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Governor of Reserve Bank defends Reserve Bank over State Bank of South Australia crisis

RICHARD PALFREYMAN: The Reserve Bank came under fire this morning, for not sounding the alarm bells to warn of the State Bank of South Australia's serious financial problems. The bank was in the firing line at today's hearing in Sydney, of the parliamentary inquiry into the banking industry, with the Reserve's Governor, Bernie Fraser, coming in for some tough questioning. The bank has been criticised for its lack of supervision during the '80s credit boom, which has claimed a string of high profile casualties, including the State Banks of Victoria and South Australia. Today, the banking inquiry wanted to know why authorities didn't see it coming. Finance correspondent, Philip Lasker, was there for the World today.

PHILIP LASKER: The banking inquiry is the Federal Government's response to community suspicions that deregulation of the banking sector has to a great extent been responsible for this recession. There's a feeling that deregulation gave banks the green light to embark on reckless lending policies which left them with massive bad debts. They then became over conservative, imposing their own credit squeeze, making the recession a lot worse, and charging good customers higher interest rates to recoup some of the money squandered on bad loans. There's also a feeling that while all this was happening, the Reserve Bank - the banking system's guardian - was out to lunch. But at today's inquiry, Reserve Bank Governor, Bernie Fraser, painted a different picture. Deregulation, he said, had left customers better off and authorities had performed their supervisory role as well as possible, given the first six years of deregulation should be regarded as a learning process. But he agreed part of the problem was caused by inadequate risk management, poor management skills in banks, and poor information. It was clear the Reserve Bank was not always getting the right signals from bankers, but in the case of the State Bank of South Australia, Mr Fraser claimed it was in close consultation with senior executives.

BERNIE FRASER: There was a good deal of probing during the course of last year on some of these things, but the difficulty all the time in .. well, in this particular case, is in terms of the judgments that one has to make about making provisions for bad loans. And when the time might come to have to make a provision for those - for bad loans, and those are judgments that can't be made by central bank supervisors, I don't believe, on the way we operate at the present time. They have to be made by those people on the spot. They have to be made on the basis of the best available information, and so on. What we can do, and what we have been doing, and what we did in the case of the State Bank of South Australia, was to look at the kinds of exposures that that bank had to property, the kinds of provisions that it was making relative to what other banks with similar exposures might have been making, and made appropriate noises about.

UNIDENTIFIED: Why is it that despite these concerns that you had last year, and the probing that you were doing, why didn't you inform the South Australian Government or the Federal Government at any stage that there was concern about the State Bank of South Australia? The South Australian Government is the owner of the bank.

BERNIE FRASER: Well, that's true. You said why not did we inform the Federal Government as well. What we're engaged upon is a review process between the Reserve Bank and the State Bank. I don't feel that we need to be running to the Treasurer about all these consultations we have. We have consultations all the time with the banks. In my view, it's neither necessary or proper to be running to the Treasurer on the back of all of these or any of these particular consultations that we might be having with a bank. Obviously, when things become .. it becomes clear that there are serious problems there, that might have implications for federal financial matters or for the Treasurer, then, of course, the Treasurer needs to be informed in an appropriate way.

RICHARD PALFREYMAN: Reserve Bank Governor, Bernie Fraser, at today's banking inquiry in Sydney.