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Banking Legislation Amendment Bill 1992



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House: House of Representatives Portfolio: Treasury

Purpose This is an omnibus Bill that will amend a number of Acts falling within the Treasury portfolio. The major amendment will: * require foreign banks before accepting a deposit from a person, to inform them that they will not have the protection of the depositor protection provisions of the Banking Act 1959; * strengthen the confidentiality provisions relating to information passed to the Reserve Bank; and * provide for the appointment of a second Deputy Governor of the Reserve Bank.

Background As there is no central theme to this Bill, the background to each major amendment will be explained below.

Main Provisions

Amendments relating to foreign banks: Commonwealth banking legislation comprises the Reserve Bank Act 1959, the Commonwealth Banks Act 1959 and the Banking Act 1959. These Acts provide a scheme for the regulation of all banks, other than State banks. Under section 7 of the Banking Act 1959, only an incorporated body may carry on banking business in Australia, and then only when in possession of an authority under section 9. Corporations seeking authority to carry on banking business have to apply to the Treasurer for the authority. An authority is discretionary and may be made subject to conditions, which may be varied or revoked. Subsection 9(1) of the Banking Act 1959 confers authority to carry on banking business on banks listed in Schedule 1 to the Act. Division 2 of Part II of the Banking Act 1959 (the depositor protection provisions) imposes a duty on the Reserve Bank to exercise its powers and functions under this Division for the protection of the depositors. The Reserve Bank may require banks to provide information relating to their financial stability. Where a bank fails to comply with such a requirement, the Reserve Bank may appoint a person to investigate the affairs of that Bank. Where a bank considers it is unlikely to be able to meet its obligation, or is about to suspend payment, it must inform the Reserve Bank. Where a bank is unable to meet its obligations, or suspends payment, its assets in Australia have to be used to meet its deposit liabilities in Australia in priority to all other liabilities.

Since 1985, foreign banks operating in Australia have had to be established as locally incorporated subsidiaries rather than as branches of the parent bank. In October 1990, the Government referred to the House of Representatives Standing Committee on Finance and Public Administration (the Committee) an inquiry into the Australian banking system. In relation to operation of foreign banks as branches, the Committee's conclusions included that there was wide spread support for allowing foreign banks to operate as branches; and that allowing foreign banks to operate in Australia as branches may increase competition in the banking industry (Note: the Committee argued that by having a broader capital base and improved fund raising capabilities, a branch of a foreign bank would be in a better position than a subsidiary to compete against incumbent domestic banks). 1 The Committee recommended that foreign banks, from countries offering Australian banks reciprocal access, be allowed to operate in Australia as branches, subject to certain conditions including maintenance of appropriate prudential requirements set by the Reserve Bank of Australia. 2

In the February 1992 One Nation statement, the Government announced that it had decided to allow foreign banks, authorised under the Banking Act 1959 to carry on banking business in Australia, to operate as wholesale banks in the form of a branch. "Allowing foreign banks to provide wholesale banking services through branches should bring benefits of greater flexibility in the provision of finance and cost advantages to Australian clients", said the Government. 3 Wholesale banks provide banking services to the business sector (e.g. capital to set up new factories) while retail banking provides banking services to the consumer (e.g. home loans). "Permitting foreign banks to operate as branches does not allow the RBA to ensure the same level of prudential supervision and depositor protection as can be applied to subsidiaries. The Government places great importance on protecting the interests of Australian bank depositors, and, to this end, the Government has decided to allow foreign branches for wholesale banking but require retail banking by a foreign bank to be conducted in a subsidiary." 4

The Government's One Nation announcements relating to foreign banks have received general support from the banking industry. For example, in The Australian of 27 February 1992 it is reported that the managing director of Westpac said that he was reasonably happy with the economic package and the banking changes involved; the chief economist of the National Australia Bank said that the changes were sensible; and that analysts said "the changes applying to foreign banks were a good development as they would allow rationalisation in a banking system generally regarded as over- banked by world standards."

The principal amendments relating to foreign banks proposed by this Bill are contained in clauses 4, 6 and 9. "Foreign bank" is defined in clause 4 to mean a foreign corporation that is within the meaning of section 51(xx) of the Constitution; is authorised to carry on banking business in a foreign country; and has been granted an authority under section 9 of the Banking Act 1959 (the Principal Act). A new subsection 9(8B), that will be inserted into the Principal Act by clause 6, provides that the Governor- General may on the recommendation of the Treasurer revoke the authority of a foreign bank if: * it does not comply with a condition imposed on the authority; * it does not comply with a requirement of the Principal Act or regulations; or * satisfied that it would be contrary to the national interest for the bank to continue to operate in Australia.

