Monday, November 22, 2010

It's time. For a new financial system inquiry. Here are the Terms of Reference:

From Joe. Where's Labor?

Terms of Reference for an Inquiry into the Australian Financial System 2010/11


Since the Financial System Inquiry of 1997 (“Wallis Inquiry”), the collapse of HIH Insurance and the onset of the global financial crisis in 2007, there have been very significant changes in the Australian financial services industry. These include changes in the nature of prudential regulation, the structure of the industry and the basis of product competition.

In particular, since the Global Financial Crisis, the creation of the notion that many financial institutions are now “too big to fail” has created a policy dilemma for regulators and legislators.

Given that without the financial system shocks of the last few years governments in Australia have willingly commissioned external reviews of the financial services system, now is the time to engage with industry in a general review of financial services to prepare us, so far as is possible, for the many challenges that may lie ahead...

Terms of Reference

The Inquiry will inquire into and report on:

1. An analysis of the developments since the implementation of the Wallis Inquiry recommendations and lessons to be learnt from the implementation of those recommendations with specific reference to, but not limited to;

a. The establishment of a stand-alone, integrated prudential regulator, the Australian Prudential Regulation Authority, and its working relationship with the Reserve Bank of Australia, the Australian Securities and Investments Commission and prudential regulators in other jurisdictions;

b. Further policy changes made in the wake of the collapse of HIH Insurance;

c. The aggregation of financial services providers into financial conglomerates resulting in the emergence of large and diverse financial institutions;

d. The role and impact of new technologies; and

e. The appropriateness of government pledging its balance sheet or providing other support to particular entities.

2. The impact on the Australian financial services industry of the Global Financial Crisis including consideration of, but not limited to:

a. An explanation of how United States sub-prime contagion was able to be quickly transmitted to Australian financial markets and severely impede the capital flows on which Australian institutions rely;

b. The consequences for prudential supervision, confidence, stability and competition of government intervention in guaranteeing financial entities and specific products, and the associated creation of a new risk profile (“moral hazard”) for public sector engagement in financial services;

c. The reduction in the number of product providers including an analysis of the impact of entity mergers and changes in the level of business activity of international banks in Australia;

d. The implications for current and future funding of the domestic economy;

e. Changes in global competition that occurred as a result of the crisis;

f. The impact on non-bank lenders and hybrid domestic financial entities such as Cash Management Trusts and Mortgage Trusts;

g. The reduction in liquidity and scale of investment markets such as the corporate bond market, Real Estate Investment Trusts and the RMBS and CMBS markets;

h. Wholesale funding challenges for entities and the need for alternative funding products such as covered bonds or other forms of asset-backed instruments;

i. The impact of new Basel III capital and liquidity rules on stability and competitiveness in the Australian financial services sector; and

j. Any unilateral actions by other jurisdictions that may limit or restrict the Australian financial services sector and how these decisions should be managed into the future.

3. Factors likely to affect the evolution of further stability and competition in financial services, including, but not limited to:

a. Economic growth, demand for credit, domestic savings and investment, technology and industry structure;

b. Efficiency of the domestic financial services system relative to international peers having regard to regulatory, structural and cyclical differences;

c. The emergence of the $1.5 trillion superannuation system and the relationship with the broader banking system including the structural shift of savings from the core banking system into superannuation; and

d. Emerging challenges for cost of capital and required rates of return to ensure both availability of capital when needed and funding of growth in the domestic economy.

4. Consider and recommend policy measures which can facilitate stability and further competition including, but not limited to:

a. Initiatives that reduce the complexity and duplicity of regulation whilst maintaining certainty and predictability in the delivery of financial services for consumers and small business;

b. Facilitation by government of industry wide rather than specific entity competitiveness;

c. Better use of existing government infrastructure such as Australia Post and Medicare Offices, for distribution of financial products to facilitate improved competition, but without government assuming balance sheet risk by competing directly with the private sector; and

d. An improved regular and independent reporting framework that provides comprehensive information on the risks and returns generated by the banking system; and

e. The specific ranges of risk and return that could be reasonably expected to be produced by institutions operating within the unique regulatory sphere of the modern banking system.


The Inquiry will call for and consider submissions from any person or institution and may hold public hearings as it sees fit.


The Inquiry will report back to the Parliament by 1 November 2011.

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