Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Prime Minister. Will the Prime Minister outline recent developments in the global financial crisis and the government’s response?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

The question asked by the honourable member provides me with the opportunity to inform the House of developments overnight, particularly in relation to an emergency summit of leaders in the 15-member euro zone presided over by the President of France, President Sarkosy. This goes of course to integrated measures on the part of the Europeans in response to the global financial crisis. At that meeting European leaders agreed to guarantee, for an interim period and on appropriate commercial terms, new debt issued by banks. President Sarkosy said:

Banks need to be loaned money. So that this confidence is restored, states will have the possibility to guarantee the loans that banks take out, guarantee them under different forms.

That reflects President Sarkosy’s position, reflecting in turn the combined position of the euro zone economies meeting in Paris overnight, Australian time. The German Chancellor, Angela Merkel, said that these measures:

… will allow markets to start functioning again, that was our aim. It is a strong message to the markets.

The House will be aware that the Australian government yesterday made a similar move. Our package includes a guarantee for term wholesale funding which formed the basis in part of my answer to the previous question, from the Leader of the Opposition. But the core rationale, apart from overall efforts to stabilise the global financial system, was this: to ensure that Australian banks were not going to be penalised in global credit markets as a consequence of the sovereign guarantees being provided by other governments, nationally, to their banks.

A critical challenge that we were presented with is this. Around the world there were a number of banks whose balance sheets were actually in very bad shape. As a consequence, governments in those countries acted in order to improve their reputational standing in global credit markets, and they did that by extending sovereign guarantees to the loan raising which those banks were engaged in. The problem that presented our banks was as follows. Despite the fact that our major banks had no problems on their balance sheets, despite the fact that they were registering strong profits and despite the fact that our regulatory authorities properly and entirely appropriately underpinned their continued strong position, the fact that sovereign guarantees were extended by foreign governments to their banks, often in bad credit state, meant that prospectively we faced a problem where Australian banks would be discriminated against in the global financial market. The direct consequence of all that is the flow-through in the availability of commercial credit to the general credit activities of Australian banks within the domestic market, not just in the mortgage sector but crucially also in the business sector, in the commercial sector of the Australian economy. The attitude that I took as Prime Minister was that I was not prepared to stand idly by and allow that to happen because the roll-through consequences of those actions as they affected Australian banks long term would in turn affect households and in turn affect businesses. That is why we acted.

The second set of measures we took yesterday related to the protection of depositors under the financial claims scheme. Our attitude as a government was that the time had come to guarantee all deposits, whatever their size, in the Australian banking institutions for a period of three years—that is, to guarantee deposits, whether they are in banks, whether they are in building societies, whether they are in credit unions, to ensure that individual Australian families, that pensioners, that carers, that small businesses should have absolute confidence in the robustness of these financial institutions. It was the right thing to do. It was the right thing to do also because we saw again around the world various governments, in far, far more difficult situations than we find ourselves in Australia, acting in this regard. And as a consequence again this was potentially going to have an impact on the way in which international credit markets looked at Australian financial institutions. Therefore, it was necessary not just to allay the concerns and anxieties of individual deposit holders but also to ensure, in terms of the reputational status of our banks worldwide, that that factor would be removed from any doubts on the part of global credit-lending institutions. So, again, as Prime Minister of the country the view that I took was that I was not prepared to stand idly by and allow the concerns of households, of working families, of pensioners and of carers about the banks to go unaddressed. That is why we acted.

A third measure which the government announced yesterday goes to the availability of funding for non-authorised deposit-taking institutions. Further to the Treasurer’s announcement in September, the government has decided to direct the Australian Office of Financial Management to purchase an additional $4 billion in residential mortgage backed securities. The government has been monitoring the market closely and has determined that an additional $4 billion in funding is required for the purchase of residential mortgage backed securities from non-ADI lenders, those being lenders who are not banks, building societies or credit unions. This will be done by the Australian Office of Financial Management. This will benefit Australia’s mortgage market and ensure that this sector of the lending market has access to funding for their future operations.

The reality is that the global financial crisis in recent days has entered into a new and dangerous phase, with real impacts for growth and real impacts for jobs both in Australia and abroad. Therefore, the government have taken the view that the surplus that we spent a lot of time and a lot of effort putting aside in the May budget, putting aside for tough times, is there to be used to deal with these tough times. The purpose of the surplus is to deal with the tough times ahead and my message to the nation today is that those tough times have arrived. Therefore, the government remain determined to deploy that surplus intelligently to deal with the long-term support of positive economic growth in Australia and to deal with the necessary supports for households.

We are well positioned to weather this crisis. We have taken the necessary steps yesterday to assist in continuing to stabilise the Australian financial system and to ensure that that stability which we already have will be maintained into the future, given what is happening in the global marketplace. But beyond that, this global financial crisis and the entering into of this new and dangerous stage and its impact in the real economy around the world on growth and jobs will have an impact in Australia. We are glad on this side of the House that we took the measures necessary to set aside a surplus for the period ahead—a significant surplus, a surplus which is designed to deal with tough times. Those tough times have come and we are well prepared to act in anticipation of them.

