Sharon Bird (Cunningham, Australian Labor Party) Share this | Hansard source

I rise today to support the cognate bills before the House, which include 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. I intend to take the opportunity in this debate to first of all identify the details of the bills before us and their significance and then to put them within the context of the reason for their introduction into the House.

The bill covers the deposit guarantee, it establishes the Financial Claims Scheme, which will be unlimited for the first three years, and it enhances the powers of APRA to manage distressed financial institutions. Last Sunday the Prime Minister announced that the government would guarantee all bank deposits in Australian banks, Australian subsidiaries of foreign owned banks, credit unions and building societies. The guarantee covers all bank deposits, whatever their size, in all Australian banking institutions for the next three years. Any type of deposit, savings or cheque account or term deposit is guaranteed, including deposits held in any currency. Australian regulators advise the government that Australian deposits covered by the guarantee are estimated to be around $800 million. The move to guarantee deposits places Australian banks on the same footing as other banking systems around the world in the current circumstances. It should be emphasised that the government has been advised by regulators that Australian banks remain sound, profitable and well capitalised. The four largest Australian banks have very high ratings internationally.

Deposit-taking institutions are required to hold sufficient capital against their deposit liabilities. In the unlikely event of the failure of an Australian financial institution, depositor preference has always ensured that depositors have first call on an institution’s assets. No depositor of an institution supervised by APRA, or by the RBA before it, has ever lost money. The government does not expect that it will be called upon to pay out on the guarantee. However, there has been community concern at the international events they see unfolding nightly on the news, and the government is keen to ensure strong community confidence in Australian banking institutions. It is for this reason that the issue of the guarantee and the establishment of the FCS have become necessary.

The government has also announced a guarantee by application of term wholesale funding by Australian banks. The government has undertaken this initiative to ensure that Australian banks are not disadvantaged in accessing global wholesale capital markets. A guarantee will only be applied to individual transactions following an application by an institution and receipt of a fee. The government has been careful to guard against the consequences of encouraging risky behaviour, charging an insurance premium or fee for those institutions applying to take up the guarantee on term wholesale funding. The fee ensures that taxpayers receive compensation for guaranteeing wholesale funding and that institutions applying to take advantage of the guarantee pay for the benefit of that guarantee. The fee will be structured to act as a disincentive for institutions to continue using the guarantee once conditions in capital markets return to normal.

We find ourselves in quite unprecedented times. I reflect back a bit over 12 months to August last year, when I was deputy chair of the House of Representatives Standing Committee on Economics, Finance and Public Administration. A couple of weeks earlier, while we were meeting with the Reserve Bank governor in Western Australia, there were reports on the international news channels about some problems occurring in the subprime mortgage sector in the United States. At that point, it was seen to be a contained and not particularly threatening development, although it obviously had severe implications for those who were affected by it in the United States. As a result of some of those reports, it was decided by the committee to have a one-day roundtable on Australian house mortgages and the situation in this country and to generally have a look at the implications for Australia of what was unfolding in America.

What is particularly interesting for me is that, now we are a bit over 12 months down the track, it is quite astounding that the evidence we took at that roundtable on that day has proven to be so profoundly unreliable. The reality is clearly that very few if any major commentators, economists or people working in the field or with the regulators around the world in any way anticipated the hidden, intricate connections between what was happening with the subprime market in America and the broader international economic world. Sadly, whilst I am sure we have not completely unfolded the implications and exposed them to the light, today we have a much better and more devastating understanding of those connections and their effects.

At that roundtable we had the four major banks; the regulators; the mortgage insurers; a variety of independent economists, including Associate Professor Steve Keen; and the union, the FSU. The general view from most of those—Associate Professor Keen probably being the outstanding exception at the time—was that Australia was unlikely to see any particular flow-on effects from the subprime mortgage issue. I think that was really a very limited view of what the flow-on effects might be, because it was about the nature of our mortgage market and the fact that subprime mortgages were such a tiny percentage of our market and that our defaults were at good rates so that the defaults were not emerging as a major problem, although there was an acknowledgement that within specified markets or geographical areas there was a greater problem than in others—and Western Sydney obviously comes to mind; my colleague the member for Bankstown, particularly, has been engaging with the problem in his community in recent times.

