Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

by leave—I make a ministerial statement relating to the exit from the government’s guarantee of large deposits and wholesale funding. On several occasions now since this government took office, I have updated the House on Australia’s path through the worst global recession in 75 years. Through March and June 2008, I warned of the deteriorating global outlook, and advised that much of the impact on the real economy was yet to be felt. In September 2008, I said I was confident that, through the hard work and unity of all Australians, we would come through these challenges in a position of strength and ready to tackle our future.

I am sure all the honourable members of this House were pleased to see the IMF, just two weeks ago, endorse again Australia’s standout economic performance among the developed world during the global recession. We are virtually alone amongst advanced economies in avoiding recession. That is why I believe that Australians have good reason to be confident, but of course not complacent, about our economic prospects. And it is against this improving economic landscape that I would like to update honourable members, and through them the Australian people, on a very significant development in Australia’s financial and economic recovery.

Yesterday, I announced that the government, acting on the advice of the Council of Financial Regulators, will withdraw on 31 March 2010 its guarantee of large deposits and wholesale funding for authorised deposit-taking institutions. However, as I made clear yesterday, the government’s Financial Claims Scheme will continue to provide certainty to depositors through a free guarantee for their deposits of up to $1 million until October 2011, at which time the $1 million cap will be reviewed. This deposit guarantee provides automatic free coverage for an estimated 99.5 per cent of Australian depositors. Following these announcements yesterday, I would like to use today, in this first parliamentary session of the year, to describe the context for our decision to exit the guarantee of large deposits and wholesale funding.

As honourable members know, the collapse of Lehman Brothers on 15 September 2008 sent shockwaves through financial markets across every time zone. In the months that followed, we saw global financial markets in disarray. Lenders across the world became paralysed by fear and anxiety—as their previous complacency about risk was shattered into pieces. What followed was the severe dislocation of global credit markets as investors ran for safety. Governments and regulators across the world took unprecedented policy actions to stabilise the global financial system. Some even had to go as far as injecting taxpayers’ money to prop up major financial institutions or, worse still, outright nationalisation. And even here in Australia, as Governor Stevens of the Reserve Bank put it, people were ‘ringing money programs on TV and asking, “Is my money okay in the banks?”’

Honourable members will know, as Governor Stevens stated at the time, that the answer to this question was of course yes. Our banks are highly rated, well capitalised and did not engage in the risky lending seen in some countries. But, as Governor Stevens told us, actions like those taken by the Australian government maintained ‘public confidence in the security of the banking system’. And honourable members will know that, despite the resilience of our banks, they still compete in global credit markets for funding against other borrowers all around the world.

There was a period in late 2008 where our banks experienced great difficulty in borrowing offshore, and this threatened the flow of credit to the entire Australian economy. Where Australian banks were able to borrow at all, the cost had skyrocketed since the onset of the global financial crisis. In mid-2007, before the crisis, our banks were able to issue five-year wholesale funding for as cheap as 35 basis points over the benchmark rate. By late 2008, at the peak of the crisis, this had blown out by a multiple of five times—to 175 basis points over the benchmark rate. Our G20 colleagues started introducing bank guarantees to support international borrowing by their banks. So the Australian government acted quickly and decisively to ensure our banks stayed on a level playing field. On 12 October 2008, the government announced the guarantee of all deposits and wholesale funding. This was just one in a suite of actions that we took to protect Australia against the worst the world could throw at us.

The Rudd government provided three critical waves of fiscal stimulus to boost demand, keep businesses ticking over and support employment. As a result, Australia has been virtually alone among advanced economies in avoiding recession. Australia now has lower debt and deficits than comparable countries, we have maintained our AAA rating, and we have the second lowest unemployment of the major advanced economies. So it is unsurprising, with everything else we are doing to support jobs and growth, that the community has not focused as much on the importance of the guarantee in keeping our economy moving forward.

But the government’s guarantee of wholesale funding was indeed central to Australia’s crisis response. It gave our banks continued access to global capital markets on competitive terms, allowing them to raise more than $160 billion. This meant they could keep lending to Australian businesses and households, providing vital support for jobs and growth. And the Financial Claims Scheme will keep giving over 16 million Australians certainty over their deposits.

In fact, we had Governor Stevens say in early 2009 that actions like those of the Australian government ‘helped to stabilise what could have been a catastrophic loss of confidence in the global financial system’. In the governor’s words, he thought ‘what was done stabilised a potentially quite dangerous situation’. Governor Stevens said that these measures saw ‘term spreads in money markets decline’ from their peak, and ‘long-term markets reopen to banks’. And the IMF told us the guarantee has been critical in supporting the flow of credit through the Australian economy. It allowed our banks last year to issue bonds in larger amounts, with longer maturities and at lower cost, than had been possible since mid-2007.

