Helen Coonan (NSW, Liberal Party, Manager of Opposition Business in the Senate) Share this | Link to this | Hansard source

On behalf of the coalition, I am contributing to the second reading debate on the Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Bill 2008. As I indicated a little earlier to the Senate, the opposition supports the bill. But I want to place on record the history of how this bill has come to be considered by the Senate without being referred to a Senate committee and also place in context some of the quite unfortunate and untrue remarks about Mr Turnbull and the shadow Treasurer, Ms Bishop, in terms of their statements made on these guarantees and the guarantee scheme.

This bill will provide for a standing appropriation from the Consolidated Revenue Fund to pay claims under the large deposit and wholesale funding guarantee scheme. The bill allows for the repayment of borrowing, and the payment of interest on borrowing, made in accordance with the scheme. It therefore provides greater certainty to the guarantee scheme by allowing an appropriation to occur without the requirement for parliament to be recalled to pass a specific bill should a claim be made.

There is a background to this. On 10 October the Leader of the Opposition and the shadow Treasurer called on the Rudd Labor government to take three immediate decisions to further strengthen the Australian economy in response to the international financial crisis. Those calls included: to increase the proposed government backed deposit guarantee scheme to cover deposits up to a minimum of $100,000; to increase the investment into AAA rated residential mortgage backed securities, RMBSs, through the AOFM; and to announce that it will not implement the emissions trading scheme, the ETS, prior to 2011. The coalition committed to working cooperatively with the government to expedite the passage through parliament of any legislation that they would bring forward to responsibly implement the deposit guarantee.

On 12 October the Prime Minister announced an unlimited deposit guarantee scheme to operate for a period of three years and a guarantee of wholesale term funding by authorised deposit-taking institutions in return for a fee which was unspecified at the time of the announcement. The Prime Minister told Australians that he was acting on the advice of the regulators. In a press release on 12 October this year, he said:

My officials have done considerable work on the design of these arrangements and, in developing these measures, I have received advice from the Governor of the Reserve Bank of Australia …

The opposition supported the policy. In a press conference on 12 October 2008 the Leader of the Opposition, Mr Turnbull, said:

The Opposition welcomes the decisions taken by the Prime Minister today to provide a guarantee for all deposits for Australian deposit taking institutions, banks, credit unions, building societies and so forth.

In the parliament, the opposition asked questions regarding the detail and design of the scheme, and the government was unable to answer even the most basic questions. On 21 October, it was confirmed that the Prime Minister had not directly consulted the Governor of the Reserve Bank prior to announcing the unlimited guarantee. On 22 October, during the Senate estimates process, we learnt that the decision to increase the deposit guarantee, unlimited in amount as it was, was an entirely political decision in response to the Leader of the Oposition calling for a $100,000 scheme. During the Senate estimates process, I asked Dr Henry:

When did you first have a conversation with any senior member of the government about the possibility of extending the proposal for a $20,000 capped guarantee to one that is unlimited in amount?

His response was:

It is hard to say. I suspect it would have been the day the Leader of the Opposition first suggested that the $20,000 capped figure may not be adequate.

The government had initially claimed that it had been working on the detail of its bank guarantee policy for over a week and that the weekend meeting was merely to finalise the details. But, of course, the lack of policy detail underpinning the announced policy immediately caused confusion for account holders, business and financial markets. Account holders were unable to find out for certain whether their savings were even covered by the guarantee and, if not, whether they could move their funds. The government was unable to release a comprehensive list of institutions and accounts covered. To this day, the list of accounts covered is only a sample list.

So, with the savings of thousands of Australians frozen, the Treasurer said, ‘Go to Centrelink.’ He said:

So I say to the people who are adversely affected by some of these decisions that have been taken in these managed investment funds, do fully investigate your eligibility for income support through Centrelink, that’s what I say to them.

That was a quote from the Treasurer from a press conference on 23 October 2008. This week, the Treasurer denied ever making what I think could only be regarded as careless, and perhaps even disrespectful, remarks. Yesterday—I believe it was—he said:

I did not say that all people in managed investment funds who were experiencing problems should go to Centrelink.

So we have rampant confusion and contradiction. It was revealed on 21 October that the Reserve Bank governor had written to the Treasury secretary, Dr Henry, on 12 October informing him that there should be a cap on the guarantee and ‘the lower the better’. On 24 October the Treasurer announced that a $1 million cap would now apply. The exclusion of foreign bank branches from the guarantee resulted, as you would expect, in a rush of transfers from foreign bank branches to banks covered by the guarantee. On 28 October the government finally got around to sorting out the anomaly of foreign bank branches being excluded from the guarantee while foreign subsidiary banks had been included. This had caused considerable problems for foreign bank branches. On 31 October, in a response to the hardship caused to depositors in non-guaranteed institutions and funds, the government requested ASIC to provide advice on how to assist hardship cases where redemptions from funds had been frozen.

