Malcolm Turnbull (Wentworth, Liberal Party, Leader of the Opposition) Share this | Hansard source

The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008, the Financial Claims Scheme (ADIs) Levy Bill 2008 and the Financial Claims Scheme (General Insurers) Levy Bill 2008 introduce a new Financial Claims Scheme, including a three-year 100 per cent guarantee of deposits in authorised deposit-taking institutions, compensation to eligible policyholders with claims against a failed general insurance company and provisions to strengthen the ability of the Australian Prudential Regulation Authority, APRA, to deal with distressed or failing financial institutions that it regulates. The Financial Claims Scheme has been in the process of being created for some time, with consideration by the Council of Financial Regulators, including the Treasury, the Reserve Bank, APRA and ASIC, as well as the Financial Stability Forum. In 2003, the coalition commissioned Professor Kevin Davis to undertake a study of deposit guarantees, which was published in March 2004 as The study of financial system guarantees.

As the House is aware, the arguments for and against deposit guarantees are finely balanced. On the one hand, it can be considered that the guarantee will affect competition and may increase moral hazard. On the other hand, it was clear, as Professor Davis reported, that many Australians thought there was, in any event, an explicit guarantee in place or otherwise thought that there was an implicit guarantee that would be called upon in the event of an institution failing. As I have said many times, Australia’s financial system is very strong, and our depositors and insurance policyholders enjoy preference under the Banking Act and the Insurance Act.

The reforms introduced by the coalition following the Wallis inquiry, to create APRA and ASIC, have been of considerable importance to ensuring the strength and stability of our financial sector during the present global financial crisis that originated with subprime loans in the United States. Essentially, what happened in the United States was that an incredible quantity, amounting now to 15 per cent of the entire mortgage book in the United States, was lent in the form of subprime loans—that is, to people whose prospects of repaying the loan were, at best, poor. This whole process, this incredible exercise in imprudent lending, depended, of course, upon a housing bubble and, indeed, fuelled that housing bubble. Bubbles invariably burst and, when this one burst, these loans became bad loans. In the meantime, many of them had been securitised, often into very complex financial instruments, which made their analysis extremely difficult. You had the combination of imprudent lending and considerable complexity. These derivatives found their way onto the books of hundreds of banks around the world. There was a combination of distressed assets—distressed derivatives, if you like—which were difficult to analyse and a falling property market in the United States. The housing market in the United States has fallen from its peak, I might note, on average, in real terms, by more than 20 per cent. Most analysts expect it to fall by more than 30 per cent, so this is a very, very serious correction decline in property values.

All of that resulted in a crisis of confidence. Banks lost confidence in each other. They were unwilling to lend to each other, and liquidity started to dry up. As a result, of course, central banks initially, and then governments, have had to step in to reinstate confidence and to provide liquidity to make sure that banks have the money to continue funding their operations. It has been an extraordinary crisis, and its implications and consequences will not be fully appreciated by any of us, I imagine, for some considerable time. The protection of systemically important deposit-taking institutions and insurance companies is absolutely vital to maintaining the confidence in our financial system. Confidence is everything. When confidence fails, so does credit. Everything depends on confidence. That lack of liquidity affects even well-run financial institutions, such as Australian banks, because it has made the cost of money higher. It has made money, in effect, dearer and less available. That, of course, impacts directly on businesses small and large, on homeowners, on every Australian. The crisis may have originated in Wall Street, but the rubber has hit the road and hit it very hard on Main Street right around the world.

On 2 June this year, the Treasurer announced that the government intended to legislate for a scheme which would enable depositors in a failed ADI to receive within weeks, he said, a refund of their deposit with that institution up to a limit of $20,000. The scheme would cover checking deposits, savings deposits and term deposits and would cover banks, building societies and credit unions—the ADIs regulated by APRA. Any deposit protection scheme, as we know, raises issues of moral hazard, and there have been some very unedifying experiences in the past. All of us remember the experience of the savings and loan collapse in the United States in the late 80s and early 90s, where institutions were basically given free rein as to the type of investments they undertook but nonetheless benefited from a very substantial depositor guarantee. This had the effect, in the market at the time, of encouraging risky behaviour. They offered high rates of interest to attract deposits and invested in high-yielding but risky investments. The inevitable happened; there was a collapse and the United States government, through the FDIC, had to pick up the tab and then, through the Resolution Trust Corporation, take over the assets and work them out.

