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Tuesday, 6 December 1938

Mr CASEY (Corio) (Treasurer) .- I move-

That the bill be now read a second time.

The amendments of the Commonwealth Bank Act proposed in this bill are largely concerned with implementing the recommendation of the Royal Commission on the Monetary and Banking Systems to the effect that a mortgage bank should be established to provide better facilities for fixed and long-term lending. Opportunity is also being taken' to carry into effect certain other recommendations of the banking commission which relate to the constitution of the Commonwealth Bank, and to make a number of other amendments of a more or less minor- character of the Commonwealth Bank Act.

Mr Holloway - They would be minor !

Mr CASEY - Recommendations of the commission dealing with the regulation of banking in general, and the strengthening of the Commonwealth Bank as a central bank, will be dealt with at a later stage. I ask the honorable member for Melbourne Ports (Mr. Holloway) to absorb that statement.

Mr Curtin - That means another bill ?

Mr CASEY - Yes. This bill is confined to such matters as affect the Commonwealth Bank. It does not in any way deal with the trading banks.

I propose to explain first, in brief outline, the intention of the clauses dealing with the establishment of a mortgage bank. The royal commission found that there was some lack of facilities for fixed and long-term borrowing upon land and improvements. Loans on real property are made in New South Wales by the Rural Bank, and in other States by savings or state banks and agricultural banks. The principal sources for loans of this type, however, are such financial institutions as assurance companies, trustee companies, building societies, trustees and private lenders, and the evidence before the commission disclosed some reluctance on the part of many of these non-governmental institutions to lend money in rural areas. This reluctance appears to be based on the following grounds: -

(a)   that it is expensive and difficult to supervise the securities in towns and districts far removed from the office of the lender ; and

(b)   that if the borrower fails to meet his obligations, there may be difficulty in realizing on the security.

Many country borrowers have, on this account, to resort to accommodation by way of overdraft from the trading banks or pastoral finance companies. Such overdrafts are nominally repayable on demand, but, in many cases, they are granted with the knowledge that they may not be fully repaid for several years. Hence they are, in effect, long-term loans. The interest rates on such overdrafts vary generally according to the trend of interest rates. The uncertainty of the term, the possibility that the borrower may be called upon to repay part or whole of the loan at any time, and the lack of certainty as to the interest rate to be charged from time to time, render this method of financing long-term capital requirements unsuitable in many cases to country industry.

Mr Nock - It is unstable.

Mr CASEY - Yes. The Government feels that the commission has uncovered a defect in our credit machinery as it exists atpresent. By filling in the gaps left by the existing lending authorities, it, hopes not only to remove possible hardships from borrowers, but also to effect a cheapening of credit by erecting a suitable organization that will be equipped to undertake business for which private organizations do not fully provide. The Government feels that its objective can be best achieved by setting up a mortgage bank designed both to accommodate individuals directlyand to supplement the resources of certain existing institutions that already cover part of the field of fixed and long-term lending. The bill is intended, therefore, to supplement existing facilities and; to fill in certain gaps in the service provided by existing lending organizations. It is not our intention to duplicate facilities where these are already satisfactorily provided.

For such a mortgage bank to function effectively there are three conditions that should be satisfied -

(1)   The bank should have experienced, efficient and economical management.

(2)   Capital should be obtained as cheaply as possible.

(3)   The bank should be able to borrow and lend at reasonable rates of interest.

The banking commission suggested the following ways in which such a bank could be established: -

(a)   By a trading bank, or by several trading banks conjointly, as a separate unit of their business;

(b)   by a new company, with capital provided by the public ;

(c)   by an institution, the capital of which would be provided by a government, the Commonwealth Bank, the Commonwealth Savings Bank, or State Savings Bank or State Bank.

(d)   by capital provided partly by any of the institutions named and partly by private investors.

