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Reserve bank supervision of SA state bank

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Peter Reith



The Treasurer should make a ministerial statement to the Parliament next week and outline the response of the Reserve Bank of Australia (RBA) to the criticisms of it made by the Jacobs Royal Commission into the State Bank of South Australia (SBSA).

A reading of the Royal Commission Report, and exhibits tendered to the Commission, disclose extensive dealings between the RBA and the SBSA going back to 1984.

A summary of some examples of the RBA's involvement is attached.

The SBSA had voluntarily agreed to prudential supervision of its activities by the RBA and in pursuing its responsibilities the RBA had become aware as far back as 1987 that the SBSA was in difficulties and was in breach of standards which the RBA would impose on private banks.

It is important that the RBA explain its role in the SBSA's collapse.

The Treasurer's statement should include details of when and how the Federal Government first became aware of the SBSA's problem.

The documentation reveals that the problems of the SBSA were discussed at RBA board meetings which the Secretary of the Treasury attends on behalf of the Treasurer.

The Prime Minister, who was Federal Treasurer during the relevant period, should also tell the Parliament when he was first informed by the RBA of the SBSA's problems and whether he passed that information to the then State Premier and ALP Federal President, John Bannon.

19 November 1992 Broken Hill

Contact: David Turnbull (06) 2774277 D208/92



G. 1.2.6. nature of RBA concerns re BFC in 1988, 1989 and 1990 and extent to which Bank Board and Government aware of and heeded those concerns:

In mid May 1988 the Reserve Bank began querying strong asset growth and the effect on gearing ratios and in particular the recent purchase by Beneficial of Equiticorp's receivables and Beneficial's links with Fletcher Challenge in New Zealand. On 25 October 1 988

the RBA noted that Beneficial grew by 78% to $1.27 billion in financial year 1987-88 particularly in corporate lending. This included the purchase of receivables from Equiticorp and, according to an article in the BRW, participation in property projects throughout Australia totalling around $2 billion which included taking risk positions in the State Bank Centre and East End Market developments (Ex.476, Vol.l). The RBA had also queried Southstate and Ken Matthews told the Reserve Bank on 1 November 1988 that Beneficial was reviewing Southstate's likely ownership structure (Ex.476, Vol.l).

The Reserve Bank had been told in May 1987 that Kabani was involved in the building of the State Bank Centre (Austin at p.5339). RBA requested more information about Kabani Pty Ltd on 3 0 / 9 / 8 8 and 2 0 / 1 2 /8 8 but following a reply by SBSA on 1 5 / 2 / 8 9 note on

2 7 / 2 / 8 9 that the ownership of Kabani was not yet fully resolved and that the structure appears to be designed to avoid RBA capital adequacy requirements and furher information should be obtained on the ownership of Thomson Simmons Nominees. On 28 February

1989 the RBA told SBSA of its concern about the n o n -tra n sp aren t ownership structures of Southstate, Kabani and Campbell Capital and counselled SBSA about commercial property exposures. On 5 April 1989 the RBA wrote to Beneficial about ongoing problems with BFC's

tardy and unreliable retu rn s (Ex.476, Vol.l). In May 1989 the financial collapse of Tricontinental Corporation owned by the State Bank of Victoria (transcript p.5467) was given wide publicity and would have been of concern to Beneficial and SBSA as well as the

Reserve Bank.

By the prudential consultation meeting of 16 November 1989 the Reserve Bank was questioning Beneficial's large exposures and why Beneficial was expanding in areas which SBSA could itself service

and querying the sustainability of such rapid growth and the ability of management to control it (Ex.476, Vol.l).

At 22 November 1989 the Reserve Bank met with Beneficial noting that Beneficial was on the finance companies' watchlist because of its size, property exposures and rapid growth. The RBA queried BFC's non accrual loans, low provisions and relatively high and increasing exposure to property including the Hooker W aymouth Centre (non­

performing), State Bank Centre, the East End Market, Mindarie Keys, Park Lane Raddison and Export Park. These w ere vulnerable to major property m arket shake out. The Reserve Bank also noted Beneficial's acquisition of Southstate, Campbell Capital, First Pacific

Mortgage, Pacific Rim Leisure, IBIS and Asset Risk Management and queried known problem exposures such as Hooker, Equiticorp and Chase (Ex.476, Vol.l).

