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Economics References Committee - 08/08/2012 - Effects of the global financial crisis on the Australian banking sector

BECKETT, Mr Ian, Acting General Manager, Financial System Division, Markets Group, The Treasury

MIKULA, Mr Christian, Manager, Consumer Credit Unit, Retail Investor Division, Markets Group, The Treasury

MURPHY, Mr Jim, Executive Director, Markets Group, The Treasury

SIM, Ms Irene, General Manager, Retail Investor Division, Markets Group, The Treasury

Committee met at 9:01

CHAIR ( Senator Bushby ): I declare open the first hearing of the Senate Economics References Committee inquiry into the post GFC banking sector. This inquiry was referred to the committee by the Senate on 14 March 2012 for report by 31 October 2012. The committee has received over 150 submissions, which are available on its website. These are public proceedings, although the committee may determine or agree to a request to have evidence heard in camera.

I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may of course also be made at any other time.

I remind members of the committee that the Senate has resolved that department officers shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions to superior officers or to a minister. This resolution prohibits only asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted.

I welcome officers from the Department of the Treasury and I invite you to make an opening statement.

Mr Murphy : Thank you very much. I will make an opening statement. Primarily, the purpose of this statement is just to put in context the committee's inquiry. The Australian banking system demonstrated considerable resilience during the global financial crisis, and in my view it is now in a position where it is adapting itself to a changing environment, especially in terms of a global reassessment of risk.

In terms of the history, in contrast to many other countries, the Australian government was not required to bail out any authorised deposit taking institutions—and that is in contrast to a lot of other countries who are still working their way through that issue. The government introduced a financial claims scheme as well as a fee based guarantee for large deposits and wholesale borrowing. It was a fee based system and banks were required to pay for the use of the government guarantee. The government also had a program of support for Australian residential mortgage backed securities issuance and also introduced some restrictions on short selling.

The government closed the guarantee for large deposits and wholesale funding in early 2011 and restrictions on short selling were reformed. The government has retained the financial claims scheme at a lower cap of $250,000 and continues to support the issuance of asset backed securities by non-major lenders. APRA has also been given enhanced powers of intervention where in terms of the supervision of the banks it is felt that it needs to intervene.

During and post the GFC the G20 has developed a wide-ranging work plan to strengthen the regulation and supervision of the banking sector. The new Basel III standards are at the core of these reforms. The aim of these standards is to improve the resilience of the banking system, especially in relation to capital and liquidity. In Australia the Basel III standards are being implemented by APRA, with implementation commencing in 2013.

For some time the Australian major banks have been taking steps to improve their capital positions and funding profiles in response to market pressures, including the ongoing threat of instability emanating from Europe. These efforts, combined with APRA's conservative approach in the past, especially with the implementation of Basel II, have in my view reduced the effort needed by the banks to comply with Basel III. In effect, it is not a big step for bank majors to meet the Basel III standards in terms of increased capital.

The GFC has had a significant impact in the banking sector, particularly in relation to competition. The major banks have marginally increased their share of most significant lending markets. Some smaller lenders have had some difficulties in raising new funds to lend as depositors and investors become much more risk averse—and that is this global reassessment of risk coming at a domestic level and also at an international level. Lenders who relied on offshore parent funding—probably one of the issues that this committee is looking at in relation to Bankwest—or securitisation found it much more difficult to access funding.

In terms of competition, the period since the GFC has seen substantial competition for funds, importantly including deposits. This has benefited depositors and investors. There has been strong competition for deposits between the major banks. Major bank net interest margins—and largely that is the difference between what the banks can borrow at and then they can lend at—and their profitability remain around their longer term averages. The current environment of low-growth credit is likely to encourage competition between lenders for market share—and we can discuss that. The government has sought to act to boost competition in lending by abolishing exit fees, strengthening disclosure of borrowing costs and making it easier to switch transaction accounts. The new switching package, commenced on 1 July, is a considerable advance on the previous regime.