As we can see, the lack of detail on how the wholesale term funding guarantee would operate immediately caused confusion for the financial sector. On 13 October the Leader of the Opposition asked the Prime Minister how the government would ensure that the wholesale term funding guarantee did not have the result of bank losses being borne by the taxpayer. The Prime Minister failed to answer the question. On 14 October the Leader of the Opposition asked the Prime Minister whether the government would undertake to make public the amount, and terms, of wholesale term funding guarantees provided by the Commonwealth to Australian banks and other institutions, and the Prime Minister failed to answer the question. On 20 October, the Leader of the Opposition asked the Prime Minister if he would introduce legislation for the wholesale term funding guarantee. The Prime Minister failed to answer the question. On 21 October, the opposition asked the Treasurer how the fee structure for the wholesale term funding guarantee would operate. The Treasurer failed to answer the question. The details of the fee structure for the wholesale term funding guarantee were finally provided on 24 October.

On 24 October the Leader of the Opposition called on the government to make the wholesale term funding guarantee the subject of legislation. On 13 November the Leader of the Opposition asked the government whether it was aware that Standard & Poor’s, the ratings agency, had ruled that it would not give the government guarantee a AAA credit rating unless the payment on the guarantee ‘is unconditional, irrevocable and timely’. He also asked:

Why won’t the government act to fix this flawed guarantee and allow banks to receive its full benefits, which must then be passed on to the millions of Australian customers through lower interest charges and fees?

The Acting Treasurer, Mr Tanner—yes, you guessed it—failed to answer the question. On 17 November the Leader of the Opposition called on the government to immediately present legislation to authorise the provision of wholesale term funding guarantees to Australian banks. He said:

Without legislation the guarantees will not be effective commercially or practically.

By 21 November the major banks were calling on the government to fix the wholesale term funding and bank deposit guarantees. Again, the Leader of the Opposition called on the government to present legislation to provide for an appropriation to give effect to the wholesale term funding guarantee for Australian deposit-taking institutions.

From that history, of course, we are no doubt going to hear Senator Sherry repeat the comments made by the Treasurer, Mr Swan, in his second reading speech in the House yesterday. Somehow or other, from this unfortunate history with the government being incapable of clearing up this mess and of making clear statements for the benefit of consumers and financial institutions, this becomes Mr Turnbull’s fault. But it has taken six weeks for the government to concede, and finally get around to the fact, that legislation should be introduced to the parliament to support the government’s bank guarantee of large deposits and wholesale term funding. It was immediately clear that the government’s bank guarantee policy was panicked and poorly implemented economic policy that was simply not thought through.

Confronted with the real impact of its panicked and poorly thought through decision, the government has steadfastly refused to acknowledge, or to immediately rectify, its mistakes. The Rudd government bank guarantee has been all about a political strategy with no focus on sound economic decision making. Over one weekend, in a series of long distance phone calls, Prime Minister Rudd and Treasurer Swan produced their flawed bank guarantee. They did not even bother talking directly to the Reserve Bank governor before unveiling their bank guarantee policy. Since the announcement of the bank guarantee policy, the government has been forced to announce a series of changes to try to paper over the cracks of what was poorly conceived from the outset. If the government had simply adopted the policy of the coalition—announced on 10 October—ordinary Australian investors and our financial markets would have been spared six weeks of uncertainty and instability caused by the government’s poorly designed policy and, what is more, the opposition would have provided that advice for free.

The unlimited bank deposit guarantee has been a financial blunder of epic proportions. As a direct consequence, 270,000 Australians with investments in unguaranteed mortgage funds and cash management trusts have had their savings frozen. This has affected finance companies which support, for example, the purchase of motor vehicles. They have been unable to roll over their short-term borrowings. The cash management trusts and superannuation funds that used to buy their commercial paper are now only investing in guaranteed deposits. This has dire consequences for jobs, and the impact on jobs is something of enormous consequence to Australians. As the Leader of the Opposition has said, what this government must be responsible for is jobs, jobs and jobs. And this is certainly not the way to go about creating jobs and preserving jobs at risk for the thousands of people in just the motor vehicle industry alone.

The leading banks are now begging the government to roll back the guarantee to a cap in the order of the amount that we originally proposed. The banks’ representatives have been told by officials that the Prime Minister will never agree to a cap at or even approaching that recommended by the opposition. This problem is still not fixed and it shows the folly of the government’s approach to this. But, not content to bungle the retail deposit guarantee, the Rudd government has also bungled the wholesale term funding guarantee. We supported the wholesale guarantee. All other countries have done the same. Australian banks should not be disadvantaged, which is why we are ultimately supporting this legislation today.