At a meeting with Michael Hamilton on 23 July 1990 the RBA said they had heard m arket concerns expressed about Beneficial in particular and Hamilton's diary note of 3 0 / 7 / 9 0 states that the RBA was "concerned that Beneficial does not constitute a re p e a t of the

Tricontinental experience and sought assurance that the Bank is taking w hate ver steps are necessary to protect the liquidity of its subsidiary. At the annual prudential consultation with SBSA on 29 August 1990 the RBA put detailed questions about their concerns

with Beneficial. These concerns w ere noted to the SBSA Board through a covering paper by Guille dated 20 S eptem ber 1990 but the RBA notes on 9 October 1990 that a n u m b e r of their concerns w ere not referred to in Guille's note. On 30 August 1990 the RBA

telephoned Michael Hamilton to re q u e s t regular updates about Beneficial about which they held concern and to request advance consultation about any proposed securitisation schemes. On 31 August 1990 the RBA note that their real w orry is with Beneficial

and the possibility of f u rth e r large losses (Ex.476, Vol.2).

On 24 September 1990 the RBA said they would be looking for the bank to examine closely the need for extra provisions, especially in Beneficial and w anted to be kept informed of Board decisions to do so. On 3 October 1990 the RBA notes its concerns with advice from Guille that Beneficial's problem loans had f u rth e r deteriorated. On

18 October 1990 the RBA notes its surprise in the decline in Beneficial's provisioning charges (Ex.476, Vol.2). On 6 November 1990 the RBA note that while SBSA problem loans increased to $1.3 billion at 30 September 1990, much more than suggested by Guille

on 24 September 1990, they are concerned that Beneficial's problem exposures may not have been fully reported. At a special meeting called by the RBA on 21 November 1990 the Reserve Bank questioned Beneficial's property security valuations, the extent of

projects under construction and the latest strategy on downsizing.

On 30 November 1990 the RBA noted the need for more provisions and that Beneficial will record a substantial loss at 3 1 December 1990. At a meeting with Guille on the same date the RBA also said they had serious problems with SBSA's securitisation proposal involving Beneficial. The RBA also asked w h e th e r SBSA's large exposures return included Beneficial and was told the returns may not include Beneficial and repea ted their request for an explanation of discrepancies with the Group's total New Zealand exposure (Ex.476,


According to a Reserve Bank diary note of 17 January 1991 on 14 January SBSA met with the RBA and advised them of a likely full year loss of about $200 million, 65% of which would be attributable to Beneficial and would reflect the entire w rite off of its joint v en tu re

activities. At a meeting with Guille of SBSA on 31 Ja nuary 1991 the RBA queried why Beneficial's provisions covered only 19% of its non-accruals. The RBA also queried w h y $400 million of Beneficial's

non-accrual loans had been tra n sfe rre d to Southstate and was told this was to meet its Trust Deed by leaving only $300 million of n o n ­ accruals in BFC. The RBA was told the w orst case loss scenario was

$420 million (Ex.476, Vol.3).

G. 2.4.3 increasing number of questions raised/concern expressed by RBA concerning the SBSA:

An important prelude to this topic is the extent to which the State Bank of South Australia was regulated by the Reserve Bank and voluntarily observed Reserve Bank prudential guidelines. According

to the'capital section of Ex.30 1, ,yoL2 (Board paper 8 5 /1 6 9 of 2 7 / 6 / 8 5 ) the State Bank agreed^to hold prime assets to satisfy the Reserve Bank's 12% prime assets ratio (PAR) like all other Australian banks. This was also referred to in a letter from Graham Ottaway to

the Reserve Bank dated 27 November 1987 (Ex.476, Vol.l). However, the State Bank declined to satisfy the Reserve Bank's requirem ent to lodge statutory reserve deposits (SRDs) and their successor non-callable deposits (NCDs) with the Reserve Bank until after its huge losses in 1991.

