A day after releasing his report that called on the big four dominant banks to increase capital levels so they were “unquestionably strong”, Mr Murray called for the inquiry’s recommendations to be embraced in the national interest.

While regulators could choose not to change the banking system and no economic shocks may occur for some time, Mr Murray warned that when the inevitable crises came “the credit rating position of the Commonwealth government at the time would become very relevant”.

Speaking at a CEDA lunch in Sydney today, Mr Murray said crises in other countries such as Britain had shown to increase government debt positions by 50 per cent in a “very short period of time”, which could be amplified when bank debts also turn bad.

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Along with a nation’s debt-servicing position, Mr Murray said ratings agencies assessed the contingent liabilities in the banking system and “if those tend to deteriorate at the same time, the government could be put in quite some spiral to the extent where foreign bondholders become extremely nervous”.

“We don’t want such a spiral,” he said, adding Australia’s debt to GDP ratio of 22 per cent could creep up towards the 30 per cent level which ratings agencies use as a cut off for AAA ratings.

“If it becomes more and more difficult to handle the end of the mining boom with the fiscal consequences for that on government, then we’re going to start incrementing this (debt to GDP) by one or two percentage points a year and the rating agencies will take a forward-looking position and reduce that rating,” he said.

“At first that’s not necessarily a serious issue, because around the world there’s not a huge discrimination between AAA and AA borrowers,” Mr Murray said.

“But the cost of credit could raise by 10-20 basis points on the back of that and the lower Australia’s rating is going ... the more likely it is you get into that spiral and that’s what we don’t want.”

The inquiry made 44 recommendations to government, which will consult until March 31.

On banking reform, the Australian Prudential Regulation Authority will be tasked with implementing changes.

APRA chairman Wayne Byres was in attendance at Mr Murray’s speech in Sydney today.

But APRA has indicated it will not rush and will wait for a global review on “risk weightings” to end later next year before imposing the inquiry’s recommendation of forcing the big four banks to hold more capital against mortgages through minimum risk weights of 25 to 30 per cent, up from around 18 per cent.

The inquiry also called for all banks to hold more capital and Mr Murray said it was critical Australia remained appealing due to its reliance on funding from overseas.

While conceding Australia’s experience during the global financial crisis “makes it very difficult for Australians to empathise” with the depth of loss in other countries, he said “the circumstances that shielded Australia from the crisis will not recur”.

“We had very high terms of trade, negligible net government debt, a budget surplus, a triple A credit rating, a record mining investment boom, and a major trading partner growing in real terms at an annual rate of around 10 per cent and able to throw immense resources at a stimulus program that favoured our exports,” he said.

“For all these reasons we need to maintain credibility among foreign investors and have an unquestionably strong banking system. The marginal cost of achieving this is small relative to the economic and social cost to the country and to taxpayers when a crisis occurs in less favourable circumstances than the last one.”