What is Future Fund chairman David Murray, a former head of the Commonwealth Bank, doing urging Australia Post (now headed by the former NAB Australian boss Ahmed Fahour) to get into banking?

Is Murray currying favour with the federal Government and Opposition in urging this course of action on Australia Post. If he was still running the CBA, you’d bed Murray would be highly critical of the move.

Murray’s touting comes as banking remains a growing issue for the Government, the Opposition (is Joe Hockey’s foot out of his mouth yet?) and the country and economy as a whole. It’s not denied we need more competition, what has to be worked through is finding the current fault lines in the financial system, which includes banking, possible avenues for repair or modifications, and future proofing, as best as possible the system against problems we saw in 2008-09.

That means we need a fully fledged, wise as possible, examination of the financial system, despite  conventional wisdom in this country that we don’t because we survived the GFC and credit crunch, our banks were strong and well regulated.

While broadly that is true, in detail enough problems have emerged for a new inquiry to be called, not the theoretical effort of the Wallis inquiry back in 1997, which gave us the current structure of regulation, but something a bit broader and with less focus on process and more on  outcome, something with some of the hallmarks of the Campbell Inquiry from the early 1980s, which set us on our present course.

We need another inquiry into the financial system, not the half-cocked thing suggested by a floundering Joe Hockey yesterday, but a full fledged, everything-is-up-for-grabs probe of the strengths and weaknesses of the country’s entire financial system.

For example, take Murray’s urgings about Australia Post; what was not mentioned is where the regulatory burden should fall, who protects the deposits and other financial dealings Australia Post might engage in? Who would regulate AP’s banking dealings and other facilities? In terms of the financial system, AP is unregulated at the moment. Allowing AP into the financial system in the form advocated by Murray — without working out where it would fit and a host of other questions — would weaken regulation.

We have had piecemeal probes, but they are just examinations at the edge. A a wider inquiry is needed and it should be independent, not parliamentary, with the powers of a Royal Commission merely to make sure that everyone attends and takes it seriously.

This broadest possible inquiry should consider some of the following.

The Australian financial system has a very major weakness, competition is concentrated in four very large banks that are simply too big to fail, While the UK, the US and other countries, plus regulators, have expressed concern at the dangers of having banks deemed too big to fail and have discussed ways of handling a possible failure, we have had silence from the Government and regulators. This is the central weakness of the financial system and the biggest threat to the stability of the economy. The structure of the Australian financial system, based on four big and at the moment sound, banks is a systemic risk of its own. That is not acknowledged by anyone.

This is unsafe, the banks and their management know that they will not be allowed to fail, that if one got into trouble, the regulators would make sure it survived, even as part of another bank. There should be a clear and explicit statement of what happens if one of the big four gets into trouble, what will the regulators and the Government do. Will government funds be used to save or prop up a faltering bank, for example.

This is especially important as the key bank regulator, APRA, moves towards implementing an international agreement (modified for the different circumstances in Australia) on new bank regulation. And inquiry should probe and force APRA, the Reserve Bank and Federal Treasury to discuss and lay out just what they understand by having four banks, any one of which could plunge the economy and society into crisis should it be ineptly managed.

APRA and other regulators should not be allowed to conduct this re-regulation in silence. It should be examined the tested by an inquiry, The new rules don’t start until about 2012, 2013, so we have time now for an inquiry. The Reserve Bank, APRA, ASIC, the ACCC and Federal Treasury should all be required to explain the current structure of the financial system and markets, warts and all.

The recent new agreement between the RBA and the Federal Labor Government on monetary policy says in the key section:

“The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions. However, the Reserve Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management.”

That’s all well and good, but does that mean that the RBA and the Government are turning a blind eye to uncomfortable fact that each of the big four banks are too big to fail? This needs to be discussed and fleshed out in an inquiry into the financial system. The RBA will protect depositors, but if the big four are too big to fail, does that also imply protecting bondholders and shareholders as well? TNA RBA and regulators would say no, but that is not written down anywhere.

Switzerland is insisting that its big two banks, UBS and Credit Suisse, hold more capital and liquidity than many other comparable banks around the world because in terms of the Swiss economy, these two are giants and would cause total collapse if they failed. And remember, UBS came very close to failure in the GFC.

We have four whose assets are considerably more than the size of the Australian economy, and their liabilities.

And don’t say an Australian bank can’t fail. The ANZ and Westpac went close to the edge in the recession of the early 1990s, and in the December quarter of 2008, the Reserve Bank showed its hand by keeping the banking system and the Australian economy solvent by buying tens of billions of dollars of self-securitised residential mortgages from the banks in exchange for about $45 billion in cash, which was enough to tide the banks and the economy over the post-Lehman Brothers crisis.

That experience is why the banks here (and offshore) have been told to keep more liquidity and have higher capital. An inquiry should examine what happened in the December quarter of 2008, whether the banks were adequately prepared (after all it was the Reserve Bank (and no doubt APRA) that told the banks earlier in 2008 to self securitise their home mortgages for this very eventuality, the banks did not prepare off their own bat).

