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Economics Legislation Committee - 18/03/2015 - Reserve Bank Amendment (Australian Reconstruction and Development Board) Bill 2013

AYLMER, Mr Christopher Patrick, Head of Domestic Markets Department, Financial Markets Group, Reserve Bank of Australia

[11:21]

CHAIR: Welcome. Do you have an opening statement?

Mr Aylmer : No.

CHAIR: Okay, I will start the questions. Do you want to be a rural banker?

Mr Aylmer : Personally no. I am from the country myself and I think it is an interesting area of the economy. For me it is an interesting economic challenge because of the volatility in income flows. I think that presents a particular challenge for the provision of finance and the like.

CHAIR: Can you explain to me what the role of the former rural development bank was?

Mr Aylmer : There was the Rural Credits Department, which the Reserve Bank used to have, and there was the Commonwealth Development Bank, which was part of the Commonwealth Bank. As I understand it, the Commonwealth Development Bank made loans to particular areas that would not otherwise get the money. There are two things I think are interesting about that. First, those loans were being made by a commercial lending entity—that being the Commonwealth Bank—so they had experience in that. The other thing was that it operated in a world where credit was pretty much constrained. So it may have been the case that people who should have been getting loans were not getting the loans because of the regulated financial environment that existed at that time. In fact, when the Campbell committee made its deliberations it came to the view that in a more deregulated financial market it was unnecessary for the Commonwealth Development Bank to continue.

CHAIR: Does the Reserve Bank of Australia already have the mechanisms to step in and take over troubled loans from commercial banks?

Mr Aylmer : No, we do not. We do not have a commercial lending operation.

CHAIR: In your assessment then, is the concessional loan scheme operated by the Department of Agriculture filling the role that is proposed in this bill?

Mr Aylmer : Yes, we would argue that, if there is market failure or there needs to be a subsidy or a concession, that should be done through the Commonwealth budget. That is the appropriate vehicle. That is where it is done in the US and Canada.

CHAIR: Yes, we are getting some more information on that, so thank you for that.

Senator XENOPHON: Has the Reserve Bank done an analysis in terms of rural debt and rural finance while the Commonwealth Development Bank was operating and since that time? It has been quite a while now. I think that it was 1992-93.

Mr Aylmer : 1992 for the Commonwealth Development Bank, and for rural credits the last loan was in 1988. Have we done research on—

Senator XENOPHON: Has there been analysis done on that and also what other countries are doing? I understand your reservations about the bill. I appreciate that, but that was the vehicle that we as the movers, along with the Hon. Mr Katter in the other place, thought was the best way of dealing with this. Leaving aside the mechanics of this bill, in terms of the extent of the problem, has there been an analysis done of how things have changed since the rural debt facility that the Reserve Bank was involved in and also since the sale of the Commonwealth Development Bank to the private sector? Also, does the Reserve Bank look at what other countries are doing to smooth out the cyclical nature and the volatility of income flows in agriculture that you referred to in your opening statement?

Mr Aylmer : Our submission in the first part of that in some ways is looking at the history and the evolution of indicators of indebtedness in the rural sector, and there are a couple of quite striking things there. One is—I think that it was just mentioned in the previous section—the level of indebtedness. In the nineties it was about 100 per cent of rural output; it is now 200 per cent. We look at other sectors of the economy and you do get similar doublings and that.

Senator XENOPHON: The evidence that we had from Treasury, which was very useful, is that it was perhaps a little greater in rural debt. Is that correct? In other words, with the difference between rural debt and, say, household debt, is it generally that the price of houses has gone up so that you may have extra debt but you have extra assets against that debt, whereas the problem with rural debt is that you have actually seen declining asset values? I go to the issue of the Riverland.

Mr Aylmer : And your capacity to service that debt.

Senator XENOPHON: That is right.

Mr Aylmer : Ultimately the value of an asset is really the discounted value of those income streams. Just on that first bit, going from 100 to 200 per cent, if you look at household indebtedness at the beginning of the nineties it was probably about 50 per cent of income, and that is closer now to 150 per cent. In percentage point terms it is about the same. If you look at total credit as a share of total output, it has gone, over that same period, from about 80 per cent to 140 per cent. So the indebtedness of the rural sector is certainly higher in levels terms. The movement across that period does not look all that different, and that may be largely a function of deregulation of the banking system—more people getting access to that finance.