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

My question is addressed to the Prime Minister. I refer the Prime Minister to my previous question and ask him: in respect of the wholesale term funding guarantees, what, if any, additional prudential supervision does the government propose to impose on banks as a condition of receiving the benefit of the guarantee?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

The Secretary of the Treasury has advised me that, based on his consultations with the financial regulators, this guarantee will be extended to Australian lending institutions as they seek to raise capital in international credit markets. Furthermore, he has indicated to me that the precise insurance premiums to be attached to each of them will be negotiated separately with those institutions and in doing so will be mindful of their general circumstances as far as their previous lending arrangements internationally. This is a prudent and proper approach to be taken. It is right that we take this action to stabilise the financial system for the future. These institutions have fine, first-class balance sheets as of today; they have fine, first-class balance sheets as indicated by the Australian prudential regulators; and, for the future, this measure has been necessary to ensure their future lines of credit from international credit markets. We believe this is an entirely appropriate course of action.

Ms Catherine King (Ballarat, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Minister for Finance and Deregulation. What action is the government taking to ensure our banking institutions secure competitive access to international credit markets and how will this help support our economy in these difficult global times?

Lindsay Tanner (Melbourne, Australian Labor Party, Minister for Finance and Deregulation) Share this | Link to this | Hansard source

I thank the member for Ballarat for her question. Yesterday the Prime Minister announced that the government would guarantee upon application term wholesale funding by Australian banks. This step will ensure that our banking institutions have the best possible access to global capital markets. We are all aware that developments in global financial markets over the past year or so have increased the difficulty for financial institutions to raise funds in those markets. There is no suggestion that the measure that the government has taken is in any way reflecting circumstances in Australia; it is a reflection of increasing difficulties in international markets that our banks and financial institutions face. In particular, it is a reflection of the fact that a number of other key governments around the world have taken steps of a similar nature that change the relative attractiveness of major financial institutions internationally for lending and therefore if we were not to take an initiative of this kind with respect to Australian financial institutions, notwithstanding that they are very strong, well capitalised and well regulated, it would place them at a significant disadvantage relative to other financial institutions competing for the same funding in global markets. We have seen in recent times the significance of this through increases in the price of borrowings for our financial institutions internationally flowing through to increases in market interest rates and therefore were the government not to take an initiative of this kind there is a serious concern that we would see that occur even further.

These measures are designed to ensure that Australian banks can continue to do their job. The banks will be charged a fee, negotiated specifically with them according to their circumstances, for access to this guarantee. The measures are critical to the Australian economy and to protecting Australia’s economy from the worst implications of the global financial crisis.

It is also important to note that there are significant institutions in our economy that engage in lending money, particularly for mortgages, who will not have access to these guarantees because they are not approved deposit-taking institutions. But they are significant players in the market. In particular, their activities are very important for sustaining competition in the mortgage market. In order to ensure that the playing field remains even and that competition remains strong, the government has also decided to make available up to $4 billion through the Australian Office of Financial Management to these institutions for borrowing for high-quality mortgage purposes for on-lending for high-quality mortgages.

As the Prime Minister has indicated, the government is also determined to provide a general guarantee for all bank deposits—all deposits in approved deposit-taking institutions—for a period of three years on top of the proposed legislation that is in the process of being pursued by the government to guarantee all deposits up to $20,000. Again, this initiative was taken by the government in response to similar initiatives occurring internationally. The key point about all this is that we are not immune from the implications of the international financial crisis. We have moved into a new and dangerous phase of this crisis. It is already impacting on jobs and growth in Australia and we can expect it to impact further.

Equally, the regulatory initiatives undertaken by governments overseas, by central banks overseas and by regulators overseas change the global environment in ways that Australia is affected by. We have already seen this with respect to the rules regarding short selling in the Australian stock market being changed in response to decisions being taken overseas, and similar logic applies in this case. Australia’s banks and financial institutions generally are well capitalised. They are strong, they are responsibly run, they are well regulated and they will remain so. It is very important to ensure that they are not disadvantaged and that Australian householders, homebuyers, workers and people generally are not disadvantaged economically by them being in a second-tier position relative to other banks, including significant banks that are much less robust than they are, in international capital markets. That is why the government have announced these initiatives, and we believe they will be very important in ensuring that we minimise the inevitable impacts of this new and dangerous phase of the global credit crisis.

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

My question is addressed to the Prime Minister. Given that, in other countries, guarantees of the kind just discussed have, on occasion, had the consequence of encouraging risky behaviour by banks, such as offering uncommercially high interest rates to attract depositors or making risky but high-yielding loans to boost income, what steps will the government take to ensure that these guarantees do not result in risky behaviour of that kind, thereby putting the Commonwealth guarantee at greater risk?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

The first point is that it is necessary to ensure the future stability of the financial system. In particular, it is necessary to ensure that our banks remain capable into the future of raising commercial loans on the international credit market. That is the first responsibility. As I indicated in my answer to an earlier question, it has been important for us to take that action now, in particular when there was a danger of our institutions being seen in a different light to those of other institutions because of sovereign guarantees provided elsewhere. Secondly, as I have indicated in my answer to the honourable gentleman’s question, each of these institutions will be charged a fee. The fee will ensure that taxpayers receive appropriate compensation for providing the guarantee and that financial institutions pay a price for the benefit of the guarantee. Furthermore, the fee will also ensure that the facility is no longer utilised when market conditions normalise, as was reflected in my statement yesterday. This will help to support the future recovery and the operation of financial markets independent of government support. In other words, the construction of the fee will be done in a manner which encourages not just responsible behaviour of financial institutions in the international credit market but also the non-use of that instrument in the future once credit conditions normalise. The precise detail of the fee and its arrangements will be tailored accordingly.