The Government is of the opinion, however, that the proposed institution could most adequately fulfil the conditions necessary for its success if it were established as a department of the Commonwealth Bank, on the lines indicated in this bill. The reasons for this view are that the Commonwealth Bank is not dominated by motives of profit; the personnel of its board includes men well acquainted with rural industry and its requirements ; thebank has gained valuable experience through the working of its Rural Credits Department, which has advanced more than £66,000,000 against the security of primary produce. Moreover, the Commonwealth Bank has already throughout the Commonwealth many branches through which business of this type could be conducted economically. This is an important consideration, and one that will affect the ra'tes of interest at which it will be found possiblp to make loans. The department will be able to commence business with a minimum of delay, and as its capital will be provided by the means proposed in the bill, it should be enabled to provide long-term financial accommodation at satisfactory rates. Further, the Commonwealth Bank, because of its strength as an institution, and its status as a government instrumentality, is in an unrivalled position to obtain capital cheaply through its ability to offer impregnable security.

Under the proposals contained in the bill, a Mortgage Bank Department of the Commonwealth Bank will be established. The Mortgage Bank will function as a separate department of the bank, and in all major respects will be kept distinct from other departments, although conducted under the same management. As with other specialized departments of the bank, the Mortgage Bank will have a special function apart from that of the General Bank Department, and it is desirable that it should be kept distinct.

Another major provision of the bill is that the capital of the Mortgage Bank Department, which will not exceed £4,000,000, will consist of the following amounts : -

(i)   One-third of the profits of the General Bank Department of theCommonwealth Bank.

(ii)   An annual sum of £100,000 from the profits of the Note Issue Department of the Commonwealth Bank.

(iii)   One half of the profits of the Mortgage Bank Department itself.

Mr Anthony - Where will the other half of the profits of the Mortgage Bank Department go?

Mr CASEY - The other half will go to the Mortgage Bank Department's reserve fund.

The percentage of the profits mentioned will, it is anticipated, provide about £220,000 every year. In order to furnish additional funds for the purposes of the Mortgage Bank Department, it is proposed that -

(i)   The Commonwealth Bank may make advances to the Mortgage Bank Department up to a total of £1,000,000.

(ii)   The Commonwealth Bank may also raise moneys for the purposes of the Mortgage Bank Department by issuing debentures or stock secured on the general assets of the Commonwealth Bank. The outstanding amount of these securities is not to exceed six timesthe amount of the capital of the Mortgage Bank Department at the time of the issue of the securities.

These proposals mean that, at the end of the first year, the Mortgage Bank Department will be in a position to obtain funds amounting to about £2,500,000. These funds may be increased each year by a total of nearly £1,600,000, until they reach a final total of £29,000,000. Payment of principal and interest on debentures or stock issued by the Commonwealth Bank for the purposes of the Mortgage Bank Department is guaranteed by the Commonwealth under section 56 of the Commonwealth Bank Act. This guarantee reinforces the guarantee provided by the proposal to secure the debentures or stock on the general assets of the Commonwealth Bank. Together, the two guarantees should give to the debentures issued for the purposes of the department an excellent market, and enable the bank to borrow advantageously. The amendments proposed in clause 23 of the bill will exempt the interest on these securities from State income tax unless it be declared, with the approval of the Commonwealth Treasurer, to be so liable in the prospectus of the issue. Under the proposed amendments, transactions in these securities will also be exempt from stamp duty, or any other tax of the Commonwealth or of a. State. They will also, under Section 58a of the act, be securities in which trustees, executors, or administrators may invest trust moneys.

With all these advantages, securities issued for the purposes of the Mortgage Bank Department should find ready acceptance at reasonable rates of interest ; and these rates, taken in conjunction with the contributions from the profits of the general bank and the Note Issue departments, should permit loans to be made to borrowers on favorable conditions.

The Mortgage Bank Department may make loans -

(i)   to individuals on the security of a mortgage over land in Australia granted or primarily used for farming, agricultural, horticultural, pastoral or grazing operations ;

(ii)   to societies approved by the Treasurer on the security of a mortgage over land in Australia, or on the security of the interest held by a society in such a mortgage;

(iii)   to such authorities of the Commonwealth or of a State as are approved by the Treasurer.