However, there were assurances that the risk assessment behind the insurance of these products was sound and that the ratings and regulations were appropriate. I think that that remains the case. There is no doubt that in Australia we have a well regulated, well capitalised and, I would say, responsible banking sector. However, what was not seen at that time—and was probably not seen internationally at that time—was the way in which these products were dodgy at best and basically reliant on an ever-expanding house price market so that it was okay to lend something to someone regardless of their capacity to repay it because at the end of the day the lender could always repossess the house and sell it for a profit anyway. The very nature of the economics of that sort of loan, despite its morality, was that it then became a contagious, viral reality in our economy internationally.

These products were packaged up and sold out, often with regulators giving them good credit ratings that encouraged people to think that they were safe investments, so they spread throughout the system. As the Prime Minister indicated in his speech today at the Press Club, it was not until that crunch time came, where there was a major failure in that whole system, and people started handing back the keys in those parts of America where the subprime crisis started to hit, that the tidal wave—or the tsunami, as the former Treasurer, the member for Higgins, described it not long before the election last year—began to flow through. Now, at the end of the day, we are all paying a price for that. It is important that we understand that, while we are in a much stronger position in Australia than in most other developed countries—as has often been said by many in this place, if you had to choose one of the countries amongst the developed nations in which to be weathering this storm, Australia would be your No. 1 choice—we are not immune from the flow-on effects.

One of the most critical effects is the psychology of this sort of event, and that goes to the issues around confidence. I mentioned earlier this week that the major impact in my electorate that I have seen as a result of this in recent days has been the number of people ringing our office who were concerned about the safety of their bank deposits. As much as we can assure people of the strength and resilience of our sector and the quality of our regulators, if people in this country are watching, night after night, TV news about countries internationally providing guarantees to their banks and deposit-taking institutions, they will say, ‘Why haven’t we got that protection as well?’ If you do not provide confidence, it will flow through to behaviours in our real economy. It means that people will get so spooked by what is happening that they will stop spending and will no longer feel secure to invest. Sadly, in the worst cases, people even start pulling their money out of banks and deposit-taking institutions, and that is exactly the sorts of behaviours and reactions we do not want to occur in this country. So the announcement that the Prime Minister made on Sunday about the guarantee behind deposit-taking institutions in this country was very, very important in order that people could have that confidence.

It is also important that we recognise that the credit squeeze internationally has made it increasingly difficult for banks, no matter how well regulated and well capitalised they are, to compete for finances on the international market. I was talking to some locals and reminding them that, when we bought our first house in 1984, we had to basically bow and scrape to the bank manager to get a loan to buy it. The current generation just cannot imagine that. They now have the experience—which we raised with the banks at the roundtable in August last year—of being told, ‘Surely that’s not enough; surely you want more money,’ and of walking away and thinking, ‘I can’t believe that I’d actually be able to borrow that much.’ That is the reality of this generation’s experience, so I think it is hard for many of them to picture what it was like in the days when credit was so tight that you had to basically mortgage your soul, let alone your income, to get a mortgage to buy a home. We certainly do not want to get to the point where the credit squeeze is so bad and our banks are unable to compete on the international market for accessing credit that we get to the point where that occurs again.

The importance, therefore, of the guarantee is also to make sure that our banks are competitive on the international market. One of the most important messages that the Treasurer has brought back from his meetings is the need for countries to act in unison, to act in a way in which no one nation takes action that disadvantages another. With countries internationally providing these guarantees, it is important that we reflect that in this country as well, which is what these bills are about. I commend the bills to the House.

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