Joe Hockey

Something happened to Joe Hockey’s financial system inquiry on the way to fruition. It didn’t exactly get neutered, but some interesting ideas seem to have vanished from the draft terms of reference the Treasurer released last night.

And of course there’s the (unsurprising) appointment of climate denialist and former Future Fund head David Murray to lead Hockey’s slimmed-down inquiry. We’ve previously described in detail Murray’s nonsensical views on the “Eurovirus” he believes is afflicting Australia, his preference that the economy be trashed in order to get the budget back into surplus and his shocking performance at the Future Fund of smashing Telstra’s share price.

Of all the commentary this morning, only the AFR’s departing banking guru, Andrew Cornell, thought fit to question Murray’s fitness to lead the inquiry. Cornell wrote that Murray is “a poor choice”. No such qualms at The Australian, for whom Murray is not merely an ideological soul mate but a reliable rent-a-quote as well.

Murray played a significant part (compared with current bankers and financial leaders) in creating and shaping the financial system as we know it. He signed up early to the “four pillars” policy of Paul Keating when the latter was treasurer. Without supporting that, he would not have been selected to lead the privatisation of the then government-owned Commonwealth Bank. He maintained that support through the Howard years when the likes of ANZ and Westpac tried to examine mergers.

And he drove the modern bank model of trying to be all things to all people — or, as Hockey’s original terms of reference (TOR) put it, “the aggregation of financial services providers into financial conglomerates”. Under him, Commonwealth Bank bought Colonial to get control of Colonial First State, its huge funds management business. That enabled Murray to bulk up the CBA’s small funds management arm, just as the super surge was taking off.

He also pushed the bank deeper into insurance and triggered a price war in the 1990s in home lending by cutting margins and then started Commonwealth Securities (Comsec) to build share among people running their own investments or early adopters to self managed super funds.

Through a combination of longevity, tenacity and ability, Murray is the single biggest influence on the financial system left standing. No other bank CEO remains in public life dating back to the days of the Wallis inquiry.

It’s important to note, though, that Stan Wallis wan’t a financier or banker, he was a former CEO of packaging and paper group Amcor. Likewise Sir Keith Campbell, who kicked off the inquiries for John Howard when he was treasurer, was CEO of property group Hooker. They brought a non-financial eye to the inquiry, which gave their inquiries and their recommendations greater weight and credibility.

Because David Murray has a reputation in business for being extremely conservative, set in his ways, and refusing to change his views despite the weight of evidence (which is a pretty good definition of a climate denialist), there is a real danger he will take preconceived ideas and opinions into an inquiry and maintain them through to the recommendations stage, simply for consistency’s sake, not for usefulness of outcome.

“David Murray has a reputation in business for being extremely conservative, set in his ways, and refusing to change his views … “

Turning to Hockey’s new inquiry as a whole, here’s some history: the idea of a son-of-Wallis financial system inquiry was first floated more than four years ago by “the six economists“, a group of economic thinkers from across the ideological spectrum who, among many other things, urged an inquiry into the financial system to work out what we’d got right, and got wrong, in relation to the financial crisis, and to work out how to address some of the impacts of the crisis — such as, for example, the significant reduction in lending competition that resulted.

Then-treasurer Wayne Swan rejected the need for an inquiry at the time. Much of the media attention focused on the proposal to enable Australia Post to provide Kiwibank-style financial services to put more competitive pressure on banks. But Hockey, encouraged by economist Chris Joye, who was one of the six, picked up the idea and ran with it, enduring some political flak in the process, including from ANZ’s Mike Smith (who childishly compared Hockey to former Venezuelan president Hugo Chavez).

Hockey released a proposed terms of reference for an inquiry almost exactly three years ago. And if you compare it to the TOR he released last night you’ll see it’s very different, and not just because Treasury has pounded the text into bureaucratese.

We’re three years further on from the financial crisis, of course, so the heavy focus on that is understandably diminished. But absent, too, is a proposal to consider “… 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”.

So, no AussieBank.

And one of the concerns guiding Hockey’s original inquiry proposal related to the tension between having “too big to fail” financial entities (i.e. the big four banking cartel) and the implicit government guarantee that “too big to fail” entails, and a regulatory framework that treats banks more like commercial entities than utilities — leading, for example, to ANZ using an implicit government guarantee and lack of competition in domestic markets as the basis for an aggressive pursuit of market share in riskier regional markets like Vietnam. The IMF echoed Hockey’s concerns at the time.

“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,” Hockey wrote in an op-ed in 2010. It would also “examine whether Australia has emerged from the global crisis with any ‘systemically important’ or ‘too-big-to-fail’ institutions”.

That found expression in his original TOR in a proposal to consider “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”. You can see the danger of that proposal to the banks, of course — in their view it is up to them to determine how much risk they take on and what sort of returns they should get.

None of these are ruled out in the new TOR, but they’ve been rendered in such vague and anodyne terms as to not worry anyone. No wonder the Australian Bankers’ Association welcomed them. The inquiry will now look at “how financial risk is allocated and systemic risk is managed”, for example, as well as the issue of “domestic competition”.

It’s also significant that near the end of the TOR we’re told “the inquiry will take account of, but not make recommendations on the objectives and procedures of the Reserve Bank in its conduct of monetary policy,” a restriction presumably put in place to guarantee RBA co-operation.