As I have noted, investors and depositors have become much more risk averse in the wake of the GFC. This has meant that lenders have had to pay more for depositors and other funds. This is compounded also, especially for most of the banks, in that transaction costs associated with offshore borrowing have also risen. The major banks' cost of funding their aggregate fund books in our view has increased by probably around 140 basis points since around mid-07. This is the continual debate about whether there have been increased funding costs. I think it is a given that there has been increased funding costs. The real discussion and various views are about the range of that increase.

At the same time where the majors have been able to borrow in offshore markets the government has sought to boost the sustainability of the whole sector, especially the smaller lenders, by allowing the ADIs to issue covered bonds, which has assisted the major banks in a difficult period where the global markets are seeing to reposition themselves; by introducing a mechanism in covered bonds legislation to enable smaller ADIs to aggregate their borrowings together to issue covered bonds; and through continued support for securitisation of smaller lenders—that is the AOFM program, which is an ongoing program.

As to the terms of reference for this inquiry, business lending practices are generally governed by state and territory law as well as the general law of contract and equity. The ASIC Act provides protection for consumers and small business in relation to the provision of credit by prohibiting conduct that is unconscionable and deceptive as well as prohibiting false and misleading representations. The next limb of that issue is that the Corporations Act regulates the conduct of receivers appointed to corporations that default on a debt. In addition, some industry bodies have also developed codes of practice governing lending activities—and ABA is a clear one. They are, I suppose, the ground rules for the issue of lending between Bankwest and its customers.

Overall, the period since the GFC has seen a global recalibration of risk in lending—and I wanted to make sure that I made that point—and there has been a reassessment of the capacity to repay loans as well as lenders looking at the value of collateral offered for new loans. You cannot have a recalibration of a reassessment of risk without it having the downstream effect of what contains risk for banking institutions—that is, their lending and the way they value the assets which are the collateral for those loans.

In summary I would just like to say that, from my thinking, the Australian banking system is in a period of transition. I say that because we have at the present time considerable international work going on in the Financial Stability Board and the Basel Committee on what should be the governing rules for banks in terms of their capital and liquidity. You also have securitisation markets seeking to return. You also have government seeking to diversify the funding sources for ADIs in Australia and seeking to assist by developing a corporate bond market. I think that sometimes a lot of people seem to ignore the fact that we are in this transitional period and they are looking back pre GFC.

In my view, we are not going to return to a pre GFC model for a financial system—primarily in other countries. When I say that, I do not mean our regulatory structure, which has proved quite resilient but I mean in terms of potential risks that banks may take in terms of their lending practices, the seeking of credit by consumers. I think we are seeing that in the number of consumers who are much more reluctant to leverage off their own credit.

In summary, we are in this transitional period and we are actually repositioning our financial system, which is strong, resilient and has proved, from what we hear from other countries' officials, as one of the models for the rest of the world. I will finish on those comments, and I am very happy to take any questions.

CHAIR: Thank you, Mr Murphy. In your closing comments you were saying how people often ignore the fact that we have gone through the GFC and there has been a reappraisal of risk and some people expect things to go back to the way things were pre GFC. One of the big differences between now and pre-GFC is there has been a concentration in most banking markets, particularly with the Big 4 but also with banks generally as opposed to the mutuals and nonbanks. Is the higher level of concentration in the banking market one of the things that you think will not go back to the way it was before the GFC?

Mr Murphy : It is hard to predict, but I think what is needed is a couple of things. One, if it is a very profitable market, you are always going to have entrants seeking to take a share of those profits. That is basic fact. I know a general view out there is some people might say the major banks are too profitable. If there are high-profit levels, you will have new entrants. It is always open to competition and the government is always open to competition. What you may find also is that the major banks will be repositioning themselves in terms of wanting to retain a competitive edge, and I think there is strong competition between intramajors but also, at the smaller ADI level, they can compete on service levels. It may be that at the secondary market level, the non-majors, there is a need for a reassessment of where the competitive edge is that they can provide to the system.