Mr White - Will an individual citizen have direct access to the bank, or must, he approach it through a building society ?

Mr CASEY - The honorable member is anticipating; I shall deal with that point presently.

It is not intended that the benefits provided by the Mortgage Bank Department shall be restricted to primary producers. Whilst the chief emphasis of the commission's recommendation was laid on the difficulties of providing long-term capital for primary producers, the provision of funds for housing is also important. The facilities already provided in the latter field are, however, greater than those provided in respect of loans to primary producers.

Mr Francis - Are struggling now sccondary industries provided for in this bill?

Mr CASEY - No.

In making loans, it is proposed that the department shall deal directly only with primary producers, in respect of mortgages on land used primarily for the purposes that I have indicated.

Mr Fadden - What about co-operativo societies ?

Mr CASEY - There is some question as to whether they come within the legal definition of persons.

As I have said the intention of this bill is to supplement - not to supplant - existing institutions. So far as primary production is concerned, the Mortgage Bank Department will also be empowered to lend to governmental instrumentalities already established to assist the primary producer; but, in order to carry out the intentions of the bill, loans may be made to such authorities only on the condition that the proceeds are lent to individuals on the same general conditions as those on which the department will lend directly to its individual customers. These instrumentalities will also be able to make loans for the purpose of city and country house-building out of the funds provided by the Mortgage Bank Department.

In order that there shall bo no undue interference with the operations of other existing institutions already catering for house-building, it is proposed that any further assistance for this purpose shall be given by making loans only through approved societies. These approved societies will thus be placed in aposition to continue and to expand the facilities that they at present offer to the public.

Loans may be made by the bank to individuals and approved societies:

(i)   On the security of a first mortgage, unless the loan is to be used to discharge an existing mortgage, or the prior mortgage is to. the bank or some governmental authority;

(ii)   up to an amount not exceeding two-thirds of the capital value of the property on which the loan is secured ;

(iii)   for periods of from three to 35 years;

(iv)   on such additional terms and conditions, for example, rate of interest, and terms of repayment, as the Commonwealth Bank approves.

Loans may also be made to approved societies on the security of their interest in mortgages which satisfy the requirements already mentioned. The types of land which may be mortgaged consist, broadly, of estates in fee-simple, and various kinds of leasehold and conditional purchase tenures held from the Crown. As these are too numerous to set out individually in the bill, the types to be accepted as security must be left to the discretion of the Commonwealth Bank.

If the Mortgage Bank Department is to 'be of lasting benefit, it is essential that it shall be conducted on sound business lines. The Government believes that the needs of borrowers will .be best served by empowering the Mortgage Bank Department to provide loans at reasonable rates of interest on first-class security, rather than that it should undertake business which, because a greater degree of risk is involved, will require higher rates to be charged. The requirement as to first mortgage and the limitation of advances to two-thirds of the capital value of the land are in consonance with the usual policy of other institutions dealing with this type of business. A sum not exceeding two-thirds of the capital value of the land is the most that can safely be advanced if the difficulties which have previously been experienced by institutions of this character are to be avoided. This provision means that the borrower must have an equity of at least one-third in the property on which money is to be borrowed from the Mortgage Bank Department. A reduction of the permissible equity would tend to encourage speculative demands for land, and might endanger the financial stability of the department.

No special provisions have been included in the bill to enable the department to make self-amortizing loans. This is a matter which can be safely left to the discretion of the department, which, no doubt, will provide for loans of this class in suitable cases.

The aim of the department will be to render financial aid and advice to sound borrowers rather than to make large, profits. In this way, it is hoped to give real assistance to the community, in directions in which existing facilities may be inadequate, and at the same time to preserve the department as a financially sound and stable institution.

Mr Beasley - Will a man who is already doing business with another bank bc permitted to transfer it to the Mortgage Bank Department?

Mr CASEY - That will be a matter of arrangement between him and the bank with which he is already dealing.

