Wednesday, July 08, 2009

Son of Wallis, daughter of Campbell

Its time is approaching

The growing power of Australia's big banks has been targeted by a coalition of six influential economists who have petitioned the Prime Minister and Treasurer to set up an a new inquiry into Australia's financial system - the first since the Wallis and Campbell inquiries of 1997 and 1981.

Since the onset of the financial crisis Australia's banks have increased their share of the mortgage market from 80 per cent to 92 per cent and have taken over non-bank lenders including Aussie and RAMS and second-order banks including St George and BankWest.

The open letter expresses concern about the way in which the banks are using their privileged access to government guarantees, saying they are "rushing offshore" to expand despite Australians being "repeatedly told that our banks were lucky not to have had substantial overseas exposures"...

The Campbell and Wallis inquiries were aimed at opening up Australia's financial system. Campbell recommended floating the dollar, letting in foreign banks and abolishing exchange controls. Wallis recommended 'light touch' regulation allowing banks to expand into superannuation and insurance.

But the letter says much of what it brought in was inappropriate or is now out of date. It cites as an example the Wallis Inquiry's decision to reject the use of deposit guarantees, tools which turned out to be "critical" during the current crisis.

The open letter is signed by economists who have advised both sides of politics including Dr Christopher Joye who chaired former Prime Minister John Howard's 2003 Home Ownership Task Force and Dr Nicholas Gruen who is chairing current Finance Minister Lindsay Tanner's Government 2.0 Task Force.

Delivered to Mr Swan's office late yesterday it has sparked support across the political spectrum receiving backing from Trade Union President Sharan Burrow as well as Coalition Treasury Spokesman Joe Hockey.

But a spokesman for the Treasurer appeared to reject it straight away saying Australia's financial system had performed "very well" during the crisis compared to others and that the government was "not contemplating" any major systemic review.

"The Government of course remains vigilant in relation to our financial system and Australia is a full participant in current G20 reforms to the architecture of the international financial system," he added.

Dr Joye, who runs the research and investment firm Rismark, labelled the response an example of the complacency the open letter is warning against.

“Everybody knows that providence has played a part in Australia’s ability to skate through this crisis," he said. "When a coalition of top academic economists calls for a review to evaluate improvements to Australia’s decades old regulatory system, politicians should listen.”

Also signed by Melbourne Business School Professor Joshua Gans, Monash Professor and former ACCC commissioner Stephen King, Queensland University Professor John Quiggin and management consultant Sam Wylie, the letter says Australia would "do well not to discount the possibility that a roll of the dice left us without more significant system failures.

It adds, "in future, we may not be so lucky."

Twelve years on from the inquiry that neither foresaw the current crisis nor developed tools to deal with it, the new inquiry would examine whether Australia's banks should pay a "systemic capital charge" to account for the risks inherent in their business, whether they should be required to accumulate capital in good times, and whether the government should set up a "basic bank" that would allow ordinary Australians to deposit money with Australia Post and have it managed by the Future Fund.

Shadow Treasurer Joe Hockey said yesterday while he thought the Wallis Inquiry got things 85 per cent right, the crisis had taught us "about the other 15 per cent".

"We can't be policy lazy," he said. "This is a debate worth having."

ACTU President Sharan Burrow said Mr Rudd and Swan had been understandably scrambling "to apply bandaids to symptoms," but now needed to formulate an overarching policy.

Is Australia ready for...

the third wave?

The Campbell Inquiry: 1981

- led to floating the dollar

- allowing in of foreign banks

- dismantling exchange controls

- abolishing interest controls

The Wallis Inquiry: 1997

- allowed banks to manage super

- set up APRA and ASIC

- favoured "light touch" regulation

- found against government guarantees

The Next Inquiry: 2009?

- banks to pay for their advantages?

- a new "basic" government bank?

- official oversight of foreign debt?

- Reserve Bank to target bubbles?

Published in today's SMH and Age