Senator XENOPHON: Thank you for that. But is net rural debt actually greater because the capacity to service loans and the actual value of the assets have declined? In South Australia, in the Riverland, you have a lot of wine grape growers who are actually not doing very well at all, because what they are getting for their grapes is less than the cost of production. So who is going to buy a farm if you say that if the value of an asset is its discounted income future income flow, and the future income flow is negative? So is that taken into account? The second part of that question is: does the Reserve Bank look at what other countries are doing in order to grapple with this issue of rural debt?

Mr Aylmer : On that first one, the thing about rural debt and rural asset values is that there is a lot more variability across the country depending on grape growing, broadacre farming and that, as opposed to housing, where you see a lot less volatility. So banks are obviously more comfortable advancing loans there because the risks associated with that are smaller, whereas there is so much more variability in the rural sector. The issue we always have is that we tend to look at it in aggregate terms, because we have a monetary policy—it is a very blunt instrument. But we do appreciate there is considerable variability within those aggregates. Did I answer the first part of your question?

Senator XENOPHON: Largely, but the second part of it was: does the Reserve Bank take heed of what other countries are doing in terms of dealing with rural debt? And tacked onto that, as a supplementary question before I get your answer, to what extent will Basel III make it even more difficult, in relative terms, for farmers in a difficult rural debt situation?

Mr Aylmer : On the first question—do we look at developments overseas?—we do. In some ways, this inquiry itself prompted us to look at the sort of arrangements that might apply overseas.

Senator XENOPHON: I am glad we have been useful to you.

Mr Aylmer : The thing that is interesting for us is: is this a problem for which you would look for an insurance solution? It is the volatility in cash flow that is the issue here, and the way you would normally look at that—in fact we had a really interesting conversation with Rowell a year and a half or so ago—is, 'That to me suggests maybe it is an insurance solution rather than a concessional loan solution.' And then there is the question: would the private sector actually be prepared to provide that? I do not know. In risk-adjusted terms, the premiums may well just be so high that you could not get an effective private solution.

Senator XENOPHON: We do have a precedent for government intervention. After September 11, 2001, a national reinsurance pool was set up to deal with potential market failure where, if you have a major commercial building, it cannot be insured against a terrorist attack. That is why there is a statutory scheme. So there is a relatively recent precedent for government intervention where there has been a market failure.

Mr Aylmer : They have an insurance scheme in the US.

Senator XENOPHON: For farmers?

Mr Aylmer : For farmers. I am not all that familiar with it, but its mere existence says to me, 'Okay, that is the way they have come at this issue.'

Senator XENOPHON: That has been very helpful.

Senator KETTER: Mr Aylmer, you have identified a number of ways in which the Australian government is currently offering support to the rural sector. There is the Farm Finance program—$420 million of concessional loans—and the Farm Management Deposits Scheme, which is basically a tax deferral arrangement, as I understand it. Are you able to tell us to what extent farmers make use of that scheme?

Mr Aylmer : Not really. We only made ourselves aware of the assistance that is actually currently available. I think the departments that administer those schemes would be much better placed than we would be to really comment on the detail of those forms of assistance.

Senator KETTER: Okay. You have given some costings. Over the past eight years or so, the total amount of farm assistance was about $5.9 billion, according to your submission. Are you able to give us an indication as to the breakdown of that figure to any greater extent?

Mr Aylmer : I cannot. I could take that on notice. The reference document is actually a Productivity Commission document. Because we do not have a particular expertise in the rural sector—we are interested in it but do not have dedicated specialists looking at that—we rely on what we think are good sources of information, so our submission quotes extensively from ABARES, and there is the Productivity Commission. We do try and use credible sources to build a picture. It is necessarily an aggregate picture, to be honest.

Senator KETTER: Thank you.

CHAIR: Mr Aylmer, it has been great to have you here. Thanks very much for coming: I hope that everything remains right and good at the RBA. Thanks very much.

Mr Aylmer : Thank you very much, senators.

CHAIR: I will just give you a heads-up: answers to questions on notice will be due by 25 March 2015.