* Interim review didn't make recommendations, outlined
* Says nation's financial system working relatively well
* One policy option is to ringfence bank activities
* Options to reform superannuation, help smaller lenders
* Full report due by November
(Recasts, adds banking association and analysts' comments)
By Swati Pandey
SYDNEY, July 15 Australia's main lenders are
seen as too big to fail and policy options to reduce that
perception include ringfencing critical banking activities and
boosting capital requirements, according to a government-backed
The inquiry, which is also considering reforms to the
superannuation industry and steps to help smaller lenders
compete better, has not made any recommendations at this stage
but will hold further consultations with the industry before
issuing a final report due by November.
The report, chaired by David Murray, a former head of the
Commonwealth Bank of Australia, has been tasked with
providing a blueprint for the financial system over the next
It is the first major financial system inquiry since the
Wallis Inquiry of 1997 which led to the creation of the nation's
banking regulator. The Campbell Report in 1981 led to the
floating of the Australian dollar and the deregulation of the
The 460-page report found that Australia's financial system
has performed "reasonably well" in facilitating economic growth,
but faces challenges including fiscal pressures, slowing
productivity growth and technological change.
Ringfencing, just one of a slew of policy options tabled,
might involve separating commercial banking from investment
banking or insulating domestic operations from risks in offshore
"It is clear that some of the issues raised (such as
ringfencing) will be challenging for banks," Steven Munchenberg,
Chief Executive of the Australia Bankers' Association said.
But the review also noted ringfencing would be a very costly
option, may introduce barriers to foreign entrants and limit
Australian banks' ability to expand internationally.
"My view is that we won't see recommendations for
fundamental changes. In many cases, they are only concentrating
on areas where they think a change is required," said Michelle
Levy, a partner at law firm Allens.
HELPING SMALLER BANKS
Australia's banking sector is dominated by its big four
lenders - Commonwealth Bank of Australia, Westpac
Banking Corp, National Australia Bank Ltd and
Australia and New Zealand Banking Group Ltd - all of
which are on track for a sixth straight year of record profits.
But they have been criticised for having certain funding
advantages that stem from being perceived as too big to fail,
The review said the perception that some banks were too big
to fail became entrenched during the global financial crisis,
and that reversing these perceptions and their associated moral
hazards has been a focus of international regulators.
Other options include increasing the regulators' ability to
impose losses on creditors of a financial institution in the
event of a failure. Smaller lenders could also be helped with
getting further accreditation that would help them compete
"This is probably one of the easiest ways to level a playing
field -- give them assistance in getting accreditation. And that
could in turn increase competition," said TS Lim, banking
analyst at Bell Potter Research
RETIREES AND REGULATORS
The report also said operating costs and fees in Australia's
superannuation or mandatory retirement savings sector appear
high by international standards and there was scope for fees to
fall significantly over time, the report said.
The sector - greater than the size of Australia's economy -
is expected to be worth A$6 trillion ($5.6 trillion) by 2030,
according to industry estimates.
Other measures that could be considered include making
compulsory the use of some retirement income products. It also
noted that borrowing by superannuation funds was on the rise and
had the potential to pose a risk to the financial system.
The report highlighted the need for a developed domestic
bond market and said policy options include allowing listed
issuers to issue 'vanilla' bonds directly to retail investors
without the need for a prospectus.
It also identified boosting independence and accountability
at Australian Prudential Regulation Authority and the Australian
Securities and Investments Commission as a policy option.
"One of the recommendations that we'll see is that APRA and
ASIC have greater powers to regulate sectors or companies that
are outside their remit," Allen's Levy said.
($1 = 1.0647 Australian Dollars)
(Reporting by Swati Pandey; Editing by Jane Wardell and Edwina