Mr Scullin - Will the Commonwealth Bank Board- follow its present policy of refusing to take business away from the private banks?

Mr CASEY - I cannot commit the Commonwealth Bank in this connexion. It is fully aware of the desire of the Government, and it will be furnished with a copy of my speech.

Mr Holt - The Treasurer has already said that this legislation may replace overdrafts.

Mr White - Is it a fact that a metropolitan borrower will not have direct access to the Mortgage Bank Department, but must approach it through an approved building society?

Mr CASEY - Yes.

Mr Fadden - Will co-operative societies come within the scope of the term " aPproved societies " ?

Mr CASEY - I think so, but I should like to consult the Attorney-General before being emphatic on that point.

Mr Lane - What about farming on a co-operative .basis?

Mr CASEY - I have already referred to that subject.

The proposals for the creation of the Mortgage Bank Department make necessary certain consequential amendments to the existing Commonwealth Bank Act. I shall refer briefly to the more important of these in the order in which they occur in the bill.

Clause 20 proposes a re-allocation of the profits of the General Bank Department of the Commonwealth Bank, by providing that one-third of those profits shall be paid to the capital account of the Mortgage Bank Department. Under the act as it stands at present, onehalf of the profits of the bank is placed to the credit of the Bank Reserve Fund, and the balance is paid into the National Debt Sinking Fund. It is proposed that the proportion now placed to the credit of the Bank Reserve Fund shall be reduced to one-sixth, until such time as the aggregate capital of the Mortgage Bank Department amounts to £4,000,000. When this aggregate is reached, the Bank Reserve Fund will again receive one-half of the profits of the General Bank Department.

Clause 23, to which I referred earlier, proposes to free from stamp duty or any other tax imposed by the Commonwealth or a State, debentures or inscribed stock certificates, and documents relating to the purchase, sale, transfer, or transmission of, or to the payment of interest on, such securities issued for any purpose of the Comonwealth Bank. It is also proposed that interest derived from such securities shall not be liable to State income tax unless the interest is, with the Treasurer's approval, declared to bo so liable by the prospectus relating to the issue. These provisions are intended to place debentures or inscribed stock issued by the Commonwealth Bank in the same position as bonds and inscribed stock issued by the Commonwealth Government.

It is provided in clause 23 that the Savings Bank Department shall be authorized to invest its funds in debentures or inscribed stock issued for the purposes of the Mortgage Bank Department. The Savings Bank Department is already empowered under the act to invest its funds, inter aiia, in securities of this type issued for the purposes of the Rural Credits Department, and it is obviously desirable that the scope of its possible investments should be extended to cover securities issued on account of the Mortgage Bank Department. As I have already mentioned, these are guaranteed by the Commonwealth Government in addition to being secured upon the general assets of the Commonwealth Bank.

Clause 4.0 of the bill proposes that part of the profits of the Note Issue Department should be contributed towards the capital of the Mortgage Bank Department. The act as it stands at present provides that, after payment of the expenses chargeable to the Note Issue Department, the balance of the profits shall be paid to the Commonwealth Treasury. The proposed amendment provides that an annual sum of £100,000 shall be paid from this balance to the Mortgage Bank

Department, until such time as the aggregate capital of the Mortgage Bank Department amounts to £4,000,000.

I now turn to the clauses which deal with certain other recommendations of the Banking Commission. Recommendation 2 suggested that the directors, other than the Governor and the Secretary to the Treasury, should be appointed for a terni of six years instead of seven years as at present, that one should retire each year, and be eligible for re-appointment, and that provision should be made that no director shall continue to hold office after reaching the age of 70 years. The Government has carefully considered this recommendation, and proposes to secure the ends sought by the royal commission in a slightly different way. After due consideration, it has come to the conclusion that it would be unwise to reduce the term of office from seven to six years, as this would tend to prejudice the stability and continuity of the bank's policy. It also considers that it would be preferable for Parliament not to bind itself rigidly to a 70-year age limit, but rather to give weight to the commission's opinions when making individual appointments. It is possible that there may be exceptional cases in which the services of a director, even though over 70 years of age, would be of very considerable value to the hoard. In general, however, the Government expects that this part of the recommendation will be implemented by the good sense of those responsible for making appointments in the future. The Government favours, however, the recommendation so far as it relates to the securing of an annual rotation in appointments to the board. The commission attempted to achieve this, by suggesting- reduction of the term from seven to six years. The Government believes that it can be better secured by the appointment of an additional director, and in clauses S and 9 it makes proposals to that effect.