CHAIR: I reckon that is a fair question. You mentioned that if the banks are making what is perceived by some as large profits then that does make it a more attractive market for new entrants, but new entrants have to be able to crack into that market. Given the ability of particularly the big banks, the larger you are, the cheaper the funds are that you can access and on lend. You also have the existing branch structures. You have the ability to better deliver the services that business borrowers like to have because you have branches, so they can take their cash down and deposit it and all those sorts of things. There is a whole host of inherent structural barriers that make it hard for new entrants to compete on an upfront cost basis. As you say, it is a good question: how do new entrants or even existing entrants who are looking to increase their market share compete if they cannot compete on dollars or if they do not have the capital to be able to compete with the structure that some of the bigger participants have?

Mr Murphy : Again, I would go back to the fact that we are open to competition. We have seen ING DIRECT take a technological approach to banking. We should not just look at the context as it is now. If you think about the way technology is changing people's lives regarding communications, it is not a big step for those changes to flow into banking. Some people in the industry are seeing this and when that happens the advantage of a big bank structure could be blown away. Regional banks have decided that is their niche, that is where they want to compete. The mutuals can provide a friendlier consumer service also. There can be entrants. There has been a foreign bank entrant in partnership with one of the Australian secondary banks, so you may find another development—it is hard to predict these things.

One of the majors has sought to go much deeper into Asia. That may lead to a connection there with a major foreign bank. These are commercial practices which would come to the government when there is a firm proposal. You can always mark time and say, 'Are you worried about concentration?' No. I would have thought a concentration at the moment is because there is a competitive market out there. There are 115 service providers. There is something like 3000 different mortgage contracts you can have. There is a lot of competition. Are we worried about the concentration? I do not think it has reached the level where that is a major concern. There is enough stimulus in the system and enough change occurring to keep that in check and balance.

CHAIR: You are saying that concentration may shift if participants—what we were really talking about there was niche marketing rather than major attacks on the large amounts of concentration. So it might around at the edges a little be subject to the one of the points you made: the internet or the new ways of doing banking, being opened in a big way. Generally, it is around the edges but you are saying that the competition impact of the current concentration levels are not a concern to Treasury at the moment.

Mr Murphy : We always want competition in the markets, because that is going to get you the best results for consumers.

CHAIR: Absolutely.

Mr Murphy : If there were competition problems at a level which was seen as deleterious to the proper functioning of the market, there is an ACCC; there is a competition regulator out there. We have high competition between the majors and, whenever you are looking at competition, you are looking at what is the best thing for the consumer. Wherever we have four major players, it is an advantage having—that is why I started with the resilience issue—a solid, firm platform of major institutions. That is a great prudential advantage, I think, and a great advantage having a stable platform and then have competition coming at the fringes.

Even before the GFC, the competition was provided by smaller entities. That is what people were concerned about. They said it was the smaller banks and the non-ADIs who produced the securitisation market to give you the competition prod. Once we go through this transitional stage—and you can say to me, 'That's been going for four years', but it has been going for four years. We see that with the UK and in other banking markets. They are still sorting themselves out, but there is no reason why in the future, if securitisation markets pick up again—and I know from firsthand experience that is a concern at the international level; it has lost its bad odour from previously—those smaller or fringe players cannot return to this market and start getting business.

CHAIR: Are you saying—I do not want to misquote you—at this stage, because we are going through that transition process, we are not yet at the point where we have those small players nipping at the heels of the large players keeping them honest and making sure that they being thoroughly competitive.

Mr Murphy : We have had developments like Yellow Brick Road joining with one of the mutuals to provide a stimulus, so I think it is an area where institutions can run a good business. The key issue for the smaller players is that they will have difficulty in raising funds offshore. Previously, they did not have to go offshore; they could do it through a securitisation vehicle. The other issue for them at the moment is deposits are tight. Everyone is competing to build deposits up, so again, on that transition point, the major banks are seeking to move up their level of deposits to provide a stable funding source—they are paying for it—to reduce their dependency on offshore funding. You have got a number of people competing in the same space for deposits and, again, to some extent that is of benefit to the consumer. They are getting the benefit of that competition.

