The future strength of the Australian economy will depend upon on how well regulators address the nation’s systemic vulnerabilities, says Financial System Inquiry chairman David Murray.
Discussing the findings of the inquiry at the ASIC Annual Forum in Sydney, Mr Murray argued that the economy is increasingly vulnerable to conditions outside Australia.
The favourable circumstances that applied during the financial crisis would be “extremely unlikely to apply in our favour again,” indicating the need to address weaknesses within the financial system, he said.
Mr Murray contended that the cost of a crisis is on average about 63 per cent of GDP or $900 billion of future growth, equating to 10 to 20 years of economic stagnation and an extra million people on the dole.
Moreover, due to Australia’s reliance on foreign capital, “we felt that the issue of resilience in the system had to be very clearly addressed”.
“When you use foreign capital you must have very high-quality settings on the institutional framework, the quality of economic management, and the quality of the government’s balance sheet.”
APRA member Helen Rowell, who joined Mr Murray on a panel about ‘The post-Murray financial system’, said it was up to regulators to strike the right balance between allowing innovation and managing risk.
ASIC chairman Greg Medcraft said: “We need to think of things more holistically because of structural changes in the economy.”
“We are sometimes a bit too narrow in our thinking about the future,” he added.
The Financial System Inquiry – which was released on 7 December 2014 – examined the future direction of Australia’s financial system and how the system can achieve greater efficiency and resilience.
The inquiry recommended actions in order to make the system less susceptible to crisis.
“[Recommendations] aim to minimise the use of taxpayer funds, protect the broader economy from risks in the financial sector and minimise perceptions of an implicit guarantee and the associated market distortions,” the report stated.
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