Murray’s Misdiagnosis: Analysis of the Interim Report of the Financial System Inquiry

Reading through the Financial Systems Inquiry you would be forgiven for thinking that David Murray – the chief author of the report- was some sort of political economist. There is talk of information asymmetries, market failures and the prospect of instability. But unlike political economists, these unorthodox views have not led Murray to any radical or revolutionary conclusions. What he offers is a simple refresh on Australia’s financial system.

Market economics 101

Murray’s ambit was broad, with topics ranging from the exponential growth of the superannuation sector, stability and regulation post-GFC and funding problems for business. These things are inevitably interrelated and highly contested. The report has drawn criticism and praise, and surprisingly little response from the Coalition government – which probably has a thing or two to do with differing positions on financial advice. The biggest take-aways from this report are the commentary on competition and lack of substantial commentary on the problems small businesses face in accessing funds.

Where are the competitors?

Murray’s inquiry has shone a light on the state of competition in the banking sector and it does not look good.  The fact is the banking sector is concentrated.

As the graph below shows, market share for all types of lending has increased for the big four banks since 1990. This is significant on two fronts. Not only has competition decreased since Four Pillars was introduced by the Hawke/Keating government in 1990, but it also decreased since the GFC, with the report indicating that the four big banks total share of ADI assets increased from 65.4% in September 2007 to 78.5% in March 2014.

Murray's Misdiagnosis1

This is surprising in a number of respects. Australia has been pursuing the market nirvana of competition since the Campbell Inquiry paved the way for financial deregulation, floating of the dollar and the entry of foreign banks into Australia in 1981. Sixteen years later the Wallis inquiry maintained the virtues of competition and vigorously argued for further de-regulation, including the removal of the Six Pillars policy (now Four), to enable the best functioning of the financial market. The results Murray has provided show that the ideal of competition remains solely a rhetorical flourish.

Cheap as chips

Surprisingly, Murray’s report seems largely unperturbed by these figures. In fact he suggests that despite the increased level of concentration, competition exists. He points to the decline in net interest margin rates as a way of explanation.  Indeed, as the graph below shows, net interest margins have halved in the 23-year period since 1990 for the major as well as regional banks.

Murray's Misdiagnosis2

To further substantiate his point he indicates that this decline has not occurred in other equivalent financial systems in the world, as the graph below shows.

Murray's Misdiagnosis3

This is undeniably considerable. However it is wrong to associate the decline in net interest margins with competition when it has much more to do with the changing cost of money. As the graph below shows, Australia suffered from astonishingly high cash rates in the early 1990s and is now experiencing historic lows.

Australia’s official cash rate since 1991

Murray's Misdiagnosis4

All this is to say that the question of competition in the banking sector remains a moot point. Taking this to be true, further consideration should be given to the maintenance of the Four Pillars Policy in its current form as it has all but produced a competitive environment.

You’re not interested in me!

Murray’s inquiry also suggests that customer satisfaction with the banks has improved since 2001 and is now at record highs. This is interesting because of the increased concentration of the sector over the same time period.

This satisfaction is not universal however with the exception lying, unsurprisingly, with small and medium businesses. Not only are banks more willing to lend to 18 year olds, the process to finally get approval takes a very long time.

The best way to measure this dissatisfaction is by the interest rate spread between their loans and simple personal mortgages. As shown below, this spread broadened over the period since the GFC.

Murray's Misdiagnosis5

Murray does not offer much to rectify this. His suggestion of a SME finance database to remove the ‘information asymmetries’ seems lackluster at best and a misdiagnosis of the problem at worse. In short, there is more than a lack of information in the way of banks lending to businesses and this has to do with the different levels of capital required for the banks to hold for business loans. As such this is a regulatory issue. With the specter of the GFC still present, major changes to loosening regulation seem unlikely.


Murray’s inquiry has offered one interpretation of how to address the major systemic problems of Australia’s financial system. It has some salient points about the superannuation industry, negative gearing and the moral hazard associated with big banks. The analysis of competition and the unaddressed issue of small businesses accessing funds leave one wanting.

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