In drafting the changes incorporated in clause 9, the Government has endeavoured to deal with this matter in a fair and impartial manner, and to avoid any suggestion of taking advantage of the proposed changes for political purposes. While the clauses are necessarily rather complicated, I would ask all honorable members to study them carefully as a whole, and to notice that certain alterations have been made solely for the purpose of securing the introduction of the annual rotation system. The details of the proposals can be better explained in detail in committee. In brief outline, however, clause 8 provides for the appointment of a further director, whilst clause 9 makes certain, slight changes of the dates on which existing appointments expire, and adjusts the terms of several future appointments in order to secure as far as possible the regular occurrence of one vacancy a year. It will be seen that, with the exception of 1944, in which two vacancies must occur, the effect of the changes proposed in clause 9 will be to secure the occurrence of a vacancy on the 31st December of each year commencing with 1940. The annual rotation of appointments will then continue indefinitely in the future.

After full consideration, the Government does not intend to accept recommend at. ion 3 of the banking commission which suggests the removal of the limitation on the field of choice of directors. It does propose, however, to act upon recommendation 4, which proposes that the Board of Advice in London should bo made permissive instead of mandatory. This is secured by clause 10. Occasion may also be taken to draw attention here to the minor amendments made in clauses 1.1 to 14 inclusive. These involve no questions of principle, and have been included mainly to facilitate the work of the board.

Recommendation 16 suggested that, in the public interest, the Commonwealth Bank should take control of the affairs of any bank which is unable to meet its immediate obligations, and should be given any additional powers which it may require for this purpose. The Government has decided to accept this recommendation, and even to go beyond it by giving the Commonwealth Bank power to secure information, additional to 'that provided by ordinary banking statistics, in cases where the condition of a trading bank is such that it may sooner or later be involved in difficulties.

As the failure of one bank to meet the demands of its creditors may seriously threaten the stability of the whole bank-

Mr. Caseying system, it is essential for the Commonwealth Bank to know whether any trading bank is pursuing a course which may involve it in difficulties. It is therefore desirable that the Commonwealth Bank should be in a position to obtain from any bank, in certain circumstances, such information as it requires for this purpose. Accordingly, clause 5 provides, in the first place, that the Governor of the Commonwealth Bank may require a bank, when its liquid assets, including Loudon funds arid government securities, have fallen to less than 20 per cent, of its deposit" liabilities in Australia, to supply him with information relating to its financial stability. If the information be not supplied, the Commonwealth Bank may appoint an officer to investigate the affairs of the defaulting bank. Secondly, if any bank informs the Commonwealth Bank that it is unable to meet its obligations, or if it suspends payment, the Commonwealth Bank may appoint an officer to investigate its affairs, assume control of the bank, or appoint a person to administer its affairs or a liquidator to wind it up. Should amalgamation appear to both parties to be the best solution, no additional powers are necessary, as the Commonwealth Bank already has power under section 7a of the act to enter into an arrangement for the acquisition of the business of another bank.

