A history of failed reform: why Australia needs a banking royal commission

2014 Parliamentary Joint Committee on Corporations and Financial Services Inquiry

This inquiry included proposals to lift the professional, ethical and education standards in the financial services industry. It aimed to clarify who could provide financial advice and to improve the qualifications and competence of financial advisers; including enhancing professional standards and ethics.

2015 Murray Inquiry

This inquiry was intended to provide “a ‘blueprint’ for the financial system over the next decade,” but fell somewhat short of this in not critically addressing the concentration or restructuring of the main banks. While acknowledging the high concentration and vertical integration of Australia’s banking industry the inquiry’s approach to encouraging competition was to seek to remove impediments to its development. The inquiry aimed to increase the resilience to failure with high bank capital ratios, and to reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintained sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds.

In contrast to the limitations of the Australian reform process, more ambitious reform of the banking sector is being actively considered in the rest of the advanced economies. This is because of widespread international concerns regarding bank monitoring and standards, and the continuing threat of systemic risk and failure.

The objective is to create more effective competition, greater choice, improved governance, more balanced incentives, and responsible behaviour and performance. Central to international reform proposals is the intention of:

• shielding commercial banks from losses incurred by speculative investment banking

• preventing the use of public subsidies (eg central bank lending facilities and deposit guarantee schemes) from supporting risk taking

• reducing the complexity and scale of banking organisations

• making banks easier to manage and more transparent

• preventing aggressive investment bank risk cultures from infecting traditional banking;

• reducing the scope for conflicts of interest within banks

• reducing the risk of regulatory capture and taxpayers exposure to bank losses.

Among the ongoing international initiatives to reform the banks are the UK Banking Reform Act, which includes ring fencing retail utility banking from investment banking, due for implementation in 2019.

In the US, the 21st Century Glass Steagall Act, proposed by Elizabeth Warren and supported by Democratic nominee Hillary Clinton, involves separating traditional banks that offer savings and checking accounts from riskier financial services such as investment banking and insurance.

In Europe, the Liikanen Plan, announced in 2012, proposes investment banking activities of universal banks be placed in separate entities from the rest of the group. This has already been taken up widely throughout the European banking sector.