This decision not to hold SRDs/NCDs was made by the Bank and notified to the Under Treasurer on 23 September 1988 (Ex 704 Prowse statement page 10) and gave SBSA a significant commercial advantage over other trading banks like the nationally operating banks. The basis for it being "inappropriate" to comply with this Reserve Bank guideline was the State Government guarantee and the

"State Bank's other responsibilities to South Australia in the areas of housing, economic development and maximising the re tu rn to our owner also suggests costly imposts of this kind should be strongly resisted" (Prowse annexures document 4). Austin gave evidence that

in its first few years SBSA had not agreed to meet some of the Reserve Bank prudential guidelines which made meetings between SBSA and RBA a bit more difficult to conduct (p.5356).

We submit that it is relevant that the Federal Banking (Martin) Inquiry of November 1991 found (paragraph 12.38) that "it was naive and grievously in error of State Governments and their advisors not to appreciate the need for an independent external supervisor". State Governments misunderstood the role of supervision by the Reserve Bank (paragraph 12.39) "they appeared to believe the Reserve Bank could be relied upon to protect the capital of the bank. However, in its normal supervisory procedures the Reserve is charged with protecting the depositors, not the

shareholders .

The Martin Inquiry also found (paragraph 1 2.3 1) that under State Banks' voluntary agreements to meet Reserve Bank prudential

requirem e nts "the.y were not required to place non-callable deposits with the Reserve Bank and the Reserve was not em powered to take over their operations if they are in extreme difficulties1 '. The failure to hold NCDs was an unfair commercial advantage (Ex.476, Vol.l, last

section of the SBSA Board paper dated 18/1 1/88) which the Martin Inquiry found was not desirable if fair competition is to occur (paragraph 13.92). The Martin Inquiry foujnd the voluntary nature of their supervision may also have inhibited the Reserve Bank and the Inquiry was told (paragraph 12.43) of .'suggestions that SBSA

disregarded warnings by the Bank in a m anner that would not have been tolerated in the case of a private bank".

Another example of the State Bank ignoring Reserve Bank prudential req u irem e n ts concerned a decision to commit up to $250 million to the Equiticorp Group (Ex.476, Vol.l, 1 / 6 / 8 7 ) which was over 50% of the Bank's capital and greatly in excess of the Reserve Bank's normal

30% ceiling. This refusal to abide by the Reserve Bank's guidelines led to a stern letter dated 5 June 1987 from the Governor of the Reserve Bank stating that while "in the last resort, you are not obliged to accept our advice on prudential matters. I should say,

however, that had a bank that is subject to the Banking Act put to us a proposal of a similar nature and scale, we would have used such powers as we have to oppose it v e r y strongly" (Ex.476, V ol.l). This is a clear indication of Reserve Bank concern regarding the SBSA which was conveyed to the Bank Board (see Board minutes of 2 5 / 6 / 8 7 ) .

the Reserve Bank was also advised State Bank had two furthe r exposures above 30% of capital at the end of June 1987 - one to the State Government and one to Beneficial (Ex.476, Vol.l, 7 /8 / 8 7 ) .

Mr Austin's evidence at page 5323 of the transcript lists the Equiticorp exposure as one of the Reserve Bank's more significant concerns with the SBSA. Austin summ arises other significant issues

including: frequent expressions of concern at SBSA's rapid rate of growth at least from 12 May 1988 because such growth could lower asset quality and outpace m a n a g e m e n t’s ability to control it; from at least November 1988 concern w ith SBSA's ability to effectively

oversight its subsidiaries and associates; from at least 26 June 1989 above average exposures to the property sector in Australia and overseas; and the rationale and wisdom of rapid offshore expansion (transcript page 5323). A more exhaustive su m m a r y of Reserve Bank concerns is noted below.