But of course, the guarantee was put in place to support the Australian people—not the banks. Australian banks and other lenders have so far paid around $1.1 billion to the taxpayer for the use of the guarantee and will pay around $5.5 billion over its full life. And without the guarantee, our banks would have lent less and interest rates for borrowers would have been higher. This would have led directly to lower growth and more households losing a breadwinner right across Australia.

The government has always said the guarantee would be withdrawn ‘once market conditions have normalised’. We put in place ‘very strong real-time monitoring arrangements’ through the Council of Financial Regulators. Our regulators have constantly monitored international developments, evolving market conditions, and the financial position of all Australian ADIs. The council advised the government late last year that it was coming to the view that conditions may warrant removal of the guarantee. After further assessments, the council recommended we close the guarantee to new issuance as at 31 March this year. The council considered that bank funding conditions had improved such that the guarantee is no longer needed. This reflects the prudential strength of our individual ADIs and the strength of our whole financial system. The council has advised that none of these institutions would need the guarantee to fund themselves. In fact, the proportion of non-guaranteed issuance by Australian banks has increased from less than two per cent at the start of 2009 to 98 per cent in January 2010.

As I said yesterday, I have been discussing the future of the guarantee with the council for some time. And I have been talking to the council about market conditions through the whole period of the guarantee, since October 2008. The council’s recommendation has not changed in light of the recent anxiety in some global markets. And critically, our regulators have explicitly advised that removing the guarantee will not materially affect banking sector funding costs. So I make this point very clearly—there will be absolutely no justification for any bank to raise interest rates beyond future Reserve Bank movements, for any reason at all, including the removal of the guarantee. As I have said before, with some banks’ interest margins having recovered to pre-crisis levels, the Australian people will not tolerate any bank trying to take them for a ride.

Finally, the council advised that the Australian guarantee should not be available much longer than other countries’, given the greater strength of our financial system compared to many of them. Key G20 countries, including the United States, Canada, France and Korea have withdrawn their wholesale funding guarantees. The UK and Germany will do so shortly. So just as our stimulus is being progressively withdraw, it is appropriate we now move to start unwinding our guarantees.

Honourable members will know that the government has also announced the withdrawal of the Guarantee of State and Territory Borrowing on 31 December 2010. In July last year, I announced the formal commencement of the state guarantee. I said then that the global recession has ‘severely constricted liquidity in state government bond markets’, and that ‘supporting liquidity in these markets is critical to maintaining the capacity of state and territory governments to deliver on nation-building investments’. The government’s announcement led to a sharp improvement in the pricing of state bonds relative to Commonwealth bonds and restored demand for state government bonds. These benefits were experienced by all states, regardless of whether they opted to make explicit use of the guarantee.

The state guarantee scheme was also established as an interim measure to be withdrawn when market conditions normalised. However, a longer transition period relative to the guarantee of large deposits and wholesale funding is required for states to establish liquidity in new unguaranteed bond lines. Unlike bank funding, issuing bonds under such existing lines is a critical source of funding for the states. All states and territories will therefore continue to have access to the guarantee until 31 December 2010.

Withdrawing the guarantee of large deposits and wholesale funding represents a significant milestone for Australia’s banking system in pushing past the worst of the financial crisis. But it is appropriate to not only take stock of the resilience of our financial system, but to also reflect on some of the challenges forced on us by the global economic carnage we have withstood. The stability of Australia’s banking system has been recognised consistently by both the IMF and the OECD. But as I said earlier, we were not immune from the impacts of the financial crisis—it created significant challenges for competition in our domestic banking market.

The guarantee has been critical in helping to support competition. It offered wholesale funding certainty to more than 150 Australian ADIs, including regional banks, building societies and credit unions. It has allowed non-major Australian banks to raise over $32 billion in funding from international credit markets. We know that we cannot undo all the impacts of the global financial crisis, but we are working hard to support banking competition.

Honourable members may be aware that the securitisation market was one of the strongest drivers of competition in the mortgage market in the decade before the crisis. So on 30 November last year, I directed the Australian Office of Financial Management to invest another $8 billion in high-quality, AAA rated Australian residential mortgage backed securities to further support competition in Australia’s mortgage market. This was in addition to the Rudd government’s initial $8 billion investment, which we launched in 2008.