This experience alone calls into question the complaints from the banks about about holding higher levels of capital and liquidity (as Ralph Norris of the CBA has). Their claims should be tested against the level of preparedness in 2008 and their reactions since.

It’s not that our banks escaped the GFC unscathed, they had huge losses on poor loans to the likes of ABC Learning, Babcock and Brown, Allco and a host of other mostly financially questionable groups (whose growth and fall should be a part of any inquiry and whether the banks lending helped these poorly structured and badly run companies survive for longer than they should, or to emerge in the first place). These loan losses were the equivalent of the bad property loans made in the last recession, which almost brought Westpac and the ANZ undone.

The banks helped fund the growth of leveraged lending in the stockmarket via margin loans. The ANZ funded Tricom and other funders who failed or had to be rescued when the market tanked. Tricom’s inability to settle its share dealings at one stage threatened the stock exchange.

From reports so far, there seems to have been little or no understanding of what was being funded at the banks. Banks called their margin loans ruthlessly during the crisis, especially the CBA, which has had its own parliamentary inquiry into the Storm Financial collapse.

This also calls into question the regulation of the markets, especially the stockmarket, investors of all sizes, off-market companies and the like by ASIC. After the moans and groans about the banks, complaints about ASIC (and its fund-raising set of fees and charges, which are disgraceful) and its patchy regulatory record, would have to be the second biggest source of unease about the health of the financial system.

From Westpoint, to the performance of liquidators, to the Storm Financial mess, to shorting (which is another area that should be examined), to market surveillance, prosecutions (ASIC has had a string of high-profile failures), issues such as unexplained price movements before fund-raisings or big announcements, the leaking of announcements to the financial media to soften up investors, are just some of the weaknesses identified by ASIC’s own performance in the past five years.

An inquiry should look at the activities of brokers, investment banks, analysts, fund managers, asset consultants and myriad other fee clippers feeding off the $1.3 trillion superannuation gravy train,  from industry funds, to public offer-for-profit funds owned by the banks, to the regulatory oversight of probably the second most important area of the financial system after the big four banks.

Take shorting of shares, a controversial issue when the crash was happening and companies such as the banks (especially Macquarie) were in the sights of hedge funds and others. Often the investors borrowed the funds from fund managers or custodians holding shares for super funds. This stock lending earns a fee, sometimes it goes to the fund, more often than not it goes to the fund manager, or custodian, which is wrong. The shares are not theirs to lend. The shares are owned by the fund, not the manager of custodian who are administrators.

The stock lenders (funds, managers, custodians etc) should be forced to explain the sense (financial, not moral) of lending shares to shorters who sell the same shares, thereby driving down the price of the fund holdings in those companies (such as Macquarie Bank, Fairfax Media and others) and damaging the returns and value of the same funds and their members. Often the fees and profits made from stock lending are small, while the losses in value for the shares or whole portfolios are in the millions of dollars. Why should that illogical practice be condoned. ASIC had an inquiry into this, in private.

There are a host of other questions about ASIC’s performance that need to be addressed. Investors of all sizes have issues with its regulation and its approachability. ASIC could be an inquiry on its own.

And then there’s the regulators, the four are Federal Treasury, APRA, the Reserve Bank and ASIC. A fifth regulator is left out of the Council of Financial Regulators, which oversees the financial system. That’s the ACCC. It’s acquiescence was notable when the purchase of Bank West  by the CBA from its broke UK parent was given the OK, while the commission signed off on the acquisition of St George by Westpac, and argued that it would not diminish competition.

And yet, the ACCC is the one the Government, Opposition and consumers look to to solve, resolve, or bash the banks over their behaviour, and yet its consumer protection powers are thought not important enough for the peak body that oversees the financial system That exclusion is illogical.

Both acquisitions have lessened competition. Both Bank West (for reasons of ownership) and St George (rising dud loans in property) were not in the soundest of conditions, but the federal Government’s guarantee system would have supported both through the worst of the GFC. After all, it saved a financial institution that was in worse state in Suncorp, which had more than $18 billion of non-performing loans and was rumoured to be about to be sold when the guarantee system was introduced in October, 2008.

Combined with the RBA’s buying of self-securitised mortgages, St George and Bank West would have followed Suncorp into the stricken but not dead sick bay. St George wasn’t as damaged as Bank West or Suncorp, but it didn’t have the immense strength of the big four.

It’s those two deals, more than anything, that have produced the current structure of the Australian financial system, with its glaring fault line.

No wonder the banks can throw around their weight on interest costs, its a problem of our making and there’s nowhere to go.

And there’s the subordinate, but emerging competition issue of the way the big four send signals to each other on rate rises, led mostly by the likes of Ralph Norris at the CBA and the sainted Gail Kelly at Westpac. It is surely questionable to be talking about rate rises and getting down to margins and sizes of rate rises, without breaching competition rules, isn’t it?