It was the opposition that saw the problem and urged the government to legislate for it. There are two reasons for that. I will place them very briefly on the record. The first is that, while the government can give a guarantee administratively, it cannot pay out on it without an appropriation law being passed by the parliament. It is obvious that, without that law being passed, credit rating agencies and potential investors around the world will not regard the government’s guarantee as being unconditional, irrevocable and timely in terms of payment. That is what Standard and Poor’s have indicated will be required for a AAA rating. As the opposition leader has said so presciently, it is self-evident, it is common sense, it is belt and braces law and indeed economics. The second reason is—and this comes to Senator Brown’s earlier point—that the wholesale term funding guarantee involves the government potentially taking on hundreds of millions of dollars of contingent liabilities. Why shouldn’t that be the subject of legislation and proper scrutiny? Certainly we have also been calling for legislation that would require fees to be charged on commercial terms and would require the extended guarantees to be disclosed to parliament.

The government has finally admitted that we called it right, we called it early and we called on them to fix it when they could have done so six weeks ago. The government’s reaction to our proposal has been, I am sorry to say, characteristically—and this seems to be part of a pattern that is emerging—abusive, firstly, and then dismissive. Finally, there was a backflip with pike by them in admitting that we had it right all along. The finance minister was very recently adamant that no legislation would be introduced. I think as recently as last Thursday he brushed aside the report from Standard and Poor’s. Of course he might have then had a look at what was happening in the UK, where the banks had been raising funds and the government had stated that it would legislate. That legislation is proceeding in the UK parliament.

Once again the Australian banks have been begging the government to fix this up. Mr Rudd’s ineptitude is simply shutting off the cashflow that the banks need to lend to their customers. So bank officials are saying that the Prime Minister has been reluctant to do anything that may appear to concede a win to the opposition. How petulant and childish is that! The Prime Minister is so vain and so concerned about his reputation as an economic manager that he cannot bear to admit that he got it wrong and cannot bear to admit that the opposition spotted it, called it and he has had to play catch-up.

The opposition has made constructive and, as it turns out, completely correct proposals as to this important area of economic policy. It may be embarrassing for Mr Rudd and Mr Swan to admit this. It is farcical to suggest that any uncertainty is due to the opposition. In fact, we were trying to save the government from the error of its ways that was causing such uncertainty and still is for the economy and certainly for investors. I think it clearly shows the government is struggling when faced with an economic challenge whereby one has to actually think carefully about what you do because of the unintended consequences.

The government’s handling of the guarantee scheme has been both amateurish and oafish. It is a situation where—and I say this through Senator Sherry, who is occasionally given to making some thoughtful contributions of his own—occasionally it will do the government good to listen to some advice from the opposition and to take it. We got it right on this occasion. Not everybody has all the answers written on tablets of stone. The government certainly does not in this case, and we have seen the consequences of the government’s folly. Although we are supporting the bill, it is entirely reasonable that the fact be placed on the record that the government got this badly wrong and it is certainly time that it be fixed up.

Bob Brown (Tasmania, Australian Greens) Share this | Link to this | Hansard source

The greed that brought about the current global financial crisis is now being extended by the private sector, through willing parliamentary representatives, as an extra impost on the public sector. This legislation, the Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Bill 2008, is all about advantaging the finance houses when they go to borrow overseas against competitors for those borrowings. Senator Coonan said that the government, by failing to move this legislation earlier, was effectively—the word she used meant this—blocking the banks from getting finance. That is just not right. The finance is there, it is available and it is on the open market.

What we are part of here today is a process which was begun in the UK and has spread to New Zealand and elsewhere whereby governments guarantee through the use of consolidated revenue—that is, the public purse—the ability of their domestic banks and indeed, in some cases, foreign banks to borrow on the global market and compete against other financial institutions which do not have such a government guarantee. At the end of the day, the logical process will be for governments around the world to put in similar legislation to what we are seeing in Australia today so that their banks, wherever they might be, will not be left with the disadvantage of not having a public guarantee.

According to the Australian Financial Review analysis of this process by Matthew Drummond:

The major banks—

he is talking about Australian banks—

are already at the starting gate, waiting for the race to begin.

While each of Australia’s major banks has a hard-to-beat AA credit rating, such a rating is trumped by the federal government’s AAA. Banks are keen to test the pricing possible with the government guarantee and are hoping what the UK guarantee did for London-based Lloyds TSB, the Australian guarantee can do for them.

In October, before the UK guarantee came into force, AA-rated Lloyds raised 10-year debt at a margin of 1.99 percentage points above the benchmark interbank swap rate.

Three weeks later, armed with the UK government’s AAA credit rating, it raised three-year debt at a margin of 0.18 of a percentage point. That’s getting raw materials at about a 90 per cent discount. The comparison is not exactly comparing oranges with oranges, as three-year debt is cheaper than 10-year debt, so the difference cannot be completely attributed to the guarantee.