There are many similarities between the events with the S&Ls and what is happening in the United States today. It is a different situation in other respects but it just underlines the importance of maintaining prudential supervision at all times. There is no substitute for prudent management of financial institutions. That is the absolute touchstone. The ramifications of this crisis globally have been extremely complex and, as I said, the implications and consequences will not be known by any of us for some considerable time. But its origins were very simple. It originated in poor lending practices, lending money to people who were not able to repay the loan—a practice that was only able to continue as long as a bubble, which is obviously unsustainable.

As we noted last Friday, on 10 October, in this current economic climate the $20,000 limit should be increased. The shadow Treasurer and I recommended that it should be increased to at least $100,000. This legislation provides for an unlimited deposit guarantee and we fully support it. The unlimited guarantee for bank deposits runs until 12 October 2011, with a likely introduction of a cap at that time. The legislation also provides full protection for claims against insurance companies less any excess or deductible amounts. These measures are important to maintain and build confidence in our financial sector. While we recognise the great strength of the Australian financial sector, we also must recognise that the global financial crisis is affecting confidence in financial institutions which are otherwise sound and solvent.

However, we do recognise—and I have given an example of this problem with moral hazard—the potential additional moral hazard from the introduction of any scheme of this kind. It is a central issue and it is one that should not be overlooked. So we support the review of the scheme in three years. We recommended in our statement last week that that be done by the Productivity Commission, and we commend that to the government. APRA has the key role to intensively supervise deposit-taking institutions and insurance companies that benefit from this government guarantee. It is APRA that is best placed to mitigate the additional moral hazard from the new measures. That is why we also support the additional powers given to APRA under the legislation which will enable it to move rapidly to protect deposit holders’ and insurance holders’ funds and so protect the taxpayer that otherwise underwrites the scheme.

The coalition also supports the levy part of the scheme that ensures that the first port of call to pay the deposit holders of a failing ADI is that ADI’s capital, bearing in mind that in any event under the existing legislation the deposit holders have first priority. It is highly likely, almost certain, that in the unlikely event of a failure there would be more than enough assets for depositors. After the ADI’s capital comes the levy on other ADIs, with the taxpayer providing funding for the temporary period to ensure the rapid payout of depositors and insurance policy claimants. We recognise that the scheme may have unintended consequences, and we will carefully monitor the effects of the scheme and liaise with the government where it is feasible to resolve those unintended consequences.

I note that there have been some rather scornful remarks from the government benches today about our call for a bipartisan approach to the response to the global financial crisis. We made that offer sincerely and, as the Treasurer knows—he and I had very frank and private conversations about the $20,000 cap when it was first introduced—we stand ready to continue to provide assistance to the government on designing these measures which are very important and which, without walking away from our obligations and our duty to hold the government to account, deserve to have bipartisan support.

This legislation does not deal with the proposal to provide government guarantees for wholesale term funding for Australian banks—and it may be that legislation is not required; I do not believe the government has finalised a view on this yet. That is a very different proposition entirely. Depositor protection of the kind we are talking about with this legislation is commonplace and in fact most countries have it in one form or another. The wholesale term funding guarantee is a product of this particular economic crisis and it has been made available in different ways in a number of countries. But it gives rise to very major issues relating to the protection of the taxpayer. We cannot allow the guarantees offered to banks in respect of wholesale term funding, enormous sums of money borrowed from international markets, to result in losses by banks being transferred to the account of the taxpayer. The protection of the taxpayer is absolutely vital.

We have sought information from the Prime Minister and the Treasurer in question time about that. We have asked questions about whether there will be any additional prudential supervision requirements. What will be the conditions of providing a guarantee of this kind? The Prime Minister could have either provided us with a substantive answer or simply said, ‘We are still working on the detail.’ Instead, we got an outburst of indignation. The simple fact is that protecting the interests of taxpayers is a key priority—many would say the key priority—of this parliament and this House. The scornful and indignant way in which the government has responded to legitimate questions about these matters says a great deal about the contemptuous way they are treating those Australians, both within this House and outside it, who seek some accountability and transparency.

