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Trump can lead financial system reform: David Murray

The Australian 12:00am February 3, 2017

Richard Gluyas

The new Trump administration in the US could use the country’s financial clout to play a pivotal role in the creation of a new, less complex and more widely adopted regulatory regime for the ­global financial system, according to David Murray.

In response to Donald Trump’s pledge this week to “do a big number” on restrictive post-crisis regulation, in particular the all-encompassing Dodd-Frank Act, the head of Australia’s financial system inquiry said it was up to the US to lead any push to redefine the existing rules.

“There’s a lot of concern in the banks about the complexity of regulation,” Mr Murray told The Australian. “I can see a significant opportunity for the US to simplify its regulatory architecture and negotiate a more consistent set of international standards.

“The core issue is whether you believe institutional failure will occur from time to time — the US believes you can manage it if it happens — or if you take the ­European approach, which is to create impenetrable firewalls so it won’t happen.”

Mr Murray’s proposition is broadly similar to that of Mervyn King, governor of the Bank of ­England during the financial crisis until his retirement in 2013.

In a book released last year, Lord King slammed the futile complexity of financial regulation, calling for a simple leverage ratio to replace the Byzantine process of risk-weighting various assets on bank balance sheets to arrive at a capital ratio. Deposits would also be backed by liquid ­assets at — or pledged to — the central bank.

Mr Murray, however, rejected suggestions that the ambitious and long-running Basel round of negotiations for a global framework on capital and liquidity had failed. Basel, he said, was a default position and “it is what we have”, although it would be a better regime if it was more widely adopted.

The controversial commentary came as experts predicted an uncertain future for the Murray inquiry’s key recommendation that Australia’s banks should be unquestionably strong and ranked in the top global quartile for capital strength.

Along with Mr Trump’s promise to effectively blow up Dodd-Frank, they pointed to a demand from the vice-chairman of the powerful House financial services committee that the Federal Reserve should “cease all attempts to negotiate binding standards burdening American business”.

The backlash follows delays and continued wrangling between the US and Europe over the final terms of the Basel III capital framework. The accord, which will inform the Australian Prudential Regulation Authority on its approach to the critical issue of unquestionably strong, was scheduled for completion late last year but has now spilt into 2017.

Deloitte global head of regulatory strategy Kevin Nixon said Basel III had already fragmented, with countries exercising their discretion to interpret the rules in different ways. “It’s hard enough already to convert an Australian capital ratio for a different market,” Mr Nixon said. “But if there’s more fragmentation, how on earth do you manage the requirement to be unquestionably strong, particularly in relation to numerical targets?”

APRA chairman Wayne Byres has previously said that capital strength will not be the only benchmark used to determine unquestionably strong. Mr Byres said in a speech last November that the regulator would also look at rulings by the global ratings agencies, including Standard & Poor’s and Moody’s, and would factor in the results of stress tests.

“Banks that have difficulty demonstrating their ability to survive plausible adverse scenarios without severely curtailing lending and/or emergency capital raisings are unlikely to be seen as unquestionably strong,” he said.

Mr Nixon said the world should be careful about what it wishes for, given the punishing terms of the leverage ratio proposed in the Financial Choice Act introduced (but not yet passed) last September by the Republican Party chair of the House financial services committee.

“Banks choosing the leverage ratio won’t have to complete the usual stress tests and so on, but their leverage ratios are currently in the range of 5-6 per cent so they would have to double their capital holdings,” Mr Nixon said.