Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Hansard source

The Australian financial system is a robust and resilient one. It has withstood the turbulence of the subprime crisis, as the Treasurer has noted, because of more prudent lending practices in Australia and the very disciplined regulation of our financial sector. The numbers tell the story. In the United States, subprime loans represent around 13 per cent of all outstanding mortgages; in Australia, they represent less than one per cent. While there are some areas in Australia where there are significant default rates and very significant declines in property values—I cite some suburbs of south-western Sydney as examples of that—by and large our default rates are low historically and relative to other countries, the United States in particular.

So it is, as the Treasurer intimated, somewhat unfair that the Australian financial system has been tarred with the same brush. The securitisation markets for mortgages have been, as he said, as closed to Australian issuers as they have been to those emanating from the United States. That has obviously reduced the ability of Australian financial institutions to outsource their balance sheets, effectively, and this has had a particularly harsh impact on the smaller Australian lenders, the smaller banks and the mortgage brokers, and the various intermediaries whose presence in the market has done so much to improve competition and to reduce the cost of mortgage finance or at least the margins on mortgage finance for Australian borrowers. That has been the consequence of the subprime crisis in the United States.

It has also had an impact in that there has been a flight to quality. That has happened right across the system. The difference in the borrowing cost by a bank rated ‘A’, a smaller Australian bank, and one of the big four—a bank rated ‘AA’—has increased significantly. In other words, one of the factors no doubt underlining the thinking of the directors of St George Bank in its discussions with Westpac is that as a lower rated bank, in terms of its credit rating, than Westpac it now has to pay relatively more—relative to Westpac—to borrow money that it on-lends to customers than it did a year or two ago. And of course that works all the way through the system. Nonetheless, the system is strong and it is likely, indeed almost certain—there are no certainties in finance—to remain so.

The Treasurer has outlined a number of measures in his statement which we welcome in principle. We will need to see the detail of them all, and I am sure he will make those available in due course. I have seen no more than the Treasurer’s statement so I cannot speak to the detail of what he is proposing. But the proposal on the $20,000 guarantee—I suppose the best way to describe it is as a guarantee—per customer for deposits in a failed deposit-taking institution is one that, in principle, the previous government supported but had chosen not to announce because of a concern that, in the credit market prevailing towards the end of last year, the announcement of that measure might have created more uncertainty than it would remedy. Having said that, there are some important design features associated with this guarantee that we need to discuss now, and it is very important that the Treasurer addresses these.

Any guarantee of this kind carries with it a moral hazard; that goes with the territory. I can give you a classic example with which I had some personal experience nearly 20 years ago, and that was with the savings and loans industry in the United States. These were in effect what we would call building societies or credit unions. For many years, from time immemorial, they had had very strict prudential limits on what they could invest their money in. But there was also a $100,000 guarantee for depositors: the first $100,000 of every depositor’s account was guaranteed by the federal government. The congress decided to relax the prudential requirements but left the guarantee in place. What that meant of course—this is the classic example of a moral hazard—was that depositors knew that as long as their deposit was $100,000 or less they would get their money back no matter how risky the activities of the savings and loans company might be. So there was, if you like, an indifference on the part of depositors to risky activities by S&Ls and, as we know, many of them did engage in extremely risky activities in terms of investments—investing in junk bonds and highly leveraged real estate transactions—in order to chase yield and be able to offer higher deposit rates to their depositors. The consequence was that a great many of these S&Ls went into bankruptcy and they ended up being taken over by the US government through a vehicle called the Resolution Trust Corporation, which in my previous profession I represented in a very large bankruptcy. That was a classic case of the moral hazard going wrong. In fact it was said at the time, with the benefit of hindsight, that the government should have either left the guarantee in place and left the prudential limitations in place or alternatively, if it was going to relax the potential limitations, removed the guarantee. Doing one and not the other created that problem.