But even after allowing for about 0.25 of a percentage point premium that typically gets levied on 10-year debt above three-year debt, the guarantee has allowed Lloyds to cut its cost of borrowing to about a fifth.

Well, somebody else did not get that money because they did not have a guarantee. The competition has been weighted by public guarantee for that bank against other borrowers who did not have such a guarantee.

The point that I want to make at the outset is that we have the big end of town getting the Australian government, the Rudd Labor government—if we believe Senator Coonan, through the pressure of the coalition—to use consolidated revenue. This is the fund from which we pay for hospitals, schools, defence, public transport and pensions, and it is to be used as a guarantee against a default by one of the finance houses having borrowed overseas. My advice, when I sought it from Treasury, was that the chance of that happening is very low. I think the word ‘infinitesimal’ may have even been used. That is what we are debating here today: no chance, no need for legislation. But the chance is high enough that this bill is now being railroaded through the Senate, having gone through the House of Representatives last night, so that funds will be made available to the borrowers who, according to the Financial Review, are at the starting gate waiting for the race to begin on Friday. A lot of money in the private sector is going to be gained because of this public guarantee, which, I submit to every member of this Senate, has not been canvassed with the public at all.

We saw today a move by the Greens to have this matter put to a Senate committee for investigation over the next week, but both of the big parties voted that down. In other words, they sidelined the time-honoured role of the Senate to ensure that, particularly where there are nationally significant pieces of legislation affecting every household in the country—and this certainly qualifies in that category—scrutiny is applied to the executive, which is effectively what the House of Representatives is when there is a one-party majority, and the public interest can be brought to bear. But dangling on the strings of the big finance houses, the two big parties have decided that that scrutiny will be set aside so that this legislation can be gotten through before there is any public scrutiny and, dare I say it, public furore at the parliament being sidelined.

It is not just the parliamentary process that is being sidelined today. At the heart of this bill is the future prospect of a default by a finance house on an overseas loan, which will then be adjudicated by the executive, the government of the day. It will draw on consolidated funds—that is, the people’s money—or borrow at risk to the people of Australia to make good that failed overseas loan. This piece of legislation is the Liberal Party of Australia, the National Party of Australia and the Labor Party of Australia dismissing parliament’s responsibility to be intimately involved in debating an issue as big as a loan default where billions could be at stake and it being made up for through the public purse.

I would submit that parliament must—and should—in a democracy which is respected be called to deal with such a matter. This legislation fails at the outset to respect the logic that, if there were a default big enough to warrant federal government intervention, the parliament should be recalled to deal with that matter. We Greens have a difference of opinion with other parties on the matter of going to war. We believe that, like the right of the congress in the United States, it simply cannot be done by the executive; the parliament has to agree. We have seen with the misadventure by President Bush and Prime Minister Howard of invading Iraq in 2003 how this parliament was sidelined. Anybody who wants to see the debate that took place as a result of that might do well to read the speech at that time from the then honourable member for Calare, the late Peter Andren, in which he railed against this failure of government and parliamentarians to respect democracy, which makes the parliament the supreme authority. It is not the executive.

But here we are today, legislating through this bill to sideline the parliament should the event arise for which this bill is constructed—that is, the failure of a major borrowing overseas and the need for the government to move in to make up for it through public funds, through taxpayers’ money, or through borrowed money, at taxpayers’ ultimate expense. The parliament ought under those circumstances to be recalled, but this bill specifically says the parliament will be sidelined in that circumstance and the executive will make that decision. This is a provision for a circumstance where parliament should be totally involved, and the opposition and the government say, ‘No, we will sideline parliament under those circumstances and leave it to the executive to plunder consolidated revenue to the extent needed to make up for the failed decision in the private financial sector and honour a borrowing made overseas.’

I object on behalf of democracy to the big parties sidelining this parliament in such a fashion. We will not simply let that go through to the keeper. I foreshadow an amendment in the committee stage to ensure that the parliament is recalled in such an event if it is not at that time sitting. I also foreshadow an amendment which would put a sunset clause into this legislation so that 24 months from now it is reviewed, because, as we are about to find out, I suspect—the minister may prove me wrong—we will not be given in this house of review any estimate of what the government expects to raise through the guarantee process where the bank pays an amount to the government for the guarantee offered on a particular loan. Nor will we be able to get an estimate of how much the public purse is put at risk through borrowings overseas, although I note again that in the Financial Review there is an estimate from Citigroup—you can take this figure as being as secure as the bank itself!—that the big four Australian banks need to raise $88 billion in wholesale funding in financial year 2009. We are talking about extraordinarily large sums indeed.