The principal effect of clause 9 will be to require foreign banks before accepting a deposit from a person to advise them, in a way approved by the Governor of the Reserve Bank, that they will not be subject to the depositor protection provisions contained in Division 2 of Part II of the Principal Act (Note: see p. 1 of this Digest for an outline of Division 2 of Part II of the Principal Act). Clause 9 also provides that where a foreign bank, whether in or outside Australia, suspends payments or becomes unable to meet its obligations, its assets in Australia have to be used to meet its liabilities in Australia in priority to all other liabilities.

Clause 14 substitutes a new First Schedule into the Principal Act. The proposed First Schedule is broken into two Parts. Part 1 lists banks that are subject to the depositor protection provisions contained in Division 2 of Part II of the Principal Act, and Part 2 lists banks that are not.

Amendments relating to the disclosure of certain information about bank's and applicants for an authority: Proposed section 69D, that will be inserted into the Principal Act by clause 13, makes it a duty of an officer ('officer' is defined to include the Governor or a Deputy Governor of the Reserve Bank, an employee of the Reserve Bank, or a Commonwealth public servant) to not disclose any fact or document relating to a bank or applicant for an authority to carry on banking business that has come to his/her knowledge, or into his/her possession unless it is necessary in performing a function/duty/power under the Principal Act. An officer will not be required to produce such information in a court unless the court decides it is necessary for the purposes of the Principal Act or its regulations.

No rationale is provided by the Minister in the Second Reading Speech to this Bill for proposed section 69D. However, in the Explanatory Memorandum to this Bill, it is stated that "this provision [proposed section 69D] is included to encourage a free and open exchange of information between the Reserve Bank of Australia (RBA), banks, and home country supervisors of foreign banks. ...".

Amendment relating to the declaration of dividends by the Commonwealth Bank: Section 32 of the Commonwealth Banks Act 1959 (the Principal Act) provides that before making a recommendation to a general meeting of the Commonwealth Bank (CBA) for the payment of a dividend, if any, to shareholders, the Board of the CBA is to notify the Treasurer of the recommendation. The Treasurer, within two weeks of being notified of the recommendation is to either accept the recommendation, or vary the recommendation by specifying a dividend that does not exceed 45% of the consolidated profit of the CBA and its subsidiaries. Before varying a recommendation of the Board, the Treasurer is to try to reach agreement with the Board and is to take into consideration the reasons for the Boards recommendation. The CBA, in a general meeting, is not able to declare a dividend greater than that recommended by the Board.

A new section 32 will be substituted into the Principal Act by clause 20. The major change between the current and proposed sections 32 is that the Board of the CBA will no longer have to make a recommendation regarding the amount, if any, of the payment of a dividend, to a general meeting.

The rationale given by the Minister in the Second Reading Speech to this Bill for proposed 32 is to "streamline the process of declaring dividends, by enabling the Board of the Commonwealth Bank to declare dividends without seeking shareholder approval at a general meeting."

Amendments relating to the appointment of a second Deputy Governor of the Reserve Bank: The cumulative effect of clauses 22- 33 will be to provide for the appointment of a second Deputy Governor of the Reserve Bank. These amendments will give effect to a recommendation of the Committee. In considering whether there should be a separation of Reserve Bank responsibilities for monetary policy and prudential supervision of banks, the Committee concluded that there should not be a separation (Note: The rationale put forward by the Committee for this conclusion was that on balance, the disadvantages in terms of duplication or the need to establish extensive co- ordination arrangements tend to outweigh the advantages from specialisation). 5 The Committee also concluded that the Reserve Bank's ability to conduct prudential supervision needed to be enhanced. The Committee recommended that the Reserve Bank appoint a second Deputy Governor with specific responsibility for prudential supervision, and that the occupant should be titled the Supervisor of Banks. 6

References 1. House of Representatives Standing Committee on Finance and Public Administration, A Pocket Full of Change - Banking and Deregulation, November 1991, p. 159. 2. Ibid., at p. 160. 3. Statement by the Prime Minister, One Nation, February 1992, p. 69. 4. Ibid. 5. Ibid., at pp. 227 and 228. 6. Ibid., at p. 228.

Bills Digest Service 4 November 1992 Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1992.

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1992.