Well, thank you, Ross, and thank you for the invitation to be here, and I very much enjoyed listening to Kevin's introduction to a number of the issues. What I'm going to do is to talk a little bit about the context. I was invited to come and talk about things to do with the inquiry, not macroprudential tools per se, or monetary policy for that matter, which will disappoint many, no doubt. But I want to talk about some of the context in which the inquiry has been working and a few observations about some of the issues that they're taking up.

The context is quite interestingly different to the context of predecessor inquiries. If you think back to Campbell, it was overtly deregulatory. That came after a long period of intense regulation by which time, I think, we had become quite attuned to the limitations of that regulatory world. And so Campbell was very deregulatory. Actually, it took quite a long time for the implications of that liberalisation to work through. Probably the regulatory changes themselves and the admission of foreign banks and the float of the dollar and so on, that was all completed by the mid-eighties, but it wasn't until the mid-nineties that we then had the burst of new banks in the system, a very big run-up in credit, the leveraged entrepreneurs flew high and then crashed. The banks licked their wounds and began to recover.

So that takes you up to about the mid-1990s. Then we had Wallis. And that, I would say, responded to some very interesting and important trends that were taking place. It had a focus on regulatory architecture, on payments issues – some of the ones Kevin has just talked about – technology and so on. Some of the things foreshadowed by Wallis perhaps didn't turn out, but I think the regulatory architecture that resulted from that work that we still have, has turned out to work reasonably well. Of course, Wallis, we now know, reported right in the middle of what internationally is known as the Great Moderation, the nicest period of macroeconomic stability globally, at least since the sixties. And certainly in this country, relative economic performance compared to the rest of the world, the best, probably, since World War II. So that was a very benign period.

This inquiry, of course, comes post a very serious crisis. That crisis had a less deleterious effect on Australia than elsewhere. I think it's fairly well accepted that the regulatory setup in Australia, largely a Wallis era design, serves us pretty well. That isn't to assert it's perfect – I wouldn't assert that – or that no adjustments might be made or that there are no lessons; there certainly are. But basically, it worked reasonably well. And so, it strikes me that proposals for radical reform there are probably not getting much traction, though ideas for some adjustments may deservedly get attention. So we were able to stabilise the system actually fairly quickly and fairly effectively when the crisis really erupted seriously.

And I think one reason for that is that the major institutions were actually adequately well capitalised ex-ante. And they are able to go to the market credibly – not long after Lehman failed, actually – and get more capital. And they stayed strong throughout, which says something about their management and, I think, supervision. But, of course, globally – so that's Australia – globally, the crisis was easily the worst of its kind for a very long time. And so that has fundamentally changed the pre-existing balance between liberalised markets and regulation.

The conclusions that are being drawn, you all know them. The largest banks globally had nothing like enough capital. There was inadequate visibility of risks they were running. There was a lot of interconnection through capital markets and derivative markets, more than had been appreciated, and a lot of so-called shadow banking turned out to be quite risky. Some segments of capital markets closed. Interestingly, in Wallis, the capital market and its role in funding the economy was seen as very important. It turns out that some segments of those markets actually closed post-Lehman. Extensive public intervention was required to stabilise this internationally, and even now that intervention continues. It's certainly not behind us in some jurisdictions; think of Europe, for example. And then that's before we mention the conduct issues that Kevin talked about.

So, on the one hand, the inquiry has the Australian experience, which has actually worked out reasonably well – not perfect, but pretty good – and on the other hand, globally, a sense of regulatory failure prior to the crisis, and the scope and intensity of regulation globally has gone up by orders of magnitude. I can tell you from personal experience just trying to keep up with all the initiatives and the 72 work streams that the Financial Stability Board has – that is not an exaggeration – is a full-time job.

So that's a very different global environment. And so the inquiry, I think, has the opportunity to help us develop a nuanced understanding of why we did relatively well through the crisis; also to help us avoid complacency about that success; and it can help us think about what we can learn from the lesson – the problems and experiences of others – what other challenges might come our way and what further developments of our own system might be in order.

One thing that is clear in the inquiry, I think, from the interim report is the need for Australia to continue to adopt international standards. Well, I very much agree with that. It's sometimes inconvenient to adopt international standards, but we have a good record of doing so. We have a good record, also, of, I would say, adopting them in a way that's sensible for our circumstances. A good example of that is the liquidity coverage requirements which will come in in another year or so.

There's not enough government debt in Australia for our banks to comply with that, so we invented another way of doing it – the Reserve Bank and APRA designed it – through our Committed Liquidity Facility, that will enable compliance with the same sort of pricing as there would've been had there been enough government debt for the banks to hold. So that's an example of applying the international standard, but doing it in a way that works and makes sense in our setting.

It's sometimes objected that we're going above the international standards, maybe in how quickly we moved to Basel III, or in the fact that we have, in certain ways, more demanding standards for what you can call capital in Australia. Well, what I would say about that is the international standards are minima, not maxima. It's served us well to be above them at times in the past – I think we tend to forget that – particularly on the definition of capital, where the rest of the world, if anything, has moved in the direction of the place where APRA has always been on that. And I think the evidence that being more demanding in these various respects, having led to material difficulties for our banks in raising funds or growing their businesses or returning profits to shareholders, well, I don't think there is all that much evidence of any significant adverse affect from high standards.

The interim report of the inquiry has a balanced view on regulation, accepting that while we don't assume it's needed in every case, sometimes it is. There is, I think, generally, support for the overall structure of regulation, and there is a call for regulators to be strong, independent and accountable. I want to emphasise that. I think that's very important. It's long been accepted that central banks ought to be independent within their mandate, and also accountable. I think it's equally important for bank supervisors and other financial regulators to be just as independent. And it's important that we maintain that as we go into an era of restraint on government resourcing.