By the 1 3 Ja nuary 1988 (Ex.476, Vol. 1) the Reserve Bank was considering seriously w hether it could refuse to confirm to supervisory authorities in the Cayman Islands and in New York that it had no objection to SBSA operating in those locations. Among other things, SBSA and its Managing Director had given (letter of

27/1 1/87) only qualified confirmation of its intention to cooperate with the Reserve Bank's guidelines relating to PAR and capital adequacy, a grudging acknowledgement of-RBA large exposure guidelines and had a major outstanding matter" relating to RBA

access to SBSA's external auditors. On the 12 February 1988 the Reserve Bank Governor wrote to SBSA's Managing Director to "draw attention again, given the uncertainties of the financial and economic outlook, to the need for each bank to keep a careful w atch on

emerging trends" (Ex. 476, Vol.l).

SBSA informed the Reserve Bank on 23 March 1988 (Ex.476, Vol.l) that it had entered into heads of agreem ent to acquire Oceanic Capital Corporation. The Reserve Bank queried the control the Bank would have over the subsidiary, its experience in funds management

and the difficulties in keeping a subsidiary at arms length if it were to experience difficulties. On 29 March 1988 RBA queried the sizable cost of the acquisition and asked to be supplied with details of the Oceanic accounts but had still not received them by 1 3 / 4 / 8 8 . The Reserve Bank also notes it was having difficulty ascertaining the c u rren t capital ratio for the Group. By mid May 1988 (Ex.476, Vol.2)

the RBA w as still querying how SBSA was accounting for Oceanic as well as the poor performance by the London Of f i ce and strong growth in assets. The RBA also noted that rapid growth of the balance sheet tends to outpace the Bank's ability to keep systems

and controls in place and had concerns that the capital ratio could have fallen below 6.1%.

On 1 November 1988 the Reserve Bank expressed concern that SBSA's move into New Zealand through acquisition of Security Pacific's NZ finance subsidiary "would place a fu rth e r drain on the Bank's manpower and systems" (Ex.476, Vol,l). On 15 November

1988 the RBA reminded SBSA of the lessons from the Bank of Adelaide/FCA episode, their concern over inadequate control of an increasing num b e r of subsidiaries and noted that they remain uneasy about SBSA control particularly given rapid sustained growth which may be too fast These v e r y serious concerns (transcript

pp.5 388-9) w ere not properly reported to the SBSA Board as the RBA note on 5 December 1988 (Ex.476, Vol.l and transcript p.5360).

The RBA requested information about Kabani Pty Ltd on 3 0 / 9 / 8 8 and 2 0 / 1 2 / 8 8 but following a reply by SBSA on 1 5 / 2 / 8 9 note on 2 7 / 2 / 8 9 that the ownership of Kabani was not yet fully resolved and that the structure appears to be designed to avoid RBA capital adequacy requirem ents and furher information should be obtained on the ownership of Thomson Simmons Nominees. On 28 February

1989 the RBA told the Bank of its concern about the n o n - tra n s p a r e n t ownership structures of Southstate, Kabani and Campbell Capital and counselled SBSA about commercial property exposures. On 12 May

1989 it noted SBSA's exposure to property through its London Branch "looked conspicuously high". Despite a visit to the RBA by PA Consultants on 19 June 1989 to explain proposed changes to SBSA's m anagem ent control systems, the Reserve Bank noted on 24 July

1989 that SBSA's ability to manage rapid growth is "questionable" (transcript p.5420). These concerns had increased by 5 September 1989 (Ex.476, Vol.l).

By 17 October 1989 the Reserve Bank was suggesting to SBSA that their provisioning for Hooker exposures at 30 June 1989 was too low, tha t the "phenomenal growth" of SBSA and Beneficial continued to cause concern and it was unlikely such fast growth could be achieved without taking on some bad business, and w as questioning lending

out of New York and property exposures out of London (Ex 476, Vol.l).