Mr Swan, the Treasurer, has said that the banks raised concerns about doubts in international funding markets that government will be able to pass legislation with sufficient speed in the event of a claim of the guarantee. In doing so he revealed that this is banks dictating to government both policy and the parliamentary process, and in that they have a lackey in the opposition. I stand here for the Greens in defence of the public interest. We will get an argument that says, ‘You know, the borrowings of the banks overseas can be at a cheaper rate, and that’ll be passed on to the person in the street’—the unsuspecting person who does not know that their funds are being used to guarantee that very process.

But then we move to seeing how the ratings which determine the cost of borrowing overseas work. We are told here that the Australian banks are the most secure in the world and, therefore, they rate the best. But they would like their AA rating to become AAA because that is what the government has, and this guarantee will effectively move them to AAA. Who determines these things? It is the rating agencies. What a record they have! As Prime Minister Martin of Canada said when there was a desperate financial situation brought about there in the mid-nineties because Moody’s indicated it might change the rating for Canada, ‘Who are these people to be telling us what to do?’ Here we effectively have a parliament legislating on the basis—banks are captured by this—of three international rating agencies based in Washington who have manifestly failed. They were the watchdogs of international finance.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

More like chihuahuas.

Bob Brown (Tasmania, Australian Greens) Share this | Link to this | Hansard source

Senator Xenophon, I would not demean chihuahuas by saying that the ratings agencies were in their category! These ratings agencies failed their job; yet we have a system that inherently depends upon the very same ratings agencies. The banks are saying, ‘Give us this legislation so we can move up a notch on Moody’s or Standard & Poor’s.’

The Prime Minister, in his last address to the Press Club, said:

The balkanisation of risk, the attenuation of risk sought the impossible dream of the elimination of risk and responsibility—so that ultimately nobody believed they carried risk and responsibility.

And through it all, the ratings agencies blessed these products as safe investments—ratings agencies that have yet to face their own day of reckoning—and the products they sanctioned continued to proliferate.

Here we have the Prime Minister, who said that the ratings agencies have yet to face their own day of reckoning, dancing to their tune post the financial crisis, post the failure of the very same ratings agencies. I ask the question—and I will be asking it in committee, so get ready, Minister: who is rating the ratings agencies? What is the government doing about the failure of these three international watchdogs, which are manifestly a disgrace? Whatever reason you give for them, they disgracefully failed, and millions of people around the planet are paying for it.

Now the banks are saying, ‘We depend on the ratings agencies for borrowings overseas and we want legislation that is going to put us up a notch on the ratings offered by these very same failed ratings agencies.’ What a remarkable situation this is that the Australia parliament is being bulldozed by these failed ratings agencies and the international banking system. This puts pressure on other countries in our region to do the same, to fall into line. Poorer countries cannot compete with our banks for the very same reason that we are here today, which is because our banks are saying, ‘We want to compete with the UK banks.’ We have the wealthy countries instituting a process to get advantage—I will not use the word ‘greed’—in the international financial system, which puts the squeeze on poorer countries again. That is part of this process which I object to. (Time expired)

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

I indicate my support for the second reading of the Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Bill 2008. Having said that, I supported Senator Brown’s motion that this matter be referred to the Standing Committee on Economics for inquiry. I thought it was not inappropriate that there be a short, sharp inquiry by the economics committee in terms of process and that it could have been dealt with within the week. But I appreciate that the numbers were not there.

I will confine my remarks on this issue to the implications that need to be taken into account with respect to this guarantee scheme, which I support. I think it is important that we put in context what the potential ramifications could be. I would commend to my colleagues in the Senate an article in the Australian Financial Review of 14 November by Sam Wylie, a research fellow at the Melbourne Business School, entitled ‘The Big Four need to give us something back’. It is an article that I am in substantial agreement with.

I think we need to put this in perspective. As a result of this guarantee the credit ratings of, in particular, the big four banks has improved immeasurably. It has been put that they are almost a sovereign investment because this is a government guarantee. The point that Mr Wylie and, I believe, others are making—and I think it is something we need to consider—is that, as a quid pro quo for the largesse, as Mr Wylie puts it, on the part of the government, the government must demand actions by the banks that will maintain the soundness of Australia’s banking system while the global credit crisis continues.

I think there is a concern that the market will be skewed for those institutions that have the guarantee and those that do not. I understand that that is a consequence of this measure and I believe the government did the right thing by acting swiftly to ensure confidence in the banking and financial sector broadly. I think that was the right thing to do. But the concern is that there will be ramifications from that, and I believe that, in return for that guarantee, the big four banks in particular need to give something back.

