AUSTRALIA, TIME TO GET REAL ABOUT TOUGH TIMES

The seasoned corporate executive, who chaired the federal government's inquiry into the banking system in 2014, has also described calls for a royal commission into the banking system as potentially destabilising rhetoric that could harm Australia's ability to attract capital.

Murray, speaking at the Bond Business Leaders Forum on the Gold Coast, says the European banking system is always going to have issues because the euro is a currency that is not tied to sovereignty.

He says any suggestion by political leaders that the crises faced by Greece and Italy could not happen again is false.

"It always happens and it will happen again. The reason the Europeans had to make that statement is there's a fundamental flaw in their system.

"They have a flawed system where sovereigns and banks are tied at the hip. A bad bank can cause a sovereign to go down and a bad sovereign can cause a bank to go down.

"It's unsustainable. America went through that for the first 13 years of their independence and they fixed it."

Murray says Britain's stance in retaining its currency when joining the European Union will go a long way to giving it stability in the lead-up to the planned exit from the economic union.

"Brexit was a brave vote, but really Britain kept its own currency which means Britain can adjust."

Murray says he took the situation in Europe into account when framing the banking inquiry in 2014, the result of which led to a tightening of lending rules and increased capital requirements for Australia's banking sector.

Murray says despite the strength of the Australian banking sector, and that in more than 120 years 'not one dollar of depositors' money has been lost', the system needed stronger capital requirements as an added safeguard in turbulent times.

"The financial system is the gearbox of the economy (and) its operation is not widely understood.

"The only way to ensure that the taxpayer is not hurt is to ensure the banking system needs to have sufficient capital."

Murray also has taken a swipe at Labor's call for a royal commission into the banking industry.

"Since settlement in Australia, we have relied on foreign capital. We have done that extraordinarily well and we have advanced more quickly than we otherwise would.

"But the consequence of the structure we have in Australia is that the savings that foreigners give us for our development is largely mediated through the banking system - a banking system that by international standards is very well run.

"Just when we have incurred far more debt than we should, given the structure of our economy, why would you pick that moment to demonstrate to your creditors that you are getting a bit wobbly about the way things operate around here?.

"That's what's happening at the moment. It's not time to undo the model. It's time to speak up and defend the model."

Murray says government debt also remains a big concern, and he is particularly critical of expert commentary since the emergence of the GFC that highlights Australia's debt by world standards is low.

"The idea that we did not have an emerging debt problem because other countries had more debt to GDP than we had was a perfect nonsense, because if you are a commodity exporting country where you are a price taker, those price cycles are very long and with significant volatility.

"If that was your business you would not operate with high leverage, you can't - maybe with operating leverage, but not financial leverage."

Murray also says with 25 years of continuous economic growth, many workers in their early to mid-40s with families and mortgages are ill-prepared for a recession.  He says this is being aided by politicians talking up continued growth.

"There are things that are driving the notion of the lucky country, and part of our culture driving our beliefs that these things (recessions) can't happen.

"When politicians rely on those beliefs and feed them more, it's very hard to adjust. The likelihood is we'll lose our credit rating. That credit rating is one of the quality factors you have to have if you are capital dependent.

"The ratings agencies have already said they won't wait until the next Budget. They're watching the Parliament, so that's already a serious sign."