The Reserve Bank’s submission to the Financial System Inquiry chaired by former Future Fund chair and Commonwealth Bank CEO David Murray won’t endear it to the big banks, and probably not the government that established the inquiry, or for that matter, Murray himself.

First there’s the RBA’s overall position on the inquiry.

“The Reserve Bank considers that the current arrangements in Australia for financial stability policy and regulatory co-ordination are working well, and does not see a case for significant change.”

Murray won’t like that. It is the RBA, which was always sceptical of the need for another Wallis-style inquiry, telling him that there’s really no need for much in the way of major recommendations or decisions from the inquiry.

Nor has the RBA done Murray any favours on one of the two issues where the bank does believe some rethinking is necessary, that of a deposit levy. The key suggestion from the RBA for the inquiry to examine is a levy on deposits to finance a bailout fund.

Last year, the Rudd government redux called for a levy of 0.05% on all bank deposits up to $250,000, which would have applied from January 1, 2016, and would have raised $733 million in around 18 months (up to the end of the then four year budget period of 2016-17). It would have been paid into a Financial Stability Fund set up especially.

Needless to say the banks don’t like the idea. Nor does Murray, a former head of the Commonwealth Bank. “It’s the same as putting a tax on the whole economy,” he complained last year to his favourite megaphone, The Australian Financial Review. But the RBA disagrees:

“Another area of work relates to distress management of authorised deposit-taking institutions (ADIs), including the arrangements for the Financial Claims Scheme (FCS). The FCS provides protection to depositors (up to a limit) in the unlikely event of a failure of an ADI, and provides compensation to eligible policyholders against a failed general insurer. The Bank supports the proposal recommended by the CFR [Council of Financial Regulators] in 2013 to introduce a small fee levied on ADIs for the FCS. Such a model, which is now common among depositor protection schemes internationally, would be consistent with the principle of users paying for the benefit provided.”

In part, the levy would address the fact that, as institutions regarded as too big to fail, the big banks enjoy an implicit subsidy from taxpayers, given investors know no government will let them go to the wall.

The other key focus of the RBA is superannuation — it devotes a whole chapter to it. Super has been the biggest change in the financial system in those 17 years, and in reading this submission (and the first financial stability report of 2014 issued last month) there’s a feeling the bank feels sees more possible risks in the super sector than elsewhere. In particular, it is concerned about liquidity risks, given the portability of super and that all members will eventually draw down on it.

“While the superannuation system is often viewed as being in the asset management business, it is also increasingly in the intermediation and maturity transformation business. The sector is therefore exposed to liquidity risk, which will increase as more members draw down their superannuation savings. Superannuation funds will need to balance managing their liquidity risk with their investment profile.”

The bank is also wary of the long-running push to direct more super into infrastructure investment.

“In the Reserve Bank’s view, it would not be appropriate to mandate superannuation funds to invest in particular assets to meet broader national objectives. Rather, investments must be managed in the best interest of the membership.”

“Coming to terms with that will force Murray and his inquiry into some interesting gymnastics not to acknowledge the problem identified by the RBA …”

Moreover, it believes Australians pay too much for super.

“The operating costs of Australia’s superannuation funds are higher than in many other Organisation for Economic Co-operation and Development countries, partly due to the defined contribution (DC) nature of Australia’s superannuation system. While part of this is likely to flow through to relatively high fees, disengagement among members, as well as complexity and difficulty in making comparisons of fees across funds are also likely to play a role. Accordingly, consideration should be given to ways that competitive pressure may be placed on the fees charged by superannuation funds to end users.”

The banks and AMP, which own retail super funds, won’t like that, especially Murray himself, who built up the Commonwealth Bank’s huge funds management operation when he was CEO via the takeover of Colonial First State.

And the RBA also singles out the rapid growth in self-managed super funds, and SMSFs “undertaking leveraged investment and the potential for superannuation funds to ‘search for yield’ in the current low-interest rate environment … at least some of the increase in property investment by SMSFs is a new source of demand that could potentially exacerbate property price cycles.”

It’s the banks that are financing most of the plunge by SMSF’s into negatively geared housing, especially in the two hot spots, Sydney and Melbourne. Coming to terms with that will force Murray and his inquiry into some interesting gymnastics not to acknowledge the problem identified by the RBA, and no doubt by its co-regulator, Australian Prudential Regulation Authority, whose submission is out later today.

Much of the RBA submission is echoed in the extensive submission by the industry super peak body, Industry Super Australia. ISA notes that the need to maintain liquidity levels is one of the factors that prevents long-term investment by super funds, and liquidity requirements rise as members age. Reluctance to invest in infrastructure was also driven, ISA argues, by the costs and perverse incentives of current bidding processes:

“Major infrastructure investors don’t participate in greenfield PPP projects as either a bid sponsor or primary equity investor due to very high bid costs, long procurement timeframes, the absence of a project pipeline, and the tendency for short-term participants to take their fees up front and strip long term value from the project… The long term investment horizon of superannuation funds and their appetite for illiquid assets make them ideal partners for such projects, however, the current process is biased towards short term financiers and contractors and reform is required to level the playing field.”

ISA also takes aim at SMSFs, which “have implications for systemic risk, investing procyclically and taking on greater leverage” and which, ISA says, evidence shows are more costly to run. Industry super, of course, would say that about SMSFs, which are a rival sector, although its submission avoids too much criticism of its traditional rival, retail super.

One of the big concerns identified by ISA is that the relative efficiency of the broader financial system has decreased in recent decades as it has undergone a massive increase in size driven by deregulation, technology, compulsory super and demographic changes: it now costs us more to generate the same amount of capital formation than it did in the 1980s. Then again, our financial sector is far more concentrated now than it was in the 1980s, and not just in banking but in super as well, given the banks and AMP control retail super. Despite the big gains to be had from regaining the sort of efficiency of capital formation we had in the 1980s, that might be another conversation that the banks — and David Murray — might not want to have.