The other clauses of the bill do not warrant detailed explanation at this stage. They may be conveniently referred to under the following headings : - " Provisions affecting the Savings Bank ". These are contained in clauses 25 to 30. Clause 25 has already been dealt with in part. Paragraph (a) of the clause merely redefines the term

Government securities " already referred to in the principal act. Clause 26 provides for the calculation of interest on savings bank deposits on the 31st May, instead of the 30th June, in order to facilitate the organization of the bank's work, and to allow it to balance its accounts more rapidly at the end of the year. The remaining clauses are designed to improve the act in minor respects which experience has shown to be desirable. " Offences in relation to notes These are dealt with in clauses 45 to 51 which embody mainly formal amendments, designed to remove certain ambiguities and to make clearer the original intention of the relevant sections of the existing act. " Provision for the issue of inscribed stock as well as of debentures". Eleven clauses scattered through the bill provide for. the addition of the words " inscribed stock " before the word " debentures ". The bank already possesses power to exchange debentures for inscribed stock, but to operate under this authority would involve the unnecessary and wasteful expedient of first issuing debentures and then changing them into inscribed stock. This matter will become of more importance when the Mortgage Bank Department i3 functioning. "Repeal of provisions now out of date". Clauses 6, 41, 53 and 60 merely provide for the removal of dead wood from the existing act. " Alterations to annual balance sheet, audit, &c. ". When the Commonwealth . Bank commenced business in 1913, it was the practice of all banks to make up halfyearly balance sheets, and the Commonwealth Bank Act naturally laid down the same requirements for the Commonwealth Bank. ' For some time past, however, the other banks' have been making up their balance sheets only once a year, and this practice is now followed by all the Australian and English banks. It is now proposed that the Commonwealth Bank should fall into line with this general practice, thus avoiding the heavy and unnecessary work of producing an additional balance sheet on the 31st December of each year. Clause 17 provides that inspection and audit shall be yearly instead of half-yearly, and clause IS provides that the board shall prepare a balance sheet at the 30th June in each year instead of at least twice in each year. Clause 24 provides that the net profits of the Savings Bank Department, shall bc allocated each year instead of each half-year. Clause 19 provides for the repeal of the section which requires the preparation, of a statement of the combined accounts of the Commonwealth Bank and the Commonwealth Savings Bank. The affairs of the bank are indi cated quite clearly by the separate statements of account provided for under other sections of the act. " Other proposals ". Clause 15 makes certain minor amendments of the provision relating to loans to officers of the Commonwealth Bank, with the object of bringing the act into conformity with present-day banking practice. In addition to making loans to officers for homebuilding, the bank will be empowered to lend limited sums to officers in special circumstances. Most of the other amendments are designed either to clarify the existing act, or to make changes of a minor character which experience has suggested to be desirable. Opportunity is also being taken to renumber the sections of the act.

The Government considers that this measure is the best that could be' designed to fill the needs that it is intended to meet. It is particularly difficult to legislate in the sphere of mortgage banking, as the field is already covered partially by existing organizations. As I have said earlier, the Government has no desire and no intention to supplant or to compete with such of these organizations as are supplying satisfactory service.

Mr Nock - But charging interest at too high a rate.

Mr CASEY - Maybe. Rather, our desire is to encourage these institutions, and to offer direct service, only where they are unable to supply it.

Mr Curtin -. - Does not the honorable gentleman think it is time that the Commonwealth Bank competed with or supplanted bodies that are charging too high an interest rate?

Mr CASEY - It would not be in the public interest to dry up the existing supplies of mortgage money. To this end it is proposed that the Mortgage Bank Department shall make loans directly to individuals in eases where it is necessary to provide the desired facilities, and, at the same time, assist in supplying approved societies and other instrumentalities with some part of their loan requirements. In both cases it is proposed that the Mortgage Bank Department should operate at the lowest rates of interest consistent with the adoption of sound financial methods. The Government, however, has no intention of withholding assistance from credit-worthy individuals who, through no fault of their own, may be without adequate facilities for obtaining credit. I feel sure that this bill will solve the problem of filling up the gaps in the long-term credit supply with a minimum of disturbance and with a maximum of effective assistance in those directions where it has been proved to be necessary. It will also provide many necessary and desirable alterations of the constitution and functions of the Commonwealth Bank as it exists at present. I commend the bill to honorable members.

Debate (on motion by Mr. Curtin) adjourned.

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