At the prudential consultation of 16 November 1989 the Reserve Bank remained concerned about rapid growth, managem ent control and reporting systems and that a num b e r of exposures to troubled corporations had yet to be provided against. The need to amortise fee income was stressed. The lack of working papers to allow external audit checks of loans was a basic failure. The Reserve Bank

still didn't understand Oceanic. RBA doubted the wisdom of the expansion into New Zealand and queried the increase in foreign currency assets and the rationale for SBSA's offshore growth strategy. The Reserve Bank noted its concern that SBSA could be vulnerable in the current and prospective economic conditions. In

response to RBA concern about furthe r rapid growth including aggressively taking corporate business th a t other banks had tu rn ed down SBSA agreed that the current economic conditions w ere not conducive to rapid growth of 20 per cent as forecast in SBSA's

strategic plan so growth was being suppressed and a critical mass may have been reached. The Reserve Bank recalled that at the

previous year's prudential consultation they had indicated their concern with SBSA's rapid growth, involvement in property including joint ventures, off shore expansion and acquisition of subsidiaries,

some with overlapping functions. Expansion into the US and UK was seen by the RBA as high risk. A num b e r of these concerns were reported to the State Bank Board in a paper dated 17 November 1989 (Ex 476, Vol. 1). Austin gave evidence that he did not agree with the report to the SBSA Board which stated that the Reserve

Bank did not raise any matters of serious concern (p.5426).

On 22 November 1989 the RBA in London noted its continuing concerns about SBSA's conspicuously large property portfolio. On 29 November 1989 RBA drew out the ' great risks that exist in rapid developm ent of lending business'' in New York (Ex.476, Vol. 1).

On 30 January 1990 the Reserve Bank rang SBSA to express concern about the Group's 72% proportion of total commercial finance approvals which related to construction and p roperty during 1989

which was the highest of any bank. This lending was despite the warnings that the RBA had given SBSA in 1988 about the extent of such lending (Ex.476, Vol.2). By 8 March 1990 the RBA was noting its concerns regarding SBSA's continued rapid growth and the quality

of its assets, its non-performing loans of over $400 million and reported exposure to troubled corporations of around $500 million. Mr Matthews paper to the SBSA Board of 12 March 1990 expressed no hint of past warnings bar noting the discussion with the RBA

about non-accrual loans. The paper suggested that reports of the Bank's problem exposures w ere incorrect and that the RBA was satisfied with SBSA(Ex.476, Vol.2).

On 27 April 1990 in the course of a prelim inary discussion about the possible acquisition of United Building Society in New Zealand the Reserve Bank questioned Trevor Mallett of SBSA about the risk profile of SBSA's UK property lending. On 14 May 1990 the RBA required assurances from SBSA Directors that UBS was sound and viable, that SBSA would be able to exercise effective managem ent

and control over the NZ operation and tha t SBSA's capital adequacy would not fall below the agreed minimum as a result of the acquisition. They also queried the source of a NZ$150 million capital injection. On 15 May 1990 at another meeting with SBSA, the RBA

once again stressed their concern that SBSA had managem ent capacity to effectively control its rapidly expanding operations and queried the level of non-accruals as at 3 1 March, possible Oceanic

funds outflow and w hy SBSA was still expanding strongly w hen other banks w ere contracting or standing still. A report dated 29 May 1990 was made to SBSA's Executive Committee. On 6 June 1990 the RBA rang SBSA to express its concerns that it had not been informed of a possible large exposure to the Myer-REMM project

despite media comment and Parliam entary questioning of SBSA involvement (Ex.476, Vol.2). ,