I think it's very sensible that the inquiry has a focus on the efficiency of the administration of the superannuation system. I don't start with a presumption that there's a problem there. I simply observe that something that's 100 per cent of GDP in size probably matters. If it's run efficiently or not, and that's a question at least worth asking, without having any particular predisposition as to what the answer might be.

One of the important issues that the inquiry is grappling with, and we all are, is too-big-to-fail. That is very much in the minds of the international regulatory community. And the responses here – I guess you know them all. They're mainly in two dimensions. One is more capital and better capital, so as you lower the likelihood of failure of a globally systemic institution, and the other part is building better resolution capability in the event that a failure is about to happen. That does involve – at least the proposal that will come forward ahead of the leaders' summit in Brisbane, and which we talked about in Cairns just last week, will involve proposals for bailing-in certain classes of creditor when an entity is on the brink of failure. And the intent of all that, of course, is to at least obviate the need, if it all possible, for public funds to step into the situation.

This is a complex area, as Kevin laid out, I think very well. There are many reasons for caution here. Not least that, as far as I know, there are very few, if any, examples of large scale bail-in of senior unsecured creditors to resolve a large bank working successfully. You know, in theory, this is possible. To my knowledge, it hasn't been done in practice. It doesn't mean it can't be done, but there are various considerations to think through here, and great care in design is required. And I think the inquiry has understood that very clearly. So that's very welcome.

The other thing to say about resolution, of course, is that it's more than just about bail-in. Actually, equally important, is the requirement to have extensive cross-border cooperation. We're talking about G-SIBs here, globally systemically important banks. Inevitably, a failure is a cross-border event, so cooperation across borders, recognition of resolution actions that are taken in other countries, stays on derivative contracts temporarily so people don't rush for the exits and try to grab all the collateral, all these things are just as important, in the resolution of an entity like that, as being able to bail-in creditors. And I think it's fair to say that the experience post-Lehman showed how hard it is to do that cooperative action across borders.

So there are many issues in addressing too-big-to-fail. It's complex. It's possibly intractable. We should proceed carefully. But I suppose the other thing to say is, if we think if we just sort of ignore it and it'll go away, probably that's not the right strategy. The best course, surely, is for some concrete proposals internationally to come forward, as they will in Brisbane. They're proposals – they're not an agreement – they'll be tested with a quantitative impact assessment, extensive consultation and so on, and that'll take probably a year before final proposals could be agreed, and then it will take some years, I would guess, for the proposals to actually come into force.

These are for global systemic banks. They're not for domestic ones; so not directly applicable in our case. But the thinking and the analysis no doubt will inform our own contemplation of those issues for Australia. I suppose I would say that if we're going for more loss-absorbing capacity generally, personally I think if a fair chuck of that actually came from equity, that will be a good thing, though the international proposals will include some kind of minimal requirement for bail-in-able debt.

Stepping back from all that, just before I finish, I guess we can ask, what is it we want the financial system really to achieve? And we set this out in our submission to the inquiry. I think there are four things. We want allocation of savings efficiently. We want liquidity services provided to the community. We want payments services to be provided. And we want – we want risk to be priced, properly allocated around the system to those who wish to bear it and know what they're doing. For that to happen, we need risk to be recognised fully, and we need to be clear about who bears it. Let me say clearly that there is a very important sense for the economy in which risk-taking is good. Risk-taking is good. Risk-taking is not, per se, bad.

Right now, of course, a feature of the world economy is there's a lot financial risk-taking, not all that much real economy risk-taking, the entrepreneurs with a project, an idea, a market, a product, a new worker, that kind of risk-taking, which is the one we really want. There's less of that than we would like, and quite a lot of financial risk build-up, and that's the inherent tension that the global central banking and regulatory community are grappling with.

But that risk-taking, that real economy risk-taking, is good, and we want the financial system to be able to be support that, effectively support the economy but not bring the economy down. In the words of Ed Friedel, a former colleague from the Federal Reserve Bank of New York years ago, we want the financial system to be the handmaiden of industry, not the Queen of England. I think that is key.

So we want risk to be recognised in the system. We want it to be clear who bears it. And the right kind of risk-taking is good, provided it's clear who bears it and that those who are bearing the risk and getting the return can be left to bear the losses when it turns out to be losses, and that of course brings you to too-big-to-fail and why this is inherently so hard.

One final point about too-big-to-fail, I guess, is the proposals that will come for it are about idiosyncratic events. So if they're about a set of events that might push one major systemic institution to the brink of failure, with all the attendant spillovers that they may bring, they're not really going to be able to be adequate protection against the systemic situation where all of the large institutions are in trouble, and I think on that, to be frank, there will be events sufficiently far out in the tail of the probability distribution where the private sector risk absorbency will never be able to be enough, at least not at any sensible price. And so if one of those events happens, God forbid, then the public sector, the regulators, are still going to be faced with a difficult decision of what to do.

I think what the too-big-to-fail agenda, globally, is trying to do is address the problem that we face that events which were not that far in the tail, actually, turned out to have a sufficiently big impact on the global banking system that the system needed a public rescue. So we don't want to repeat that. We want to make sure that the tail events that would really bring in the public purse really are very much right out in the tail and not just a 1 in 10 or 1 in 20 sort of event.

So they're my reflections, Mr Chairman, and I think as I say, the inquiry comes at an interesting time, and it provides the opportunity for us as a community to grapple with some of these issues in a timely and thoughtful way, and I think it's on a very good track to achieve that.