The government’s direct investment of up to $16 billion in the RMBS market has enabled smaller lenders to lend at competitive interest rates and maintain a higher level of lending than would otherwise have been possible. It has also been critical to preserving market infrastructure and fostering a recovery in private investor confidence. And just over a week ago, I announced a fresh boost to competition with three non-bank lenders and two smaller banks allocated up to $3.4 billion in funding, from our second $8 billion RMBS investment. It is expected that private investors will also participate significantly in these offerings, following recent encouraging signs of improvement in securitisation markets.

As I said a week ago, private capital has now made up some 37 per cent—or $4.6 billion—of the $12.4 billion in Australian RMBS issuance in which the AOFM has taken a stake since the government’s initial announcement in September 2008. This will place more competition on the big banks, helping to put downward pressure on mortgage rates over time. The Rudd government have acted decisively to support banking competition, but we know we simply cannot overcome all of the effects of the global financial crisis overnight.

We understand that mortgage repayments are a big part of the monthly budget for most Australian families. We will keep looking for ways to make it easier for families, at kitchen tables around Australia, to balance the household budget. For starters, we have introduced tough new consumer credit protection laws, due to come into force this year. These new laws will be the toughest laws governing consumer credit Australia has ever had, with wide-ranging powers to overrule unfair terms in credit contracts, including mortgages. And we will always make sure the independent competition regulator, the ACCC, is armed with the powers it needs to prevent anti-competitive behaviour by the banks. Finally, we will continue to promote Australia’s future as a leading financial services hub—we want to get the settings right to encourage new competitors into our local banking sector. Now more than ever Australia is the investment destination of choice, offering among the most robust financial, physical and regulatory infrastructure globally. The clear objective of the Rudd government is to position Australia to leverage the global economic recovery by preserving this reputation.

I would like to also take this opportunity to briefly discuss the global regulatory landscape for the banking sector. As honourable members know, there were some fundamental problems with key aspects of financial market regulation, particularly in other countries. These led to excessive risk taking across global financial markets. That is why Australia has committed to working through the G20 and the Financial Stability Board to address the underlying weaknesses in the global regulatory system.

We have to ensure that global financial markets contribute to sustainable global growth and not to the types of destabilising behaviour we have seen in recent years. Of course, this will mean a substantial adjustment for some financial systems and institutions, particularly in the developed world. We recognise the need to work with our G20 colleagues to create a consistent international set of principles for regulation of our increasingly interconnected global financial system.

It is important that financial institutions not be able to simply ‘go shopping’ for the easiest set of financial regulations. But, of course, Australia’s financial system did not suffer the same excesses as seen elsewhere. So our financial system is not expected to need to go through the same degree of adjustment. To this end, APRA, the Reserve Bank and the Treasury are working through the G20 to ensure any financial reform arrangements are appropriate for Australia and reflect the resilience of our system. The key here is better regulation rather than more regulation.

But I will say this to the banks: the Australian people will not tolerate any bank abusing their place in the Australian economy because of their strength. The Rudd government is working to ensure Australia continues to have a stable, efficient and competitive financial sector which will continue to serve our broader economy and the Australian people.

Australia’s financial system stands today as the envy of the world. This reflects both the hard work and experience of our regulators and the decisive action of the Rudd government. The government took swift action to ensure our banks’ access to global capital markets, to support RMBS funding for smaller lenders and to provide certainty for depositors across Australia. This ensured the continued flow of credit and, together with the government’s timely and targeted stimulus, helped infuse a sense of confidence in the Australian people. Australians worked together like they have always done—businesses and employees, governments and households—driving our economy to outperform all other major advanced economies around the world. I thank the House.

I ask leave of the House to move a motion to enable the member for North Sydney to speak for 16 minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Mr Hockey speaking in reply to the ministerial statement for a period not exceeding 16 minutes.

Question agreed to.

Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

The introduction of the bank guarantees was a necessary step to preserve confidence in the Australian financial system during the global financial crisis. Let us be very clear: there were two bank guarantees: firstly, the guarantee of wholesale raisings was announced in October 2008 and took effect one month later. It was provided for a fee and was introduced primarily to preserve the ability of Australian deposit-taking institutions to raise funds in the international capital markets. About $166 billion of taxpayer guaranteed funds were raised by banks up to the end of December. Non-major Australian banks raised over $32 billion from international markets, as the Treasurer outlined in his press release. What the Treasurer did not tell you was that $134 billion was raised by the four major banks: ANZ, Commonwealth Bank, NAB and Westpac. The government has received $1.1 billion in fees and will receive a total of $5.5 billion over the full life of the guarantee.