CHAIR: Also making it harder for mutuals who traditionally sourced a lot of their funds from deposits in terms of their cost of funds. There are a lot of factors at play, I understand that. In terms of the competitive impact of the current situation, Treasury has previously stated—and, once again, I do not want to misquote you and I am stating from memory—particularly with the big banks and their failure to follow at least to a greater extent movements in the official cash rate, there was a need for greater competition, which is why the government introduced its competitive reform package a couple of years ago. Do you think that the current state of competition is impacting on the decisions by particularly the majors to follow the official cash rate at the moment?

Mr Murphy : I think the measures that the government has introduced are biting. It is a matter of judgement as to whether that is the stimulus or that is the corrective action to make the banks follow the cash rate. This is a much debated point but things we cannot get away from are the banning of exit fees, the switching package, better disclosure, giving consumer sovereignty, giving power back to the person to make their choice and follow the market. If they do not like the mortgage rate they are paying or they are not getting a good return on their deposits, they are in a much stronger position to transfer to another bank or turn to a mutual.

CHAIR: Is that showing up in the figures yet? I know the switching package is new.

Mr Murphy : In the figures, on the number of people—

CHAIR: Has there been an increase in the number of people switching?

Mr Murphy : In terms of exit fees, since—

Mr Beckett : We have seen some changes in competition indicators since the banking package was announced. We saw the major banks had lost an estimated $16.6 billion in home-lending business to smaller banks since the reforms were announced. The smaller banks have grown their home lending at twice the rate of the major banks. The market share is going down for a lot of the major banks and there has been some increase in the smaller banks. The large banks are experiencing slightly compressed net asset margins, so we were, I think, providing consumers with the tools to get the best deal and, at the same time, we were maximising different sectors' access to funding in what are challenging conditions.

CHAIR: Those are all good thing but they are fairly broad indicators and a lot of those—no doubt, you would disagree—would have occurred as we came out of the GFC anyway. During the GFC, there was a flight to quality and it was perceived that the big banks were safer than anywhere else. That would have eased as time went on. Do you have any numbers which specifically address this like the number of people switching banks in the last 12 months compared to the year before?

Mr Beckett : We have got some data. ME Bank said recently there had been an increase in the volume of borrowers refinancing. They said that had gone from 21 to 28 per cent of their loans. I think we saw—

CHAIR: You do not have across-the-board figures of the number of people who have moved, because that would really indicate the level of people who have moved.

Mr Beckett : We saw RFi, which is an information service, saying that the ban on early termination fees has driven down the level of income banks are making off fees. We have seen people being charged less for home loans.

Mr Murphy : By observation, we have seen the home loan market is quite competitive and that reflects the pressure the banks are under.

Mr Beckett : Across the board, we have got the value of refinancing increased by 28 per cent since the reforms were introduced. We would not make the claim that that is solely driven by the reforms. I think there are a number of factors at work and that is a reasonable conclusion, but it shows that the reforms are having some influence on competitive tension, especially between the major banks as credit growth is slowing. It is a more competitive market and we are seeing that even in APRA. Dr Laker in a speech, 'Life in the slow lane,' warned banks about the potential implications of competing strongly for market share in this environment and about maintaining the quality of their asset books.

CHAIR: I think that highlights what I was saying before: the environment and outside factors other than the competition package are contributing.

Mr Murphy : I think it is very hard to disaggregate that.

CHAIR: I think it is hard to disaggregate and that is why it is hard to point to which issue might be driving it.

Mr Murphy : I do not think you are ever going to get a cause-and-effect. What the government is responsible for and what the Treasurer has done is seek to use the levers we have to create a competitive banking market.

CHAIR: Most of them were done on a bipartisan basis and there were only a few of them that were contentious.

