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Connexus : Issue 41
settled down because there was so much happening inter nationally in ter ms of regulator y changes impacting on Australia,” he says. But enough time has now passed, says Davis. “ There’s been so much happening in the context of financial regulation, with changes both domestically and internationally, it’s time to sit down and ask the questions: ‘What are the implications of this for the future structure of the Australian financial sector; How are the regulatory changes driving the development of the financial sector; Do they all make sense; Are they consistent; Do we actually have the right vision of how the financial sector works?” In its submission to the Senate Economics References Comm ittee, the ACFS claimed that a major examination of the financial sector is warranted, given the level of competition in the sector and the existence of barriers to entry. Any such review should include “an assessment of the extent to which implicit and explicit government suppor t conveys competitive advantages to particular financial institutions”. The ACFS also believes such an inquiry must consider whether the systemic impor tance of the major banks justifies some form of special regulatory treatment, while an examination of deposit guarantees and a cost‐benefit st udy of the impact of recent and proposed regulatory changes on the economy should also be on the agenda. Davis says, while there is still volatility in global financial markets, most notably in Europe, the trends of international regulation are now becoming quite clear in the wake of the GFC. “ There’s a well-developed inter nationa l regulatory agenda and a need to try and look at all the various changes that are occurring within the context of an overarching view or vision of the financial sector.” In the Deloitte Access Economics repor t, the authors back the view that the efforts of government and regulators to stabilise the financial system during the GFC favoured the major banks over smaller lenders. While government is keen to support smaller institutions, the regulator y framework – in practice and how the market responds to it – operates largely in favour of the major banks. The authors claim that addressing distortions in funding costs and regulatory burdens can help to restore competition in banking markets. Harper says the conundrum with a regulatory framework that emphasises stability is that it 1 The global financial crisis upset the balance between stability and competition in the financial sector that had served Australia well for more than a decade. 2 The GFC and subsequent developments in the financial system have affected the ability of mutuals to access funding competitively and, therefore, compete effectively against the major banks. 3 A banking system that is not competitive will lead to higher prices for services, limited choice and, ultimately, lower levels of borrowing and deposits for consumers. 4 Restoring a more even balance between competition and stability in Australia’s financial system requires a fundamental review of the structure of the system. 5 While funding costs have increased across all financial institutions, mutuals have experienced a relatively greater increase in costs compared with the major banks. 5findings from deloitte Access Economics “obviously favours those institutions that are already perceived by the market as more stable”. “ That generally goes with scale. When you’ve got scale the market worries less about you losing money and, more importantly, if you’ve got scale the market thinks the government would never let you fail. So even without the government doing anything else the market draws its own conclusions.” By contrast, smaller financial institutions get a “black mark” from the market under such a scenar io, he says. “ While no Australian government could reasonably walk away from the failure of a major bank, frankly they could walk away from the failure of a smaller mutual,” says Harper. CoverStory 36 Connexus