There is a concern that banks have clawed back margin lending to all sectors, especially the small and medium sized enterprises—the small businesses that are the bedrock of the economy. I note that, in the mortgage market, banks raised rates by 0.55 percentage points more than the Reserve Bank did as rates rose and then held back an average of 0.35 percentage points as rates fell. That is an extra 0.9 percentage points, 90 basis points, which is partly explained by the increased costs of funding to the banks. But the fact that there is now a guarantee diminishes any excuse for not passing on the full extent of any interest rate decreases.

It is important that the major banks, in return for the support that they are getting through this legislation, are made to raise capital levels, maintain credit flow to borrowers and improve transparency. These are three issues that must be taken into account. There is a real risk, as capital ratios are calculated as bank capital divided by bank assets, that instead of raising capital some banks could cut back on loans to get their capital ratios higher. That is a real concern. I think it is important that the government pressures banks not to do this.

There is also an issue of transparency on the part of the banks. In return for deposit and bond guarantees, banks should be open about the state of their loan books and their credit derivative exposure. That is important. I think that it is also important to look at the whole issue of bank mergers. The recent merger that has gone through between Westpac and St George, and the other mergers involving BankWest and also Suncorp, need to be taken into account. I think we will end up seeing less competition in the banking sector but, by virtue of this guarantee, I think that there are legitimate grounds for the government to insist on a greater degree of competition. We need to have that level of competition because otherwise consumers will be the long-term losers in this, in terms of having a robustly competitive banking sector.

So I think it is important that, in addition to this legislation, the government needs to be absolutely vigilant in ensuring that the banking sector remains competitive, and that means having a very critical view of mergers. I am looking forward to the economics committee inquiry into the whole issue of bank mergers in the coming weeks. I think it is also important that the banks should be encouraged by the government to ensure that their capital ratios are maintained in a way that does not lead to a contraction of lending, given these bank guarantees. I think there ought to be a greater degree of transparency on the part of the banking sector.

So, with those comments, I indicate my support for the legislation. I note that Senator Bob Brown has a number of amendments that will be dealt with in the committee stage. But I think it is important that, in addition to this, parallel to this guarantee scheme, there ought to be a greater degree of transparency and accountability of the banking sector so that consumers, in the long term, are not disadvantaged by a less competitive banking sector.

Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Link to this | Hansard source

I thank all senators for their contributions. I will touch on a couple of issues raised by each of them shortly. The world is facing the most significant upheaval in global financial markets since the Great Depression. A crisis that began in the US subprime mortgage market some 15 months ago—

Concetta Fierravanti-Wells (NSW, Liberal Party, Shadow Parliamentary Secretary for Immigration and Shadow Parliamentary Secretary Assisting the Leader in the Senate) Share this | Link to this | Hansard source

It’s Senator Conroy’s speech!

Nick Sherry (Tasmania, Australian Labor Party, Minister for Superannuation and Corporate Law) Share this | Link to this | Hansard source

From which I will be departing, with some additional comments—and it is paper based, not electronic based!

The crisis that was felt in the US subprime mortgage market over 15 months ago is very much being felt in Australia today. I could depart here and go into a considerable amount of detail as to why this crisis occurred in the United States, but I think I am on the record as saying many times in this chamber that it was the largest mis-selling of mortgage products in the US, with five to six million customers, and then the packaging of the underlying investment instruments, in a form of pass-the-parcel, given AAA ratings by credit rating agencies, through the financial system, in particular in the US and the UK, that has led us to where we are today.

Unfortunately, as I said, this has affected the US, the UK and Europe, and Australia is not immune from this international turmoil. We live in an interconnected and international financial system. The fundamentals of the Australian economy are sound but we are not immune from the effects of this turmoil that has emerged over the last year. Building on Australia’s strong regulatory framework and our strong fiscal position, the government did take an unprecedented and decisive step on 12 October to protect the Australian economy and the financial system. From this Friday, the first $1 million deposited with an Australian incorporated bank, a credit union or a building society will continue to be guaranteed, free of charge.

I do want to respond to one point at this stage—there are some other points I want to respond to—with respect to Senator Bob Brown, who has strongly asserted that he is representing the public interest in making the points he has made. But I would strongly contend, on behalf of this government, that what we are considering here today, and the way in which we are having to consider it, is in the public interest. There are some occasions—and they are relatively rare—where we have to deal with legislation where the circumstances are most important and most critical, and it is clearly in the public interest that we maintain, in the current circumstances, public confidence in Australia in our banking system. The cause of the Great Depression was not the collapse of the share market; it was the collapse of confidence in the banking system. In the current circumstances, it is very definitely in the public interest—not in the interests of the banks or the building societies or the credit unions but in the public interest—to be ensuring, through the measures we are passing here and the measures we have already passed, confidence in our financial institutions that are being guaranteed in this way because, in the current circumstances, if that public confidence were not maintained, the impact of this global financial crisis would be truly catastrophic. Senator Brown has claimed that he is representing the public interest; well, I would strongly claim that the public interest is being met by the legislation we are considering.

