director of Westpac (and on the board of AMP)…

Before the 2013 election the Rudd government decided to properly price the taxpayer guarantee of deposits, which was endorsed by the peak regulatory bodies. Murray appeared to criticise the move as akin to introducing a new tax.

“To impose a levy on banks . . . is the same as putting a new tax on the economy,” he said. “I am concerned that when we have a good, well-supervised banking system, we would need to have a [bank] levy that has the effect of being another tax.”

While Hockey privately says he thinks a levy should be applied, it is being shelved until Murray reviews it. It is hard to imagine he will advocate anything more punitive.

As far as I am concerned, the “Son of Wallis” Financial System Inquiry was tainted as soon as David Murray was named as chair.

As former head of the CBA, Murray is one of the people responsible for Australia’s current financial system, whereby banks have borrowed to the hilt from foreign bond holders to pump housing, requiring the Budget to remains strong in order to support (implicitly) the over-leveraged banking sector, leading to entrenched moral hazard.

It is, therefore, a bit rich to expect those responsible for the current banking system imbalances to reform them, and represents a conflict of interest.

As noted by Houses and Holes previously, Murray’s professed views on the causes of the GFC make the point. He blames the event squarely upon the governments, as if banks and the banking system didn’t do everything in its power to maximise short term gains at the expense of long term stability (without being too precise about it).

Mr Murray’s expertise and insider knowledge would be invaluable at the inquiry. But he should be there presenting evidence not running it.

With a former banking running the inquiry, supported by other bankers on the panel, the outcome looks like a forgone conclusion.

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