In the context of this proposal by the Treasurer here, there is a very important question which he has not answered and not addressed in sufficient detail, in his ministerial statement, and I would encourage him to do that. The question is this: does the guarantee or the assurance of a timely return of $20,000 for each depositor mean that deposits up to $20,000 have a priority in an insolvency over deposits greater than $20,000? One can readily see where the problem might arise. The Treasurer himself notes that in many of these institutions up to half of the total value of deposits is taken up by a smaller number of large deposits—of well in excess of $20,000—but the vast bulk of depositors have deposits of $20,000 or less. If for example, in a nightmare situation, there is only 50c in the dollar available to return to depositors and if all depositors have a priority, a first claim, as to the first $20,000 in their deposit, that would mean that a depositor with a $20,000 account could get 100c in the dollar back but a depositor with more than $20,000 could get considerably less than what his or her pro rata entitlement might otherwise be.

Why is that important? It is very important in the Australian context because our deposit-taking institutions have different profiles in terms of their funding base. Professor Kevin Davis noted in his report on financial guarantees following the HIH collapse back in 2004 that the credit unions and building societies have a much larger percentage of their funding base coming from what we would call retail deposits. It is a very high percentage, whereas the larger banks have a lower percentage because they access the wholesale markets for funding. In the inconceivable scenario of a major bank going into insolvency, the depositors would rank ahead of the providers of wholesale money. In those circumstances, if you like, they have a lot of headroom above other liabilities. With a credit union or a building society, that is simply not the case.

This issue is one that has been of concern to regulators, commentators and reviewers for a long time. I note that there was a good description of it in the Wallis report back in 1997. Mr Wallis makes this observation about capping depositor preference, which is what the Treasurer is talking about—capping the preference for depositors at $20,000:

Capping depositor preference is an approach adopted in most deposit insurance schemes. Under such an arrangement, depositor preference would operate in two tiers: first preference would apply up to the cap and second preference would apply to all other deposits. However, smaller DTIs which have a much heavier reliance on deposits for their funding than larger institutions could have difficulty attracting larger deposits under such a restriction and would be relatively disadvantaged in the marketplace by an arrangement designed to deal only with circumstances that are likely to arise rarely, if at all.

He goes on to say:

On balance, the Committee concluded that there should be no cap placed on the value of deposits subject to preference.

The point is a very powerful one, and it is something that we simply do not know, based on what the Treasurer said. We do not know whether the Treasurer is saying that deposits of $20,000 or less have a preference so that they all have to be returned, up to $20,000, before any remaining funds are divided between other deposit holders, or whether all of the funds available to depositors are distributed pari passu—proportionately to their interest—so, if there is 50c in the dollar available, everyone gets 50c, but the government would only step in to top up those deposits up to the level of $20,000.

The difference is a very important one because, plainly, if it is the first scenario, those depositors with sums in excess of $20,000 will, firstly, be inclined to open up several different accounts and break them up into accounts of $20,000 or less and, secondly, there will be a clear incentive for a depositor with, say, $200,000 to take that deposit to a larger institution whose funding base is composed of a smaller percentage of retail funds. It would mean taking that deposit from, say, a small bank, a building society or a credit union, and taking it to one of the big four. That flight to quality is already happening to some degree and this could exacerbate it. That is something the Treasurer should take into account. I urge the Treasurer to clarify precisely how this $20,000 guarantee is going to work.

Having said that—and that is purely a question of clarity and clarification—it is vital always for the Treasurer and the government to project confidence about our financial system. We have a very strong financial system here in Australia and we should tell that to the world. I am delighted that he is going to be travelling abroad and doing so, but he should mend his ways. Now the budget is done, he does not need to keep talking down the Australian economy, which he was doing for the first six months of his tenure. It is very important that the Treasurer of the Commonwealth of Australia speak strictly accurately and confidently about our financial system.

In that sense, it is also important to speak fairly. In the last few sitting days we have seen an extraordinary performance of venous denigration of those people in the financial community who dare to disagree with the government and with the Treasurer. You may recall that last week, in the context of debating Fuelwatch, I quoted Michael Luscombe, the chief executive of Woolworths, who had said in a call with analysts that their margins on petrol were higher in Western Australia than in anywhere else in the country, thanks to FuelWatch. Mr Luscombe is the chief executive of a very large public listed company. As the Treasurer knows, the consequences of a CEO of a listed company making misstatements about its financial affairs are extremely serious, and nobody would do that wantonly or recklessly or deliberately if they valued their reputation and that of their company.