The coalition does not as a general principle support government interference in markets unless there is clear evidence of market failure. It supported the introduction of the wholesale guarantee as a temporary measure to ensure Australian banks had a level playing field in competing with banks offshore for funds. The Treasurer constantly says in this place that we opposed it. In fact, the records show that we supported it. I seek leave to table the Votes and Proceedings, No. 63, of the House of Representatives of Tuesday, 25 November 2008, which states quite clearly that the question was put and passed and that the bill was read a second time.

Leave not granted.

That was a trivial response. The coalition notes that other key developed countries have withdrawn or announced a withdrawal of their wholesale funding guarantees. I also know that Australian banks are now able to readily access offshore markets for funds without the use of the guarantee. On these grounds the coalition supports the decision to terminate the wholesale bank guarantee, effective 31 March. However, I would ask the Treasurer to ensure that there is no last-minute rush by banks to gorge themselves on the government guarantee before the deadline. The use of the guarantee by the banks is a contingent liability of the Commonwealth. I expect the Treasurer will fully outline that in the upcoming budget. The Australian people should be very wary of any increase in liabilities, on balance sheet or contingent, beyond the bare minimum. I also note the comments today by David Liddy, the Chief Executive Officer of the Bank of Queensland, and by a number of other smaller institutions worried that they will not be able to raise money at an affordable rate, and those concerns need to be addressed by the Treasurer.

The second guarantee was a retail deposit guarantee, which was introduced in November 2008 for a period of three years. It has a natural end date, of course, of November 2011. The retail deposit guarantee was introduced to preserve retail depositor confidence in all regulated ADIs. The coalition did not support an uncapped scheme and suggested that it should be capped at $100,000. We remember the complete mess the government created with its introduction of an uncapped guarantee. Then it changed to the cap and created distortions for a number of other financial institutions, cash management trusts and mortgage trusts. It created confusion amongst the general public. We specifically said before it was introduced that it should introduce a cap of $100,000. The government introduced an unlimited cap, completely screwed the market and then pulled it back to a deposit for a million dollars. Even now there are some areas where people are completely confused about whether a deposit has an uncapped guarantee, a guarantee or whether part of the funds are guaranteed or not.

I want to come to responsibilities of the banks. It would have been fair and reasonable for the Australian government to have requested something in addition to a fee in return for the support granted by taxpayers to the authorised deposit-taking institutions. After all, the provision of the guarantee was one of the reasons, but obviously not the key reason, we were able to outperform many of our Northern Hemisphere counterparts. I ask the House to bear in mind that I was the minister that introduced a whole lot of financial reform, which the Treasurer naturally enough does not want to talk about but which helped to get us through the most difficult times in the financial services sector. I note that the Treasurer has called on the banks to behave as good corporate citizens. Every time the term ‘bank’ is mentioned, you can rest assured the Treasurer will say, ‘We’re giving them a warning not to act inappropriately.’ He tends to do that, to overplay, and he tends to have stern words that unfortunately fall on deaf ears.

Loan spreads have widened. In April 2009 the Reserve Bank cut the cash rate by 25 basis points, but banks reduced the standard interest rate on variable mortgages by only 10 basis points. And what did the Treasurer say? He noted in media interviews on 8 April and again on 21 April that he was ‘pretty disappointed’ with the banks’ actions and, ‘They do need a good kick up the bum occasionally.’ The Prime Minister is not happy with it. He asked them to reconsider and said that the government has made it very clear that it wants to see a full pass-through of cash rate decreases. Strike 1: the wrath of the Treasurer in April 2009 was meaningless.

In June 2009 there was no change in the RBA cash rate and yet banks, on average, lifted the standard variable rate by five basis points. The Treasurer said in the media at that time that the decision gets in the way of rate relief—‘Australians will be rightly furious; I think this is a very selfish decision,’ and, ‘It is so disappointing to see this decision. I think it is a very selfish decision.’ Strike 2: the Treasurer gave further interviews in October and November, saying that they would be no justification for banks to increase their mortgage rates over and above the increase in the cash rate, yet one month later, in December 2009, the Reserve Bank increased the cash rate by 25 basis points and the banks responded by lifting the standard variable mortgage rate by 35 basis points. Strike 3: the Treasurer says:

… there was no justification for—

banks—

to move their rates above the official interest rate rise.

Again, stern words from the Treasurer. He echoed them again in late January as a result of the banks’ actions. Despite the Treasurer’s rhetoric, since March 2009, the spread or difference between the cash rate and the banks’ standard variable mortgage rate has widened by 30 basis points. I note the Treasurer’s statement today:

…there will be absolutely no justification … for any bank to raise interest rates beyond any Reserve Bank movements.