The large deposits—that is, deposits in excess of $1 million deposited with an Australian incorporated bank, or a building society or a credit union—will be eligible for the guarantee, for a fee. I made the earlier point: Senator Bob Brown, I noticed, changed his language slightly, after I reminded him that we are not just dealing with the big four banks here—we are dealing with the building societies and credit unions and also the regional banks. It is not just the big four banks. He has dubbed it ‘the big end of town’. I do not agree with that sort of language. This is not a measure for the big end of town, for the big four banks—this is a measure for all banks, credit unions and building societies, and it is a measure for the Australian economy and society as a whole. The public interest—that is what this is all about. It is not just for ‘the big end of town’, as it has been dubbed.

In addition, any deposits by Australian residents with a foreign bank branch in Australia will also be eligible for the guarantee, for a fee. In addition, from Friday, short-term and long-term wholesale funding for Australian incorporated banks, building societies and credit unions and short-term funding for foreign bank branches raised from Australian residents will be eligible for a guarantee, for a fee.

I want to come to another comment of Senator Brown’s. He referred to the article in the Financial Review by Matt Drummond. I cannot recall the exact quote but he said the banks were at the starting gate, or the race was ready to begin. I have to say: thank goodness they are lined up as of Friday to move out there into the international money markets to borrow. Thank goodness, Senator Brown—that is what we want! One of the underlying reasons for this legislation is to ensure that they have a capacity in the international financial turmoil that is occurring, that they have a level playing field, to be out there to borrow money which we need in our economy. So thank goodness they are there at that starting gate, Senator Brown.

The wholesale funding guarantee may apply whether the borrowings are obtained in a domestic market or internationally. The wholesale funding guarantee will ensure Australian institutions are not placed at a disadvantage when seeking funding in international markets, given that many of their international competitors have the benefit of a similar government guarantee. By taking decisive and early action we have guaranteed the stability of this country’s financial system in the face of destabilising developments abroad.

I think the first country to implement a bank guarantee was Ireland. Once Ireland did it, we saw the international ramifications because there was a shift of deposits, particularly from Northern Ireland and the UK, into Irish banks. This is one of the consequences that we have seen when a guarantee is given in one country. I think we then saw the Chancellor of Germany declaring that she would not be guaranteeing financial institutions, and the next day she got back to Germany and there was a guarantee in Germany. We saw similar shifts in capital across international boundaries. So these are the sorts of movements in financial markets that this country—we are not isolated; we are not immune from these impacts—has had to respond to, and respond decisively. The guarantees are designed to promote financial system stability and ensure the continued flow of credit through the economy at a time of heightened turbulence in international capital markets.

This is not a measure for Wall Street, as it was dubbed in the US. It is a measure for main street, suburban street, because if we do not ensure the strength and confidence of Australian financial institutions by measures such as this, it is small business, business in general and consumers who will suffer as a consequence. That is why this is in the national interest. I can say that the Australian government’s actions are starting to produce results with spreads beginning to narrow and tentative signs that markets are starting to thaw.

The government’s guarantee scheme for large deposits and wholesale funding is established by a deed of guarantee and associated scheme rules, which were released on 21 November and which will commence this Friday. The government has relied on the Commonwealth’s executive powers to implement the guarantees in a contractually based scheme. This allows the guarantees to be implemented in the most seamless, effective and flexible way. This is broadly consistent with the approach taken in a number of other countries, including the UK and New Zealand. The Australian government, quite clearly, has the legal ability to implement the guarantees in this way, and our legal advice confirms this.

Senator Brown, on behalf of the Greens, is proposing to move an amendment to sunset these arrangements and is apparently proposing an amendment that will require parliament to approve any payment under the guarantee. I would argue on behalf of the government that this will undermine the purpose of the bill. It is vital that there is certainty around the guarantee in the appropriation. The appropriation must stay in force for the life of the guarantee. The deed for the guarantee itself deals with termination arrangements. In addition, further parliamentary consideration of payments under the guarantee introduces uncertainty, the very thing this bill is designed to overcome.

The standing appropriation in the bill we are putting through the parliament today will cover any claim under the guarantee in the very unlikely event of such a claim being made. The appropriation will ensure that investors are confident they can get their money quickly in the unlikely event that a bank defaults on its obligations. We think it is prudent to give certain powers to investors who provide funding to our institutions and to give certainty to those with large deposits. That is why we are moving on this appropriation today. Passage of the bill will ensure that from 28 November any claim under the guarantee scheme, however unlikely, will be able to be paid in a timely way.

