My Gripes of Wrath

Girl: I'm looking at borrowing for a house. After all prices will only rise won't they?

Me: I wouldn't be so confident. Economic forecasts are saying that property values will fall between 40 and 50% in the next five years.

Girl: Banks will lend up to 100% of property value.

Me: Have you heard of the sub - prime crisis in the U.S.?

Girl: No, what's that?

2nd Girl: I've heard that banks will even give mortgage loans to pensioners.

Me: I don't believe it. Pensioners don't have a source of income, how can they service a loan?

Rules underpin prosperity.

Following the lessons learnt during the global financial crisis, and the 12 years that have elapsed since the last such exercise, we believe that a broad-based inquiry into the integrity of Australia's financial system is warranted.

While the $40 to $50 billion per annum residential mortgage-backed securities (RMBS) market supplied the funding for up to a quarter of all Australian home loans, it did so with little-to-no government oversight or support.

The growing depth and liquidity of this market enabled the emergence of significant alternatives to the major banks in the form of empowered regional banks and building societies, and smaller non-bank lenders. When this market disappeared due to an entirely external shock - the US subprime crisis - many of these institutions were forced to withdraw from lending altogether or merge with competitors. At least one smaller Australian bank would likely have failed had it not done so.

The biggest beneficiaries of this chaos have been the four major banks. They receive the most favourable regulatory treatment under the existing system, which was not conceived with many of their smaller rivals, and the new markets that they rely on, in mind.

Yet the forced "reintermediation" of the major banks into the residential lending arena has had other unintended effects, with the pressure placed on their balance sheets in turn compelling them to ration credit to the higher risk small business, corporate, and commercial property sectors.

We are still in the midst of understanding the consequences of the global financial crisis and the actions of governments (including Australia's) in response to it. Importantly, it remains uncertain to what degree Australia's comparatively successful performance in navigating through this catastrophe has been due to regulatory foresight or just good luck.

As the saying goes, those who do not learn from history are doomed to repeat it.