All you need to know about David Murray’s report on the financial system is that it would ban borrowings by DIY super funds and hit bank dividends.

There, that’ll spare you 290 pages you were going to read on the beach over the holidays.

Oddly, for all its visionary reforms it’s hard to nail down exactly what they are. It reads more like a policy speech, directed only at politicians.

So new capital controls on the banks, which judging by Murray’s comment about their “very high payout ratios” he expects will be paid for with less generous dividends, along with maybe a tiny increase in mortgage rates, are for the Australian Prudential Regulation Authority (APRA) to sort out.

Tax changes are for the government’s white paper next year to look at.

And even the lower super fees it proudly boasts require a Productivity Commission inquiry once MySuper is bedded down after mid-2017.

What’s more the super reforms won’t happen, says Joe Hockey, unless they get bipartisan support even though they would add 25 to 40 per cent to the retirement income of somebody on the average wage.

That rules out one of the few specific recommendations which is to exclude super from industrial awards where union and company-run funds have a privileged position as front runners to be the default fund.

Unfortunately, Murray doesn’t itemise which reform will deliver how much to super balances except that a footnote reveals a 15 to 30 per cent increase would come from encouraging more annuities to be taken out by retirees.

Tax impediments would be removed – another one for next year’s white paper – and funds would have to put a bit more time and effort into designing a “comprehensive income product for retirement” which would be part account-based pension and part annuity.

They’ll also have to give you regular projections of your likely retirement income rather than the balance.

Funnily enough, having been offered one of those products you don’t have to sign up for it anyway though I guess then you’d be denying yourself another 15 to 30 per cent extra income in retirement. Don’t say you weren’t warned.

That leaves the remaining 10 per cent gain in retirement incomes. It comes from falling fees as low-cost MySuper, the default fund in awards which Murray wants to abolish, is implemented by mid-2017. If fees don’t fall much the report recommends fund managers compete in an auction run by the government to win the default prize.

Now, what was that about a ban on future borrowings by DIY funds? Well, Murray talked about “direct borrowing” so it’s not altogether clear whether that would include popular instalment warrants. I can’t imagine he’d countenance borrowing for shares which can be done clandestinely through warrants and geared managed funds, while ruling out an upfront loan for a property.

Still, it’s academic. There’s no date when it would apply, it would be grandfathered in any case, and needs bipartisan support.

If you ask me, the big deal for DIY super funds, most of which are stuffed to the eyeballs with high-yielding bank shares is what’s going to happen to the dividends on them.

The market decided the day after the report was released that the banks weren’t such big losers from Murray after all. But can it be so sure?

The report was vague about how much capital they should hold, apart from hinting the ratio is at least 1 per cent lower than it should be, and that it’s up to APRA and the central bank bureaucrats in Basel to work it out.

I’ll bet this has gone down a treat with foreign investors who worry that our banks are overexposed to property.

It also wants the big banks to set aside extra capital for each home loan. This would be counted toward the capital ratio and makes the smaller banks more competitive because they’ve always had to put a lot more aside.

So why is the market marking down the small banks?

Because they were short-changed. It had been thought the amount they have to set aside on each mortgage would fall, but instead it was lifted for the big banks, and then only to 25 to 30 per cent, not the 35 per cent they face.

Worse, it’s not just the big banks facing a higher overall capital requirement. The small ones will too, and capital is harder for them to generate.

Posted by David Potts – Money Manager on 10th December, 2014