Financial sector inquiries have played a peculiarly central role in Australian history.
In 1937 the Royal Commission into Monetary and Banking Systems set the framework for what was to become Australia's insular and credit-constrained post-war economy in the Menzies era.
The Campbell committee, which reported to the Fraser government in 1981, was an even bigger deal. It sparked the deregulation era that opened Australia's economy to the world.
Yet it's unlikely that historians will see Abbott Government's Financial System Inquiry in these sorts of epoch-defining terms. The inquiry, chaired by former Commonwealth Bank chief David Murray, released its final report on the weekend.
Here's why.
In 1979 Keith Campbell was asked to conduct his inquiry "in view of the importance of the efficiency of the financial system for the Government's free enterprise objectives and broad goals for national economic prosperity."
Campbell and his fellow committee members took those three words — "free enterprise objectives" — and ran hard with them. They presented a program of wholesale deregulation of the financial sector so ambitious it had to wait for the Hawke government to implement it almost in its entirety.
Joe Hockey didn't offer David Murray anything as direct as that.
Rather, Murray had the rather anodyne command to offer recommendations for "an efficient, competitive and flexible financial system, consistent with financial stability, prudence, public confidence and capacity to meet the needs of users."
Indeed, the philosophy of financial regulation was one of the things the terms of reference was asked to decide. (To "refresh the philosophy, principles and objectives underpinning the development of a well-functioning financial system".)
So it's hard to be shocked that the Murray inquiry has recommended big regulatory increases.
Indeed, David Murray told ABC's 7:30 last night his inquiry represented a "paradigm shift" away from the regulatory philosophy of the Howard government's more market-trusting Wallis inquiry.
Murray's central recommendation is that banks should be required to hold more capital as a buffer against a future financial crisis.
The idea is that higher capital will lead to fewer bank failures and therefore less pressure on the government to bail out banks. (I wrote about the inevitability of government bank bailouts on The Drum when the Murray inquiry released its interim report.)
Murray says that at most this would only reduce Australia's GDP by less than 0.1 per cent. Sounds piddly, right? But as regulatory imposts go, that would constitute one of the single largest new regulatory burdens in the last few decades.
Yes, larger capital buffers might reduce the whole privatise-the-profits, socialise-the-losses problem. But here's the thing: Australia hasn't had a proper bank crisis for 121 years. The last was in 1893. Neither the Great Depression nor the Global Financial Crisis saw any major bank failures in Australia.
Now, there's nothing to say that we're not on the brink of a catastrophic bank collapse. And all else being equal resilient banks are better banks.
But we shouldn't delude ourselves into thinking that we understand why banking crises hurt so badly, nor the best regulatory restraints to place on banks to help them ride out those crises.
The very idea of "systemic" significance is a relatively new one.
At best, it's a hypothesis based on observations about what seems to have happened during the Global Financial Crisis. At worst, it's a collection of guesses about what could have happened if the American government hadn't bought up toxic assets.
By calling for higher capital, the Murray inquiry is really just following the cues of the international Basel committee, which now drives financial regulation around the world.
Murray wants to make Australian banks "unquestionably strong" by ensuring they're in the top 25 per cent of global banks when it comes to capital buffers. So Australia's theory about what constitutes a safe bank is pegged to whatever other banks are doing.
This sort of cocktail napkin reasoning is a bit of a worry.
But that's how it is. Governments regulate banks like they regulate everything else — according to a bunch of common assumptions, stylised factoids about the past, and half-remembered textbook theory.
As the economist and historian George Selgin wrote on the weekend, all these debates about banking rest on a collection of assumptions about how banks would act in a free market — assumptions almost never explicitly stated, let alone borne out by the historical record.
In the United States, massive, nation-wide banking failures during the Great Depression led to the establishment of a national deposit insurance scheme. The idea has been copied around the world, including in Australia.
But many scholars now blame deposit insurance for the fragility of the banking system. (See, for instance, here.)
One forgotten aspect of the Campbell committee was that while it recommended deregulation almost everywhere, it also recommended new controls to make banks more stable.
Yet as two scholars wrote at the time, the failure of the Campbell committee to back its call for more control with careful economic analysis was "disconcerting".
One could say the exact same thing about the Murray inquiry.
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