* Interim review didn’t make recommendations, outlined options
* Says nation’s financial system working relatively well
* One policy option is to ringfence bank activities
* Options to reform superannuation, help smaller lenders also listed
* Full report due by November (Recasts, adds banking association and analysts’ comments)
By Swati Pandey
SYDNEY, July 15 (Reuters) - 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 interim review.
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 decade.
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 financial sector.
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 activity.
“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.
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 better.
“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
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 Gibbs)