Mr Murphy : Realistically, you have got to see how these things work their way through the system. To some extent, yes, you have got subdued consumer sentiment out there but, at the same time, that is a good thing. I think most commentators think that is not a bad thing at the moment. But when you think about it, subdued consumer sentiment could also lead to consumers thinking a bit more about what their service providers are doing. They are not in a rush to get loans; they are actually thinking about it and that may lead to increased competition. What the government has done is try to set up a more competitive environment but a lot depends on actual consumers exercising their rights to seek competition in the market.

CHAIR: You mentioned in your opening statement the cost of funds. During the competition inquiry held by this committee, we heard from the four big banks and second-tier banks and a lot of others about the cost of funds. One of the things that came out during that inquiry was that the cost of funds had peaked soon after the GFC. At that point, late 2010, they were coming down and they were expecting that the cost of the funds they took on during the peak were going to become less expensive round about now. That does not appear to be the case. Could you explain to us what has happened with the cost of wholesale funding?

Mr Murphy : It is bit like the European crisis; everyone looks for light at the end of the tunnel. Yes, the cost of funds rose exorbitantly during the GFC. The markets closed and the markets reopened with the cost of funds. We went through a period of time early last year where it looked like the funding costs would come back to—

CHAIR: Prior to GFC but lower?

Mr Murphy : Yes, but there would be a margin for increased assessment of risk. It will never go back to the lowest levels it was pre-GFC, which is probably a good thing. People thought things had settled down but this is a market and the market factors in risk. We can give you figures on the cost of funding but it has fluctuated. I think I mentioned we thought that the funding cost over the whole period had risen by about 140 basis points on average. Where does it get us? We went through a period where the major banks and some of the smaller ones made use of the covered bonds arrangement. Possibly if they had not had covered bonds, they would have found it difficult to find funding or would have paid an exorbitant price.

Also, you have got to put this funding thing in perspective. Because the banks have been able to increase their deposit holdings, they are less reliant on wholesale funding, which is a good thing. My understanding is that the banks have largely built up a war chest where they do not really need to go into the funding markets for a period of time, at least for part of this year. We can give you some figures but this is going to fluctuate according to international developments.

Mr Beckett : What we say is you have got to look at funding costs in absolute terms and then you have to look at them relative to key benchmarks. In terms of the actual dollar figure, we can say aggregate funding costs in recent times have probably gone down. Relative to benchmarks, relative to the cash rate, they are still elevated.

CHAIR: Because the cash rate has fallen further?

Mr Beckett : Yes. As Mr Murphy said, there are two factors behind that: one is that there has been a shift from cheap short-term, offshore sources of funding to more expensive but more stable longer-term sources of funding. The second dynamic at work within that is that banks are paying more for deposits. They used to pay 200 basis points below the cash rate; now they are paying around the cash rate. They are paying more for term funding because of the changed risk appetite Mr Murphy mentioned on the part of investors and also because it costs them more to swap it back into Australian dollars and hedge the foreign currency risk. That is partly because of the disruption in overseas markets, especially for European borrowing.

CHAIR: Are deposits more tied to changes in the official cash rate than overseas wholesale funding? Are they reflected better than overseas funding? Given the funding mix they now have or are now heading towards, is it going to mean that their costs are more likely—I do not think they ever will exactly—to reflect changes in the official cash rate than was the case?

Mr Beckett : They partly reflect changes in the cash rate and they partly reflect other factors in that they have got to compete for these funds. Before they would pay the cash rate or the equivalent plus 30 basis points or 40 and now they are paying plus 140 or 150.

CHAIR: But if they are having to pay 150 above the cash rate to get the deposit and the cash rate changes, do they still have to pay 150 above the cash rate?

Mr Murphy : You have got to split between withdrawal deposits and term deposits. The cash rate provides a basis. There was an argument saying the banks' funding does not key off to the cash rate. Well, I do not believe that. The cash rate provides a platform and then they build on their costs.

CHAIR: It will influence wholesale funding rates. I understand that.

Mr Murphy : Yes, they will look at what their cash rate is.

