Senator XENOPHON (5:33 PM) —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.