By Jill Fraser for Lending Central

Six prominent economists are urging the government to consider setting up an inquiry into Australia’s financial system - the first in more than a decade.

In the line of fire is the growing power of the Big Four banks and the diminishing competition in the banking sector caused by the demise of the non-banks and second tier banks.

In an open letter sent to the Prime Minister and Treasurer the six signatories ask whether real competition can emerge while consumers face significant costs in switching between financial institutions, and if a government-regulated securitisation market provides an opportunity to consolidate mortgage account standards and more effectively enable switching.

The letter begins by stating: “Ever since the severe market failures in Australia’s securitisation industry were identified in 2008, we have been concerned that these problems were partly attributable to more fundamental flaws in Australia’s ageing regulatory architecture and the inadequately defined role of government in dealing with such crises”.

The signatories query whether Australia’s relative resilience throughout the global financial crisis is the result of regulatory foresight or simply good luck and what effect the whole or partial nationalisation of banking systems around the world will have on Australian institutions and, more specifically, on our ability to source foreign credit.

One of the signatories, Dr Nicholas Gruen, CEO, Lateral Economics who spoke to Lending Central said the danger is complacency off the back of Australia successfully navigating its way through the financial crisis comparatively intact.

The letter goes on to say: “This cataclysm was imposed upon us by the increasingly interconnected and globalised nature of capital markets. These interdependencies also extend to government policy.. As a nation with a large foreign debt that has continually increased its liabilities via enormous current account deficits, Australia’s vulnerability to foreign shocks is in many respects greater than most of our peers.

“It is, therefore, critical that policymakers take this opportunity to thoroughly review the existing system and evaluate whether changes need to be made to it.”

The signatories suggest that the government could play a useful role in the financial system - providing basic financial services - simply by expanding the use of existing government infrastructure.

One proposal is a ‘people’s bank’ as per the publicly owned KiwiBank in New Zealand, which harks back to the old Commonwealth Bank model before it was sold off.

Gruen tells a story of his son’s teacher seeking his advice on a safe place to put several hundred thousand dollars for 12 months.

He hopes that the subsequent introduction of a Government guarantee allayed her fears of bank failure. But projecting three years on, when the guarantee is lifted, he maintains that the safest place to stash money will be in our Australian Taxation Office accounts.

Pointing out that most of us possess an ATO account Gruen says the most risk free course of action would be to transfer money via the internet into this account. If the account goes into credit he advocates that interest could be accrued.

“Since the government already helps itself to penalty interest if you’re late paying tax it seems only fair that it pay interest on your surplus,” he says.

Software that would enable internet payments between anyone with an ATO account would turn this into a “dirt cheap, simple and safe savings and payments product”.

“Anyone can bid for an agency - Australia Post, Westpac, Woolworths.. - and it’s all anchored to a simple secure system that more or less already exists,” says Gruen.

Shrugging off an apparent lack of interest shown by Treasurer Wayne Swan’s office to the letter, which was delivered on Tuesday, Gruen maintains that the motivation behind it was simply to stimulate discussion.

“So it’s already done its job,” maintains Gruen.” We didn’t expect him to stop eating his muesli and say, what a damn good idea we’ll have to implement it next week.”

The signatories on the letter headed Australia Needs a Comprehensive Financial System Inquiry are Professor Joshua Gans (Director of Centre for Ideas and The Economy, Melbourne Business School), Dr Nicholas Gruen (CEO, Lateral Economics), Christopher Joye (CEO, Rismark International), Professor Stephen King (Dean of Faculty of Business & Economics, Monash University), Professor John Quiggin (Australian Research Council Federation Fellow, University of Queensland), Dr Sam Wylie (Senior Research Fellow, Melbourne Business School)