Excessive liquidity could cause major correction: Australian bank chief

A glut of liquidity and the constant pressure of investors demanding high returns in property and stocks could spark the next financial meltdown, Australia New Zealand (ANZ) bank chief warned.

Australia New Zealand (ANZ) bank chief executive Mike Smith said at the Australian Securities and Investments Commission (ASIC) forum that central bank policies of record low interest rates - and easy access to cheap money - was laying the ground for major market corrections in the near future.

"I would say the biggest problem we've got in the next two or three years is the huge amount of liquidity that's flowing around the world and this chase for yield means that risk is not being priced properly," Smith told the conference on Monday.

"It's not only credit risk, it's things like liquidity risk - they're not being properly priced. I think that's a worry."

His concerns come at a time when the Australian share market has reached seven-year highs and more than half of property purchases in Australia are being bought by investors.

Also speaking at the ASIC forum, former Bank of England deputy governor Paul Tucker said emerging asset bubbles were the biggest concern and central banks needed to ensure "the weakest links in the system aren't chronically weaker."

"I don't know where it will be, but that's (emerging bubbles) what you have to hunt," Tucker said.

He said when financial systems becomes irrationally exuberant then regulatory requirements will not be enough.

"The only way to keep the system safe -- by which I mean the only way to keep the system in line with the desired degree of resilience that politicians, the public, regulators have decided is warranted -- is to increase the requirements." Endi