David Murray denies APRA ‘too harsh’

THE former banker defends his financial services report.

Head of the financial services inquiry David Murray has handed down an interim report on the state of Australian banks. Picture: John Feder

THE head of the financial systems inquiry, David Murray, has hit back at ANZ chief executive Mike Smith for his “machine gun belt off the hip” response to the inquiry’s interim report.

The report strongly rejects claims Australian banks are being unfairly treated by the Australian Prudential Regulation Authority in its interpretation of the new Basel capital adequacy standards, and suggests that even stricter standards may be in order.

Smith, who is also chairman of the B20 financing growth taskforce, warned this week that tighter regulation of the banking system in the wake of the crisis could ­impede the flow of funds to the economy.

But in an exclusive interview with The Weekend Australian, Murray declares that the Australian banks will “have to come up with a new set of pencils and sharpen them” if they are to prove their argument that they are being treated more harshly by APRA than other banks around the world.

The former chief executive of the Commonwealth Bank says the banks need to “look more closely at the debate around the world after the (global) crisis to understand why people are now looking at tougher standards on capital and liquidity.”

Murray’s comments make it clear that he intends to stand firmly behind APRA in its implementation of the Basel rules on capital adequacy.

The major Australian banks have been complaining for some time that APRA’s interpretation of the rules has been unduly harsh by international standards, and they argue this will have a harsher impact on the economy.

Murray is also calling for a broader national debate on the implications of the blowout in the federal government deficit.

While there is much analysis of the importance of households and companies keeping their debt levels under control, he says there is little debate about the potential problems to the economy of the deterioration in the government’s balance sheet.

“Governments are now the backstop of the financial system,” he says.

“If you have a weaker banking system and an external crisis and a weak government financial position, we are in the same spot as Greece, and the hurt to every citizen is dreadful.”

Murray says Australia is only a small to medium-sized economy that is particularly vulnerable to shifts in the commodity cycle and dependent on the inflow of foreign capital.

This means the government should be under more pressure to keep a strong balance sheet than other, larger economies.

Murray say this backdrop is also a reason to argue for higher capital adequacy ratios to be imposed on the local banks “because if you are going to get buffeted, you need a higher buffer of protection”.

“The commonwealth’s balance sheet has deteriorated. The Australian government can’t incur as much debt as other countries because of the characteristics of the economy,” he says.

“There should be a much more informed and transparent public debate around the tolerance levels of debt in the commonwealth’s balance sheet.

“There is no analysis of it, no public debate, no transparency.”

“All day, every day we have bank analysis which is devoted to looking at counterparties borrowing money and figuring out the optimal level of tolerance for gearing of companies,” he says.

Murray says the inquiry is also concerned about the lack of agreement on the objectives of the ­nation’s compulsory superannuation system.

He says the situation where people can withdraw all their superannuation savings, spend it and then go on the aged pension means the system is not leading to a reduction in demand on the government by retirees.

He says there could be more ­serious distortions in the system over the long term as the amount of money built up in superannuation rises.

“If (the current system) is meant to be a retirement incomes system, it is not doing it. If it is meant to be a national savings plan, the jury is out. There is no clear evidence that (saving through superannuation under the current system) is not just substitution of one form of savings for another,” Murray says.

“If it is meant to help the government and the budget on the aged pension, it is not doing that either.”

Murray says he expects the release of the inquiry’s interim report to help “create an agenda” for a second round of submissions that would be more focused on the points raised.

“Hopefully we haven’t missed any big ones,” he says.

He expects the inquiry to deliver its final report in November.

Murray resigned as an adviser to Credit Suisse after being appointed to head the inquiry last year.

He is currently doing pro bono work, advising some indigenous groups on how to approach their investment plans for money flowing in from the native title claims.

He has also recently joined the board of Indoor Skydiving Australia, which listed on the ASX last year. The company was set up in 2011 to develop indoor skydiving facilities around Australia starting with a new venue which recently opened in Penrith in Sydney’s west.

Murray says he has not gone indoor skydiving himself yet.

“I haven’t done it yet but I will. The place hasn’t been open long.”

The former chairman of the federal government’s Future Fund says he has no specific plans for what he may do next year after the inquiry is over.

“I really don’t have any plans at the moment,” he says.

“I might become a journalist,” he jokes.