CHAIR: I am interested in knowing whether the change in the mix of funding is more likely to reflect the cash rate than where the mix was.

Mr Murphy : I think the changed mix of funding may better reflect the cash rate. But at the same time the other factor to take into account is, as Mr Beckett mentioned, the banks are repositioning their funding profile and they are trying to get more deposits. How far they need to go with that will probably be determined (1) as a commercial decision by the banks and (2) in terms of capital requirements. At this stage, if you speak to the banks they would probably say, yes, they were very keen to get in deposits. Firstly, they have to look at the stickiness of those deposits and, secondly, at what price. It is always going to be a question. Are they prepared to pay the price? Notionally you would have thought that if the cash rate goes down, what the banks need to pay to hold those deposits could decline as well.

CHAIR: There would be a correlation. The argument would be over the degree of that correlation. You raise the question of Basel III. We have had some submissions from the ABA and other banks noting that APRA intends to introduce some of the changes in an accelerated fashion. The early stages of that accelerated fashion I do not think is a problem. But the later stages require some adjustments. The suggestions in the submissions we have is that this is going to come at a cost to the ADIs and that that cost will ultimately have to be passed on to consumers. What is Treasury's view on whether this will add to the costs of the ADIs?

Mr Murphy : APRA has always adopted a conservative approach in terms of Basel II. They are to be commended for that. It has proved the best approach. I think what happened with Basel III was that the banks thought that in light of the enhanced formal bank capital requirements APRA would give some relief to certain issues which they had not given in Basel II, so it is the composition. The difference between the banks and APRA is about how that capital should be required. I suppose our view is that APRA is the best placed to determine what should be the capital requirements for the banking system. So we would be supportive of APRA's position on this.

CHAIR: Some of the submissions we have had from financial institutions also suggested this would place them at a less competitive position to their international counterparts. The US is lagging behind on Basel II.

Mr Murphy : We cannot be concerned about what other countries do. We have to make sure that this trade-off on stability and competition ensures that we have got the best prudential requirements we can have that suit our circumstances. I think that is what APRA is seeking to achieve. There are other countries in Europe that have higher capital requirements on their banks so APRA is well apprised of the issues. I looked at the submissions the banks have submitted here and, to me, some of those issues are at the margin; they are not the main things on the capital requirements.

Senator MARK BISHOP: One of the briefing notes we received that has been reported in the press says that the major Australian banks are the most profitable in the developed world with 2011 pre-tax profits equal to 1.19 per cent of total assets. Canadian banks are in second place. Firstly, why are Australian banks the most profitable in the developed world? Secondly, should that be viewed as a good thing, a bad thing, a deleterious thing or a matter of no consequence in the context of this inquiry and allegations of abuse of proper practice?

Mr Murphy : I suppose it is in the eye of the beholder. Why are the Australian banks profitable?

Senator MARK BISHOP: Not profitable, why are they the most profitable in the developed world?

Mr Murphy : If that is an issue, what figures are you looking at? Is it very surprising? The traumas that other countries have had with their banking systems, to me, probably reflects the market and that they are being reasonably well run. We have had strong prudential regulation. The banks came through the GFC in a very strong position and that means that the whole ADI sector—I am not saying just the majors. One would think that you have got to get some benefit out of that. When we do an analysis of banks' profit levels, yes, they are in business to lend money to the benefit of Australian business and consumers. At the same time, they make profits. Their profit levels are no greater over a long period of time than other major corporates. I am not comparing them with mining companies but I am comparing them with other corporates. It is a matter for the community and the government to decide whether that is too high a profit or if that is okay.

Senator MARK BISHOP: You made a reference earlier to the price of their obtaining overseas funds in the wholesale market going up by, I think you said, 140 or 150 points, post the GFC.

Mr Murphy : That was during the GFC. It is an average from 2007 until now.

