Supplementary Submission to the Financial System Inquiry Introduction

The Reserve Bank of Australia has prepared this Supplementary Submission in response to the Financial System Inquiry Interim Report (Interim Report, FSI 2014).

The Bank's initial submission outlined key developments in the Australian financial system in the 17-year period since the Wallis Inquiry, and raised some areas where the Committee might consider directing its attention (RBA 2014). This Supplementary Submission is narrower in scope, focusing on the issues raised in the Interim Report that directly relate to the responsibilities of the Reserve Bank for the efficiency and stability of the payments system and the stability of the financial system more broadly. The detailed analysis contained in the initial submission, though relevant to many of the issues raised in the Interim Report, is not repeated here.

The Bank supports many of the key themes set out in the FSI's Interim Report, including, in particular:

• the general support for the existing regulatory architecture
• the call for strong, independent and accountable regulators
• the broad support for a strong prudential framework, grounded in global standards and tailored appropriately to Australia's circumstances
• the focus on mitigating systemic risk and improving the resilience of the financial system
• the recognition that regulation is sometimes needed to ensure efficient outcomes, especially in payment systems
• the consideration of impediments to efficient provision of small business finance
• the focus on the cost and efficiency of the superannuation system
• the emphasis on the efficacy of consumer disclosure and financial advice, as well as improving consumer engagement.

The following are five points that the Bank considers are worth emphasising.

1. Reforms over the past decade or so have been effective in improving competition and efficiency in payment systems. The Bank's current approach to payment system regulation, as overseen by the Payments System Board, remains appropriate. However, there may be scope to clarify how purchased payment facilities are regulated.
2. The Council of Financial Regulators (CFR) has worked well and cooperatively under its existing informal arrangements and charter. If there is appetite to formalise arrangements and/or increase the responsibility of the CFR, care should be taken to ensure that the existing powers and independence of each member agency are not eroded, and that the emphasis on cooperation remains.
3. Any proposed new measures to enhance system stability should account for the work already underway – globally and domestically – to improve the resilience of the financial system. This is a challenging area for policy development; hence, care should be taken in implementing new policies and consideration given to how these changes may interact with pre-existing policies.
4. Superannuation assets should be managed in the best interests of members. Measures to lower costs and fees, optimise liquidity management and limit leverage should be considered.
5. The supply of mortgage finance in Australia is ample. Therefore, any proposed policies that could further increase that supply should be subject to rigorous analysis of their costs, benefits to consumers and risks to financial stability.

The Bank supports the general principles for government intervention outlined in the Interim Report (FSI 2014, p 1–7, Table 1.1), though, as the Report notes, these can at times be conflicting. The challenge is to balance the competing objectives; for instance, to weigh the merits of a targeted response that minimises costs against the demands for competitive neutrality. This task is complicated when there are multiple proposals for reform, and when their interaction and cumulative effects are difficult to be precise about in advance.

The period following the financial crisis rightly saw an array of regulatory reforms agreed internationally. Implementation schedules were drawn out, to avoid hampering growth in economies where financial sectors were weaker. Thus some of these reforms will only be completed in the next few years. It will be important to monitor the effectiveness of these policies and to be prepared to adapt accordingly. While all of the general principles for government intervention will be important in this, the Bank – together with the Australian Prudential Regulatory Authority – has previously emphasised the importance of taking a system-wide approach in assessing the appropriateness of intervention and will continue to do so.

The remainder of this Supplementary Submission expands on the five points emphasised above, addressing some areas on which the Interim Report has sought views or further information. The common thread of many of these points is a consideration of the benefits to the economy from productive risk-taking against the significant costs of imprudent risk-taking.