According to a Reserve Bank note dated 4 .July 1990, the RBA had earlier (29 June 1990) concerns about SBSA growth, recent acquisitions and the ability of SBSA's systems to keep pace. The RBA 4 July memo also noted SBSA's continued rapid growth in New York, New Zealand and London, its application to upgrade its Hong Kong operation and breach of its country exposure limit to Sweden. On 20 July 1990 the Reserve Bank noted the marked deterioration in the

quality of SBSA's loan portfolio with its exposures to a long list of troubled corporates and non-performing loans of about $640 million. RBA note states "SBSA has only made provisions of about $50 million against these exposures'' and on 25 July 1990 noted that "the most

notable feature of SBSA's operations appear to be the low level of provisions which it carries against its problem loan e x p o s u r e s ". At a meeting with Michael Hamilton on 23 July 1990 the RBA said they had heard w idespread rum ours and market disbelief expressed about SBSA's overall profit r esu lts/le v el of provisions. The Reserve Bank also expressed their disappointm ent that SBSA was one of only

a very small n u m b e r of banks whose Chief Executive does not attend the annual prudential consultation. Further RBA concerns at the meeting w ere noted in Hamilton's memo dated 3 0 / 7 / 9 0 which was sent to Mr Marcus Clark but not to the SBSA Board (Ex.476, Vol.2).

On 10 August 1990 at a meeting b etw e en Mr Marcus Clark and the Reserve Bank, the RBA drew attention to the large $1.1 billion increase in SBSA's loan exposures in the q uarter to June 1990 and that one non-bank n o n-governm ent exposure to Adsteam was above

30% of capital. On 23 August 1990 the RBA noted some concern after a meeting with Dr Bethune that SAFA was the legal owner of SBSA. On the same date the RBA noted extensive worries they held about the SBSA and foreshadowed to Chris Guille much more detailed

questioning at the annual consultation meeting on 29 August (Ex.476, Vol.2). The Reserve Bank had alsom heard a rum our about deals betw een SBSAand SAFA designed to remove bad exposures from the Bank's books for window dressing purposes (transcript p.5464).

Long held Reserve^ Bank concerns like low provisions (only 40% of non-performing loans compared with 80% by Westpac) w ere outlined to SBSA at the 29 August 1990 consultation and according to the RBA's memo of 5 S eptem ber 1990 new items included the dramatic fall in the level of SBSA's bill acceptances, the RBA's difficulty in reconciling SBSA's figures on the size of its New Zealand operation

(NZ$4.8 billion) w ith the much lower figure SBSA had supplied to the Reserve Bank of New Zealand, and SAFA's ownership role. SBSA's adm itte d large exposures included Remm at $289 million which was stated to reflect the financing of cost ov erru n s and a shortfall of

interest until March 1992 which was part of the original package. On 31 August 1990 the Reserve Bank note that they had raised on 29 August with SBSA their rapid expansion in the corporate sector and

exposure to property despite RBA's warnings at the previous year's consultation and concern w ith SBSA's plan to increase overseas assets to 50% of total assets by June 1991. RBA concerns at the prudential consultation w ere noted to the SBSA Board through a covering paper by Chris Guille dated 20 S eptem ber 1990 but the RBA notes on 9 October 1990 tha t a n u m b e r of RBA concerns were not referre d to in Guille's note to the Board (Ex.476, Vol.2).

On 20 S eptem ber 1 990 SBSA met with the RBA and growth to June 1990 of US$800 million in the United States which was much more rapid than projected was discussed. RBA also noted their SBSA liquidity concerns. On 24 S eptem ber 1990 the Reserve Bank told SBSA that one of its v e r y senior officers may be looking to meet with the Group Managing Director and perhaps even the Chairman to hear

at first hand an account of SBSA's cu r r e n t position. The RBA asked about problem loans and was told that another couple of h u n d re d million had been added including Collinsville. The RBA stated it was not pleased and requested that extra bank provisions be examined. On 2 1 September 1990 the RBA w rote to SBSA about the large n u m b e r of subsidiaries and associates listed in the Bank's 1 989-90 annual report of which RBA was previously unaware despite their r e q u e s f on 1 September 1988 for such information to be provided regularly (Ex.476, Vol.2).