I cited that simply to make the point that the argument that Fuelwatch would be better for motorists and would bring down prices really flew in the face of a great deal of evidence. That was one piece of evidence. The Assistant Treasurer’s response was to interject: ‘If you believe that, you will believe anything.’ In other words, Mr Luscombe was a man not to be believed. That is an extraordinary thing for the Assistant Treasurer to say. There has been no apology, no correction, no retraction—nothing. Today I cited a report by a very distinguished economist called Sinclair Davidson, from RMIT in Melbourne, criticising the methodology—insofar as it is understood—used by the ACCC in assessing Fuelwatch. The Treasurer’s immediate response was to attack the man and to say that Professor Sinclair Davidson was biased. He attacked his credibility not on the basis of what he had written and not on the basis of any of his arguments or any of his algorithms but rather by saying that he cannot be believed; he is a political confederate of the shadow Treasurer.

Then we had similar criticisms of the ACCC’s work by the expert petrol industry data provider, Informed Sources, which came out today and which really undermines the credibility and the methodology of the ACCC in a very profound way. This is an expert group. They know more about petrol price data, patterns, markets and cycles than any other group in Australia. Their data is relied on by everybody, including the ACCC. They have expressed their very grave concern about it, and the answer again from the Assistant Treasurer was to attack Informed Sources’ credibility and say that they are biased too. That type of conduct undermines the credibility of the Australian government and undermines international financial markets’ faith in the Australian financial system. It is vital that we have a Treasurer, an Assistant Treasurer and a Prime Minister who speak confidently, positively, accurately and fairly about financial issues in Australia.

If people criticise a decision of the government and go to the trouble of producing a paper—a mathematical analysis full of algebra and algorithms and setting out all of the assumptions—the appropriate response for the government is to take that on board, take it on its merits and if they believe it is wrong, to demonstrate why it is wrong. The government employs more economists than anyone else in Australia, so there is no shortage of people who can be set to work to pick holes in any analysis that is presented out of the business world. Instead, the reaction was to denigrate, to attack and to sneer. That is very damaging. It gives the impression of a government that is not interested in an accurate, well-regulated financial market but simply wants to play politics. We saw that with the Treasurer’s notorious remark, which we hope we will never see again, when, the day before the Reserve Bank met, he held that extraordinary press conference and said, ‘The inflation genie is out of the bottle.’

That made headlines around the world. The headlines and stories were saying—in the Financial Times, for example, and in the other great financial newspapers of the world—that the Australian Treasurer thinks inflation is out of control in his country. Plainly, inflation is a very serious challenge. It is a very serious global challenge and it is a very serious challenge in Australia. It has been so for some time. We recognise that, and we regularly debate the appropriateness of different measures and approaches to dealing with it. But to say that inflation is out of control was an extraordinary thing to do because that undermined confidence in our economy and, above all, it undermined confidence in our central bank. That was why when the Reserve Bank Governor, Glenn Stevens, was asked about this when he testified before the House of Representatives economics committee not so long ago, he very testily responded, ‘Inflation is not out of control.’ It is his job to manage inflation, and he has—just as the previous government had—a very proud record of managing inflation precisely in accordance with the inflation-targeting objectives of monetary policy: that is to say, between two and three per cent on average over the cycle.

It is fine for the Treasurer to stand up here today and talk about enhancing the stability and credibility of the Australian financial system, but, as with so many aspects of this government, he has to do more than talk the talk—he has to walk the walk. He has to move beyond the spin and actually demonstrate that he has a commitment, a real commitment, to the type of confident, accurate and disciplined economic management that is expected from the Treasurer of a great country and a strong economy like Australia. We have seen far too much spin from this government, and much of it has been very damaging—not just to the government in a political sense but also to Australia. He also needs to be quite precise as to how this $20,000 guarantee is going to work, because the lack of clarity there, for the reasons I described, could have very significant implications for Australian deposit-taking institutions, particularly the smaller deposit-taking institutions whose funding is much more heavily dominated by retail deposits. It would be a great pity if a lack of clarity from the Treasurer resulted in a decline in deposits in excess of $20,000 in institutions of this kind, because that would put those institutions under more pressure. They are under considerable pressure at the moment for the reasons I described at the outset of my response. I thank the House.

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