The wholesale term guarantee must be structured in such a way that there is an exit plan because, as I believe John Stewart, the chief executive of the NAB, said only a few days ago, the real challenge will not be in getting banks to apply for these guarantees and to pay the fee. And, of course, the determination of the fee is a critical issue. The real challenge will be getting them off it. I think Mr Stewart described it as getting them off the government teat. That is a major issue, because we do not want to get into a situation in which unsustainable practices by banks are in effect supported and continued by virtue of a Commonwealth government guarantee. It is fine for the Prime Minister to say that APRA will keep an eye on it. APRA, as he should know very well, is not constituted to act as an investment advisor for the Commonwealth of Australia. When the Commonwealth gives a guarantee of this kind, it is on the hook. It is taking on board very substantial contingent liabilities. It can charge a fee. It should charge a fee, and the fee should be very commercial. Nonetheless, it is taking on considerable risk and that is something that will need additional, heightened and very careful supervision.

In the UK, where a similar proposal is being put in place, I was advised by one of the UK bank chief executives here recently that one of the conditions is to demand the provision of additional capital. We have asked the Prime Minister about that, and we have had no answer. But it is vital that the government satisfy Australians that, in providing these guarantees, the interest of taxpayers will be protected. It is not acceptable to rush into a scheme that will result in bank losses becoming losses of the Commonwealth government and being debited to the account of the Australian taxpayer.

That is why it is important that the parliament, the government and the opposition are able to agree on the principles that should underline this extraordinary intervention. As I said to the House yesterday, I wrote to the Prime Minister on Monday and invited him to agree to a motion that would have the support of both sides of the House that set out the principles that we would all agree on in respect of responses to this crisis. I will not repeat the whole of the motion here, because I read it into the Hansard yesterday. But the five key elements are worthy of repeating. The first was that we recognise the need for an urgent and coordinated international approach to the current financial crisis. The second was that the interventions be temporary until such time as confidence has been restored in global financial matters—in other words, they must not just be temporary but there must be an exit strategy. How is the government going to stop providing these guarantees? There has to be a clear exit strategy. The third was that the interventions—the guarantees and so on—must not facilitate imprudent behaviour of the kind that I described earlier that would disadvantage Australian business and Australian consumers. The fourth was that the interventions should not diminish competition in the provision of financial services to business and consumers across Australia. The final one was that above all it should not facilitate a transfer of losses from the private sector to the taxpayer.

There have been a number of very significant announcements made, such as deposit guarantees, wholesale term funding guarantees and the $10.4 billion stimulus package announced by the Prime Minister yesterday. We have given bipartisan support to these and we have offered to assist and to engage with the government in a way that would enable us to be fully informed of each other’s views. We have offered to work together in a way that the Australian people would like to see us do. Our offer of bipartisan engagement and cooperation has been rebuffed scornfully by the Prime Minister.

We saw today the most extraordinary spectacle. The opposition did its job, asked important questions about important issues relating to $10.4 billion spend by the Commonwealth government and asked questions about the economic forecasts on which it was based. It took three questions before the Prime Minister volunteered that the growth forecast upon which it was based had a two in front of it. He was not even prepared to give us a figure. So it is two per cent or more, no doubt. Why did we have to tear that out of him? It is like drawing blood from a stone.

He is so reluctant to tell the House the facts. He goes on television and says that he wants to level with the Australian people, and when you ask fundamental questions, such as, ‘Has the advice been that this would put upward pressure or downward pressure on inflation and interest rates?’, those questions are brushed aside. We asked important questions about the economic forecasts, which are everything. Why has the government chosen to spend $10.4 billion in this way? This is a very large stimulus. It is, as we know, one per cent of GDP. And we are taking the government on trust in these difficult times. We are trusting the government to get it right and not undertake a measure that will have adverse economic consequences. And when we seek to hold the government to account, we get nothing more than abuse, indignation and contemptuous scorn.

Perhaps the height of it and the most ironic response we had from the Prime Minister was yesterday in another tirade against the opposition simply trying to do our job when he said that we were less responsible than the government of Cuba. You would have to go to Cuba to find a Prime Minister who levelled less with his own parliament than this one.

See this speech in context