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Australian financial inquiry warns on housing boom

An inquiry into Australia's financial system highlighted in a report on Tuesday the risks its booming housing sector has on economic stability and perceptions its major banks are "too big to fail".

SYDNEY: An inquiry into Australia's financial system highlighted in a report on Tuesday the risks its booming housing sector has on economic stability and perceptions its major banks are "too big to fail".

The inquiry is the first major investigation into the finance sector since 1997 and follows the global economic crisis, which revealed the risks and damage caused by banking collapses.

"The financial crisis has changed the way we think about vulnerabilities," inquiry chairman David Murray, a former chief executive of the Commonwealth Bank, said in a speech. "Sustaining confidence in the Australian financial system has been central to the work of our inquiry."

The 460-page interim Financial System Inquiry report comes ahead of the release of the final review in November. It did not make any recommendations but canvassed a wide range of options to address possible concerns, including the effectiveness of financial regulators.

One of the regulators -- corporate watchdog the Australian Securities and Investments Commission -- has been criticised by consumer advocates for its perceived friendliness to big business. The inquiry warned that the housing sector, which boomed as interest rates fell to record lows following the global crisis, was "a potential source of systemic risk for the financial system and the economy".

"A large enough disruption to the housing market could have significant implications for household balance sheets, financial stability, economic growth, and the speed of recovery in household spending and broader economic activity following a shock," the report said.

But the inquiry did not support macro-prudential tools such as tougher housing lending rules, which are already in place in New Zealand and Britain, to reduce risks to financial stability.

Competition in Australia's banking sector, which is dominated by the big four of ANZ, Commonwealth, National Australia Bank and Westpac, was given a tick of approval, although Murray added the industry had become "more concentrated".

The inquiry said perceptions that some financial institutions were "too big to fail" could be tackled by stronger regulations, including higher capital requirements, and the "ring-fencing" of banks' retail and investment divisions.

The report also focused on the country's growing A$1.8 trillion ($1.7 trillion) superannuation, or pension, sector, which it said was significant to the overall financial system. It criticised the high fees people have to pay for superannuation -- a mandatory retirement fund for Australians, saying it was among the highest in the Organisation for Economic Co-operation and Development.

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