The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, November 22, 2010

Son of Wallis Terms of Reference + AFR op-ed

Bernard Keane, who published a sublime article on the debate here today, has got a copy of the Shadow Treasurer's Terms of Reference for his new financial system inquiry, aka "Son of Wallis". You can read the terms here. And here is what I must say is pretty damn fine op-ed from the man himself in the AFR today (over the fold)...

Son of Wallis is long overdue
22 Nov 2010
Joe Hockey

A month ago I kicked off a renewed debate about the future of Australia’s financial system – about how we can get more competition into banking, and how we can best insulate the nation from future crises.

I understand banking and I love competition. But when I look at the sector now, I see a market that is more concentrated than it has been in 20 years. The single best way to address community angst about the quality of banking services will be through encouraging more consumer choice. And that means more competition.

It is now largely forgotten that the recommendations of the 1997 Wallis inquiry were explicitly designed with a 2010 expiry date. This is why one of the principal authors of the inquiry, Ian Harper, supports the follow-up “Financial System Inquiry” I have proposed.

The Wallis inquiry formally rejected government guarantees of private companies (including deposit guarantees) for fear of inducing irreversible “moral hazards”. These are risks found in all insurance markets where the availability of such protection has the perverse effect of encouraging beneficiaries to assume abnormally high risks by playing the “heads we win, tails the taxpayers lose” game.

Yet during the global financial crisis, Australian taxpayers were compelled to deploy more than $850 billion worth of guarantees of the liabilities of private financial institutions. About $690 billion worth of guarantees of bank deposits were put in place because of concerns depositors were rapidly withdrawing savings from smaller banks, potentially precipitating a run on the wider system.

This insurance was provided to the banks for free – no premium was paid to taxpayers. A further $163 billion worth of taxpayer guarantees of the banks’ wholesale debts was furnished to allow them to leverage off the commonwealth’s AAA credit rating. The Reserve Bank of Australia also supplied the banks with $43 billion worth of finance on advantageous terms via its “repo’” facilities, which used the banks’ home loans as collateral for the first time. Finally, taxpayers committed to inject $16 billion to support the private residential mortgage-backed securities market.

At its most basic level, our financial system was not designed with taxpayer guarantees in mind. So it needs to evolve so that it can appropriately respond to, and manage, these new risks. The time has therefore arrived for a root-and-branch review of Australia’s financial system.

The “Son of Wallis” inquiry I have proposed will deliver a series of recommendations that help enhance competition in Australia’s financial services market while maintaining a stable, durable, diverse and well capitalised industry.

The inquiry will set down a new roadmap for the development and maintenance of a globally competitive financial system that takes into account the rapid growth of our main trading partners in the Asian region. It will consider all available tools that could improve the depth and liquidity of Australia’s capital markets, including taxation, regulatory and systemic reform that will enhance our economy and prepare it for a more volatile trading environment over the next two decades.

The inquiry will address the question of whether the use of taxpayer guarantees of private financial institutions has introduced new moral hazards, and, if so, how these risks should be mitigated. Finally, the inquiry will examine whether Australia has emerged from the global crisis with any “systemically important” – or “too-bigto- fail” –institutions, which is today the first-order concern for the global Financial Stability Board, as demonstrated by the recent Group of 20 summit.

I’ve been calling for a new financial system inquiry for well over a year. The Campbell inquiry, which was the first major external investigation into the banking system, was in 1981. The Wallis inquiry came 15 years later. It is time, particularly given the ructions wrought by the global crisis, and the debate on financial services reform that is raging globally, that we undertake a substantial investigation into the architecture of our system.

Let’s make no mistake: we have world-class banks and a very good financial system. I was a minister who helped put in place things like the Financial Services Reform Act. I’m very familiar with moral hazard and what it really means. From my perspective, this is about more competition without upsetting the stability of the system. It is not about reregulation. It is about undertaking reform today to prepare us for the challenges that we will inevitably face in the future.

Joe Hockey is the federal shadow treasurer.