Murray report falls short on delivering solutions
Far from providing a workable blueprint for reform, the Murray Financial System Inquiry avoided addressing fundamental flaws in our financial system and devoted far too much attention to areas of little relevance to the stability of our banking system.
For example, the recommendations concerning the composition of superannuation trustee boards and the minuscule level of borrowing by SMSFs have little relevance to improving the integrity of the financial system.
Even the key recommendation for our approved deposit institutions to boost their capital reserves does not ensure that a future government won’t have to bail out our banking system. That recommendation does nothing to address the risks arising from the banks’ heavy reliance on residential and commercial property lending, in many cases on very high loan valuation ratios (LVRs).
Higher capital reserve requirements will ensure that the banks take longer to go broke but it won’t force them to address fundamental flaws in lending procedures. Instead of focussing on the nuts and bolts of our property lending arrangements, the Inquiry has left the running to APRA and ASIC, organisations that have often fallen asleep at the wheel, to address items of concern such as those they announced this week in relation to interest-only loans, high LVRs and the rapid growth of investor lending.
Consider LVRs. Australian home buyers can easily borrow up to 90 per cent or even 95 per cent of generous valuations for terms as long as 30 years. The lenders draw comfort in doing this by requiring mortgage insurance when LVRs exceed 80 per cent. Surely the ability of the mortgage insurers to honour their commitments and their capital reserving requirements would be a crucial element in any review of the systemic risks in our financial system.
The mortgage insurers would be the first institutions to go broke in a major property collapse leaving the lenders unprotected and bearing the full loss. The changes in US lending procedures after their major property collapse all too clearly highlight the risks of high LVRs.
US mortgage lenders will now lend only up to 75 per cent at most of conservative property values making it very difficult for many borrowers to acquire a property. The risks of lending to Australian homebuyers are much higher than in the US because our homebuyers have to service their mortgage out of after-tax income. US taxpayers by contrast obtain a tax deduction for their interest costs.
Without changes to reduce Australia’s high gearing ratios and over investment in property, such as allowing individuals to use their superannuation to help acquire their home, our financial system will continue to be at grave risk from a major property price collapse no matter how large the banks’ capital reserves are.