On 16 October the Reserve Bank met w ith SBSA London Branch officers and queried problem loans, risk control and large exposures. On 17 October 1990 the RBA wrote to SBSA about its continuing

concerns since March 1988 with the acquisition of Oceanic and, in particular, the accounting tr e a tm e n t of Oceanic management rights to bolster SBSA's capital position. On the same date the Reserve Bank

noted its concerns,with the looseness of information provided on SBSA's US balance sheet (Ex.476, Vol.2). By 7 November 1990 the RBA note that SBSA had reported nine large exposures at

30 September totalling $2.6 billion and by 12/1 1/90 they were concerned about the exposure to Adsteam. On 12 November 1990 the RBA note their concern that SBSA is facing a $290 million

shortfall in capital (Ex.476, Vol.3). .·

At 13 November Guille notes that the RBA have requested a special meeting on 21 November to talk about SBSA's non-accrual growth and the adequacy of specific provisions, Beneficial and Southstate, London Branch and SBSA's liquidity and growing holding of its own bills. These matters w ere discussed as w ere Oceanic, Kabani, future income tax benefits which the RBA would not allow for capital adequacy purposes. New York and exposures to Remm, Adsteam and

Fay Richwhite. Guille's record of this meeting (Ex.85) was noted by the SBSA Board on 22 November 1990. Dr Bethune was also informed about the special Reserve Bank meeting as seen in his note of 26 November 1990 (Ex.476, Vol.3). The Reserve Bank note their concern on 22 November 1990 about discrepancies with SBSA's reporting of UK exposures and the v e r y high loan to valuation ratio on lending. As per RBA memo dated 30 November 1990, the Reserve Bank note low provisions, a likely Group loss and problems with

property valuation and suggest merit in the Governor of the Reserve Bank meeting with the Chairman and Managing Director of SBSA and reinforcing the need for SBSA to boost its capital. These issues w ere

discussed at a meeting with Guille of the same date w hen the RBA suggested getting help from external consultants (Ex.476, Vol.3).

At 7 December 1990 the RBA's main concern with SBSA was their liquidity position particularly given their large holding of their own bills. This liquidity concern was supplem ented at 1 1 December 1990 to include the need for adequate capital and provisions and for the SBSA Board to get a bett^handle on subsidiary and offshore operations. A paper to the SBSA Board dated 12 December 1990

noted the RBA's view about a need for additional capital. On 12 December the RBA also noted an additional concern about SBSA's shorter than desirable structure of liabilities. A possible problem on the liability side of SBSA's books was raised by the Governor and

Deputy Governor in their meeting with SBSA on 13 December 1990 and the Governor also suggested that the extent of problems on the asset side may not yet be fully identified (Ex.476, Vol.3).

At a meeting on 14 January 1991 the Reserve Bank's prime concerns with SBSA w ere liquidity and capital adequacy and RBA told SBSA to exclude future income tax benefits from capital adequacy calculations. On 16 January 1991 the RBA noted a need to write to

Premier Bannon and "require that SBSA receive an immediate injection of shareholders' funds which qualify as tier 1 c a p ita l'. On 18 January the RBA noted that the situation was fast approaching the critical stage even w ithout SBSA classifying"their largest exposure (to

Adsteam) as a problem. On 22 Ja nuary 1991 the RBA noted concern that SBSA's estimate of a loss of $200 million was too low since only $70 million referred to the Bank and this seemed to exclude

problems in New Zealand and the corporate loan book. The theme of the RBA's concerns at a prudential consultation in New York on 24 January 1991 was problems with rapid growth in the USA and London (Ex.476, Vol.3).

According to Paddison's diary note dated 3 1 January 1991, Paddison rang the Reserve Bank on 30 Ja nuary and informed them that analysis by J.P. Morgan was indicating that a SBSA loss of $500-900 million over time was possible. At a meeting w ith Guille on 3 1 January 1 99 1 the RBA was told the w orst case loss scenario was

$420 million. The Reserve Bank stressed the need to fully recognise its problems in its accounts for the December half year. On 7 February 1991 the Reserve Bank noted concern that they could not have confidence in SBSA's m a nagem ent to successfully run the Group's operations (Ex.476, Vol.3)