Nov. 10 (Bloomberg) -- Group of 20 regulators pose the greatest threat to Australia’s banking system as they clamp down on the financial industry, according to David Morgan, chairman of private equity firm JC Flowers & Co. LLC’s Australian unit.

“Measures are being devised up the line in the hands of a few who don’t fully appreciate the technicalities, the costs, potentially serious ones, and the unintended consequences,” Morgan, former chief executive of Westpac Banking Corp., told a business gathering in Sydney today. “The greatest threat is from heavy handed, hastily devised G-20 re-regulation.”

Regulators worldwide are seeking tighter controls after the global crisis sparked more than $1.6 trillion of losses at financial companies. G-20 governments met in Scotland Nov. 6, where they discussed how to curb excessive risk-taking. In Australia, banks face tougher rules on what count as liquid assets for stress testing, the Australian Prudential Regulation Authority outlined in September.

The nation’s financial system remained resilient throughout the crisis and in aggregate, banks experienced only a modest profitability decline, the Reserve Bank of Australia said in a review published in September. No Australian bank required a government bailout during the worst global depression since World War II. In the U.S., financial companies received $407.2 billion, according to data compiled by Bloomberg.

‘Fight Hard’

“The existing financial regulatory system, certainly in Australia, has served us well, and we should fight hard not to be saddled with these looming G-20 reforms,” said Morgan, who left Westpac in 2008 and is now also a director of BHP Billiton Ltd.. “Heavy regulation comes at a heavy cost, especially in terms of lack of innovation and efficiency and competition costs.”

Commonwealth Bank of Australia, the nation’s biggest lender, made profit of A$1.4 billion in the three months to Sept. 30, it said Nov. 9. Westpac posted cash earnings of A$2.33 billion in the six months ended Sept. 30.

Morgan said regulators failed to evolve with the “shadow banking system,” of private equity, hedge funds and with new securities such as collateralized debt obligations and credit- default swaps.

“Wherever we draw the new circle, it is certain new entities will be designed to sit just outside it,” Morgan said.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

Last Updated: November 9, 2009 23:44 EST