I refer to his stern, decisive comments yesterday that the banks would ‘incur the wrath not just of the Australian people but’—oh, my God—‘of the Australian government’, the same wrath that the banks had received over all those months. They completely defied the Treasurer and $135 billion later the banks are saying to this government, ‘Stick it in your purse and run away.’ And what effect is that having on the Australian people? The Reserve Bank stated in its last statement that one of the key reasons it was not moving on the cash rate was that the banks had already increased the flow-through to mortgage holders. In effect, the Reserve Bank was saying, ‘It doesn’t matter what we do, the banks themselves are charging more for mortgages.’ Somehow, in this place, the Treasurer came in and claimed that it was a great win for Australians with mortgages—such a great win for Australian mortgages that the Reserve Bank did not increase the cash rate. In fact, with $134 billion of taxpayer guaranteed money over the last few months, the banks themselves had increased interest rates by nearly one per cent when the Reserve Bank had only gone with 0.75 per cent. So it seems that the banks have thanked the Australian public for their support by lifting interest rates by more than the Reserve Bank and by tightening access to credit. That seems hardly a fair deal.

The Treasurer also announced that the guarantee of state and territory borrowings will be withdrawn on 31 December 2010. This guarantee was introduced on 24 July 2009 and provided the states with the right to use the federal government AAA rating to enhance the quality of their bond offerings and to facilitate their ability to raise funds in the capital market. I note that there are some states already with a AAA rating. To be fair to the Treasurer, bond markets do price AAAs differently. Obviously some of the states were struggling to get their bond issuance away. But the coalition overall has supported the introduction of a guarantee of state debt, provided that an appropriate fee is charged. Also, significantly, given that a difference in credit ratings results in a different charge applied to each state, it is important to note that there should be no financial incentive for the states to use the AAA rating to engage in some form of arbitrage that will work to the disadvantage of taxpayers overall. I note there is a long lead time until the withdrawal of the government guarantee of state government debt until December this year. Again, I would ask the Treasurer to explain in detail why he gave an undertaking to the states to provide that guarantee until December whereas the banks themselves have until March. It might have something to do with election timing, but that would be a little cynical. Forgive me for being a little cynical about it.

I want to touch on the issue of the register of government debt. Legislation was passed on 18 June 2009 for the creation of a register of holders of government debt. This was to include Commonwealth government debt and state government debt guaranteed by the Commonwealth. This was an amendment moved by the coalition. It is amazing how the government say we have no policy and yet they are actually taking our policy and accepting it as part of the legislation that goes through this place, if you can you believe that. This was an amendment moved by the coalition because we believe it is important for Australians to know the identity of our creditors. It is now eight months since it became law and the register has still not been put in place. The Australian public still do not know from whom the government is borrowing money. They still do not know to which countries they are indebted. I call on the government to deliver this. We will be pursuing this in estimates and we want some answers. Why hasn’t the register of government debt been delivered? Why aren’t the agencies complying with the law as it stands to set up a register so that we the Australian people and the Australian taxpayers know exactly who we are borrowing money from every day and every week of the year?

I just want to touch on the economy for a moment because it is all linked, as the Treasurer quite rightly says. With the winding back now of the government guarantee on wholesale funding, together with the Reserve Bank increasing interest rates and the banks themselves increasing interest rates, it is patently clear that Australia has come through what will be the worst impact of the global financial crisis. The Reserve Bank said that as well in its statements on monetary policy only last week. The fundamental point is that this government is continuing to spend money as if Australia has an unemployment rate of 8½ per cent. Yet Australia’s unemployment rate seems to have stabilised well under six per cent. We welcome the fact that Australia has an unemployment rate of less than six per cent. I was the Minister for Employment and Workplace Relations who saw it at 4.1 per cent, but do not let that get in the way of a good story.

I want to point out that the government said that it needed to spend so much money in the budget to address Australia’s problems, but that was all based on the fact that Australia was going to have an unemployment rate of 8½ per cent. Australia now clearly has an unemployment rate of less than six per cent, but the government is still spending the same amount of money. In fact, it is spending half a billion dollars on school halls in 2012 to address an economic downturn of 2008. The spending by this government is putting upward pressure on interest rates, it is putting ‘crowding out’ pressure on financial institutions and others that need to borrow money, it is making credit harder to get and it is making it more expensive for small business. We support good initiatives that are based on good policy but we will not go down the path of not criticising bad policy and bad initiatives, which this government has a habit of foisting on the Australian people.