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The Age’s economics correspondent Peter Martin noted yesterday that Finance Minister Lindsay Tanner has:
 
“…lent support to a new financial system inquiry. Addressing international regulators in Sydney Mr Tanner said the pace of financial innovation had now "outstripped the capacity" of regulators to keep up. "The world has changed beyond recognition," he told the conference. "Whether we’re talking about the United States or Australia, we need a regulatory regime that’s appropriate for 2010 and beyond, not one that simply reinvents the past”…
 
Former Competition and Consumer Commissioner Stephen King said there was now a real question as to the degree to which the big four banks "were keeping each other honest and were kept honest by facing competition."
 
"These figures show the smaller players are becoming less relevant as a constraint on the banks. We have a straight out competition problem. The last 18 months have reversed a 20-year trend for the banks to face more competition," he said.
 
Professor King is one of the six public policy economists who last week petitioned Treasurer Wayne Swan asking for a new inquiry into Australia's financial system.
 
"The last financial system inquiry was carried out against a background of the banks facing increasing constraints on their behaviour from emerging competitors, and that has turned around - a 180 degree change," he said.
 
What the people who say we don't need an inquiry are ignoring is that the rest of the world is changing. In the UK and other countries the old rule book is being thrown out. We can't act as if we are an island."
 
Australia's Financial Services Minister Chris Bowen Sunday opened the door to a new financial system inquiry saying he "would not rule out" such a review "at the appropriate time".
 
Treasurer Wayne Swan is understood to also be open to the idea of an inquiry after the dust has settled on the current financial crisis.
 
Mr Tanner said Australia’s regulators had been vigilant in overseeing Australia's financial sector but that it was clear that a new international rules were needed. "We cannot simply restore past regulation, as appealing as it may be to some," he added.”
 
Referencing our open letter, the Australian Greens have announced that they will move to establish a Senate Inquiry into Australia's banking system when the Senate resumes in August. Greens Leader Senator Bob Brown commented:
 
“At a time when we need robust diversity in financial systems, we instead are seeing a concentration in favour of banks - and especially the big four banks which are benefiting the most from the Rudd Government's Guarantee Scheme for Large Deposits and Wholesale Funding…I'm mystified as to why Finance Minister Lindsay Tanner can say that the pace of financial innovation has 'outstripped the capacity' of regulators to keep up. The Government showed no such inability when it moved with great speed to provide access for banks to billions of dollars of government underwriting through the Guarantee Scheme. Senator Brown said a Greens' inquiry would encompass the concerns raised recently by leading economists…The last inquiry into the financial system was held in 1996-97."
 
One of the letter’s signatories, Professor Stephen King of Monash University, notes on the Core Economics blog that The Economist has published an excellent article on the complex relationship between competition in banking markets and system stability. Here Professor King remarks:
 
“The bottom line is that competition and regulation of the financial sector are intimately related. I wonder if that means that the RBA will get together with the ACCC to inquire into the next major bank merger?”
 
In a subsequent post, he continues:
 
“A key issue for the banking sector post-GFC is the changes in regulation over the past twenty or so years. Many developed nations set up rules to regulate the banking system in the wake of the 1920s and 1930s depression. However, after 60 to 70 years of financial stability it appeared that these rules were no longer needed. Unfortunately, the GFC has meant that countries around the world are revisiting the deregulation of the past two decades to see if was justified. A nice example from the Economist is presented here.”