In its submission to the Financial System Inquiry, Regnan also pointed to the influence of the financial sector over other parts of the economy as a something that warrants “particular vigilance” on the part of government.
Compulsory and tax-advantaged superannuation has the effect of inflating funds flowing into the financial sector, said the submission.
“We note an emerging body of research concluding that beyond a threshold level, financial sector size and growth have a negative association with stability, economic growth and productivity,” Regnan said.
The submission pointed to research that suggests large and/or fast-growing financial sectors divert financial. political and human capital from other sectors, and that financial sectors ‘crowd out’ real investment.
“Regnan identifies intermediation and short-termism as a further means by which the size and composition of the financial sector may hamper economic and productivity growth,” said the submission.
“Businesses and their customers (at one end of the investment chain) and long-term investors/beneficiaries (at the opposite end) are subject to significant intermediation by financial sector participants whose priorities and preferences can differ substantially from those of either group.”
This “fragmentation”of the industry hinders the efficiency with which the market is able to connect seekers and providers of ‘patient capital’, said the submission.
“Via trading practices oriented towards returns over short timescales, intermediaries can express and thereby encourage neglect of initiatives which build resilience and underpin future performance, such as R&D, energy efficiency investment, or training programs,” said Regnan.
“Numerous studies confirm that capital allocation within companies does in fact exhibit myopia of this sort.”
Trading and ‘speculative’ behaviours can result in an overemphasis on price rather than on broader measures of value, said Regnan.
“By confounding the price signals sent by long-term investors with sentiment and momentum-based signals, such intermediation can weaken the investment case for others who might otherwise invest for the long term,” said the submission.
“This feedback loop further limits the incentive for financial and industrial actors to invest in future growth and productivity.”
