THE nation's banks are ill-equipped to finance a looming pipeline of critical infrastructure due to their reliance on volatile foreign funding markets, NAB chief executive Cameron Clyne says.
In a call for "urgent" reforms to wean the banks off overseas funding, Mr Clyne on Tuesday night said the Australian banks' heavy use of wholesale funding markets still posed a key economic risk.
With banks raising up to $100 billion a year from overseas and many foreign lenders retreating from Australia, Mr Clyne said local banks were "not set up optimally" to finance up to $700 billion in infrastructure that would be needed in future.
"Australia's banking system is not optimised to finance smoothly the long-term investments which Australia currently needs. This needs to be urgently addressed if we are to prosper over the coming decades," Mr Clyne said in Sydney.
While there was no single solution to the issue, Mr Clyne suggested policies such as a greater allocation of retirement savings towards fixed-income products, a deeper domestic bond market, and tax changes.
He made the comments while arguing that the public debate on bank profits and interest rates should move on to include the sector's long-term funding needs.
The big four have cut their use of overseas funding significantly since the global financial crisis, mainly by competing fiercely for domestic deposits.
However, Mr Clyne said it would be "wasting a crisis" if further action was not taken to give banks more flexibility to fund themselves in the event of another financial meltdown.
"We should look at all our future funding needs and how we can protect the Australian economy and Australian jobs from any future international shock," Mr Clyne said.
"If we can take action now to ensure that Australia's future growth is less exposed to the vagaries of the international markets then we should do it."
The Coalition has pledged to hold a sweeping inquiry into the financial system if it wins government and Mr Clyne said such a probe needed to be more targeted than previous banking inquiries.
Besides funding, he said any inquiry should also examine how banks could lend more to Asia, as well as capitalising on the region's growing demand for financial services.
"If we are to have another inquiry into the finance sector, we must make it count.
"We must focus on the fundamental issue of how we fund the future of Australia and ensure we are ready, willing and able to be an engaged partner in the Asian century," Mr Clyne said.
In a sign of the industry's regional integration, figures published on Tuesday showed Asia had driven a surge in the amount of capital foreign fund managers were investing here.
A report commissioned by the Financial Services Council showed managed investment trust increased their holdings in Australia by 54 per cent, to $33.6 billion, in the two years to December 2011.
More than two-thirds of the increase came from Asia, which the government has targeted as a key growth market for financial services.