Speaking at an Australian Business Economists luncheon in Sydney last week, FSI chair Mr Murray said the perception of the government as a “backstop” may provide competitive advantages to some, and can “distort prices and the efficient allocation of capital”.
“Significantly, the overall outcome was that the GFC shifted public expectations of when and where governments will intervene. The question for us now is whether we are content to accept that shift,” he said.
In a post-GFC environment, it is “not surprising” that some of the submissions to the FSI noted that concerns about safety and stability of the system have been overridden by “longer-term interests of competition and innovation”, said Mr Murray.
One of the key questions that Mr Murray plans to ask in the planned July interim report is 'When would you expect government to step in to prevent losses to consumers?' as well as 'How far should the government go to try to prevent loss?'.
The industry fund lobby was quick to welcome the inquiry’s focus on ‘moral hazard’, with ISA director of policy Zak May arguing that FSI’s concerns should include ‘economic hazard’ as well.
“Banking profit per customer in Australia is four times what it is in the US and the UK and Australia has the most concentrated banking system among developed economies,” said Mr May.
He pointed to International Monetary Fund reports that have “clearly highlighted” the government subsidisation of both the size and riskiness of Australian banks.
“It’s becoming more widely known that the government provides billions of dollars of implicit subsidies to the big banks every year,” said Mr May.
Productivity and investment efficiency also need to be on the inquiry’s radar, he added.
“Australia’s financial system, led by the big banks, has grown enormously to about 10 per cent of GDP, but has actually gotten less efficient at directing investment into new capital,” said Mr May.
“The economic resources consumed to support new capital formation have increased on a dollar-for-dollar basis by over 30 per cent above averages in the 1980s and ‘90s,” he said.
The Australian financial system consumes more resources per dollar of assets, liabilities and investments than other developed economies,” said Mr May.
“A serious discussion about the efficiency and effectiveness of finance has to start by acknowledging the massive growth of the sector, and compar[ing] that to its real economic output,” he said.
