(Pictured: Ron Bird)

As submissions to the Financial System Inquiry are closed off, today, academics attached to the Paul Woolley Centre have questioned the fundamental assumption that a larger financial system is better for GDP than a smaller one.

Professor Ron Bird and Dr Jack Gray, both former fund managers, produced a submission to the Inquiry which cites the available research around the world on financial systems and economic growth. They say we don’t need a bigger financial system, we need a better one.

The PWC was established by Paul Woolley, the former chief of the UK subsidiary of Boston’s GMO. It funds research at three universities – London School of Economics, University of Toulouse and University of Technology Sydney. Bird and Gray both worked at GMO, as well as other managers, too.

They conclude in their submission: “We encourage the members of the FSI [the Inquiry] to steer clear of the fallacy that size is positively related to performance and encourage them to ponder the evidence that financial systems in developed economies have grown beyond the point where they make a positive contribution to either economic growth or to those they are presumed to serve.

“It would be a bad starting point to presume that the Australian financial system is currently doing a good job. The starting point of the analysis should be to assess its effectiveness and to highlight where it is falling short and why. We doubt that sufficient insight is available from existing studies. We encourage the Inquiry to commission studies along the lines of the papers referred to above. We are happy to discuss these matters further with members of the FSI.”

Click here for the full submission.