I will touch on a couple of other matters before I conclude. Firstly, I think Senator Xenophon’s contribution was a particularly thoughtful one. He has clearly given significant consideration to the way in which the financial markets in Australia are evolving as a consequence of what has happened internationally and the actions the government has undertaken. I do take his contribution seriously, and there are certainly issues that I and the government do give considerable thought to. But I would say on the point he raised about the prudential oversight of our banking, credit union and building societies by APRA, that it has been very strong and very robust. There has been very effective regulatory oversight by APRA with respect to the levels of risk, the borrowings, and I think he touched on credit derivatives. APRA has reported regularly to parliament on this particular set of issues.

There is one area where I agree in part at least with Senator Brown, and that is in relation to the credit rating agencies. I do accept that there is some irony in the role of credit rating agencies today, given what occurred in the US. The reality is that, as Senator Brown mentioned, we are dependent on the ongoing oversight or gatekeeping of at least part of our financial system. The regulators et cetera have their responsibilities on the robustness of credit rating agencies, and there is an irony, given the credit rating agencies’ manifest failure to properly rate the risk of the extraordinarily exotic—if I can term it that way—complex investment instruments that emerged as a consequence of the mis-selling of mortgage products in the US.

This government has acted. In my capacity as Minister for Superannuation and Corporate Law, I released the new regulatory and supervisory arrangements that are to apply to credit rating agencies and research houses in this country. We have analysed the risk and we have analysed the supervisory arrangements, in accordance with the request from IOSCO, the international credit organisation. I do not have the time here to go through what I have announced. But we have tackled this issue, Senator Brown. It is another example of the government acting decisively. There will be licensing and reporting of these credit rating agencies and research houses to our regulator for the first time in Australia. We have not waited and relied on what has occurred in the US.

Senator Bob Brown referred to the ‘big end of town’ and the use of consolidated revenue, from which we pay hospitals, roads, pensions et cetera. He seemed to be implying that if we approve this legislation we are somehow going to put at risk payments for hospitals, roads, pensions et cetera. I strongly submit to the Senate on behalf of this government that, if we do not take action like this, the risks of serious repercussions for our economy would put at risk the very payments and benefits that Senator Bob Brown is highlighting. We need to ensure that the integrity of our financial system is maintained to minimise the impacts both on the financial system and on the economy as a whole. Senator Brown has his perspective, and I would strongly argue, not just on behalf of the government but personally, that the very things that Senator Bob Brown is concerned about—if the worst were to happen and our financial system was impacted more heavily than it has been—would be at risk if we did not pass this underpinning legislation.

I strongly rebut the accusation from Senator Bob Brown that we are dangling on the strings of the big finance houses. I do not agree. I have explained why we are presenting this legislation and I would not suggest that the Liberal opposition is dangling on the strings of the big finance houses. We are supporting appropriate legislation for the times, given the circumstances that I have outlined. When I reminded Senator Brown that these measures were not just for the big four banks but for credit unions, building societies and regional banks, I noticed that he changed his language from ‘the big banks’ to the ‘big finance houses’, I think in an attempt to generalise his language because he is not keen to say of course that we are dancing to the tune of small- to medium-sized credit unions or building societies, who also happen to benefit from this legislation. And I strongly reject the claim that the executive will allow the ‘plundering’ of the public purse. These are, I think, over-the-top criticisms being made not just of us as a government but also of the Liberal opposition. I strongly reject this language.

Senator Coonan outlined some of the history. I have been in this place for 18 years and Senator Coonan is not far behind me. The issue of the guarantee scheme with respect to financial institutions has been around for quite some time. It has been debated in the Australian finance community and the public policy community for a very long time, but it certainly was highlighted as a consequence of the HIH royal commission, which I know Senator Coonan would certainly remember as she was a minister at the time, back in 2005. I want to emphasise this. This issue came to the boil in a public policy sense for insurance companies as a consequence of the HIH royal commission, and the previous Liberal government did not do anything with regard to guarantees up to the point in time that it lost office. So if you want to go through history, I can highlight what I believe has been the inaction of the previous Liberal government in this particular area.

Senator Coonan strongly argues that we should have just adopted the policy of the Liberal Party, which was a $100,000 guarantee. There is one thing I want to point out that has not been pointed out significantly, I think, by many observers of this debate: if that $100,000 had been adopted, what would have been the impact on the non-guaranteed products? I suggest that if it had been adopted it would be very similar in its impact on the non-guaranteed products—the property trusts and cash management trusts and the like—that were not covered by the guarantee. It would have had a very similar effect, and very few people have remarked on that issue.

I strongly urge the Senate to support this particular legislation. It is vital; it is extraordinary, but we live in extraordinary times; it is necessary; it is in the national interest; and it is very important to underpin the financial system in this way. The world financial systems have been battered in recent times and this legislation should be passed urgently. (Time expired)

Question agreed to.

Bill read a second time.