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Wednesday, 26 November 2008
Page: 7408

Senator SHERRY (Minister for Superannuation and Corporate Law) (5:39 PM) —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—

Senator Fierravanti-Wells —It’s Senator Conroy’s speech!

Senator SHERRY —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.