Senator MARK BISHOP: You have argued that wholesale borrowing costs have gone up significantly, which in the final analysis has to be passed on to consumers or to borrowers. Our banking system, as you have outlined here and in other inquiries, is so well regulated—there is heavy prudential oversight and access to growing levels of deposits, and wholesale rates are available because the country is properly run in the financial sense. There are so many countries where the risk has gone through the roof. There have been problems in particular in European countries and in large niche markets of the United States and North America generally. Why haven't the pricing practices been adjusted more downward to reflect the soundness of the borrowers coming from this country—this market—into Europe to borrow? I do not understand why we are being charged the same premium—almost 1½ per cent—that is charged in the bond market—for example, in Greece or Spain.

Mr Murphy : That is largely determined in international markets. The way lenders allocate internationally would be to acknowledge that there is a sovereign risk and allocate only so much money—they are going to diversify their risk. I suppose we face that same problem. That is why the government had to guarantee the banking system, notwithstanding the fact that we had quite a sound banking system. Once other countries guaranteed theirs, we were forced into guaranteeing, because the market is not that discerning.

Senator MARK BISHOP: If you looked at all the factors that go to sovereign risk, you would think that our prices would have gone down compared with Greece, Spain or the banks that are virtually bankrupt in the US.

Mr Murphy : Yes.

Senator MARK BISHOP: Or, look at the way the bond market is operating now, where you are effectively getting zero return or negative return in the US, yet our prices have gone up by 1½ per cent, inarguably in the most profitable, best-regulated system in the world. I do not understand that, if there is rational pricing. Is there rational pricing for loans at an international level, or not?

Mr Beckett : I think a lot of rival banks are not borrowing at all in the wholesale market. They are entirely reliant on official-sector funding from the ECB. So in some ways we are fortunate that our banks are sufficiently well regarded and highly rated that they can actually borrow in private markets.

Senator MARK BISHOP: That also tells you that the price should come down, doesn't it?

Mr Beckett : But there are also issues in terms of how much money the major investors will want to put in their Australian portfolios and the limits on the capacity.

Senator MARK BISHOP: That is right, but we also know that in the last two years in particular a whole range of significant countries—Russia, Spain, the United States, Sweden and Germany—have all been heavily investing in government bonds and the like down here, because (1) the rate is still positive and (2) the risk is lower. So government institutions at that level seem to appreciate that—

Mr Murphy : But I think sometimes the way international markets look upon it is, 'A bank's a bank.' It is an Australian bank, and it is competing with Canadian banks and with Europeans, but it is a bank. And I think what you will find in markets now is that there is a greater risk in investing in a bank than there was pre-GFC. It does not matter what bank it is. I think it is internationally acknowledged that Australia has a very sound financial system. It is internationally acknowledged that we have four banks in the top 20, I think, or the top 15.

Mr Beckett : It is probably the top 10.

Mr Murphy : But whether we get the benefit of that, or the credit for it in terms of funding costs, I do not know. I do not think we do.

Senator MARK BISHOP: Does it strike you as odd that we do not?

Mr Murphy : We might over time. I think down here we sit in a very calm, rational environment, whereas if you read the Financial Times, about what is going on overseas, you see that to some extent they lurch from one crisis to another. From Australia's point of view, we would like them to be able to move quickly to resolve these matters so that the markets stay open. Even in Australia, I suppose we have taken out some insurance by increasing our deposits so we do not have to go into the market. So yes, the markets are rational, but they react to other factors.

Senator MARK BISHOP: I will go to my last point, then. Bankwest was notionally bankrupt. It was purchased by the Commonwealth Bank from the parent Scottish organisation. The briefing notes suggested that the price paid was significantly below what was an acceptable rate for a viable operation. When the new management took over they naturally went through the loan book to find out what the real state of play is. As a consequence, they did a range of things, it is alleged, such as revaluing loans, repricing loans, putting more pressure on consumers to pay up earlier. There has been a lot of pain in particular niche markets in New South Wales and Queensland in particular. When your people have looked at that response, as outlined in the public documentation, by the Commonwealth Bank and the other submissions, do you think that was proper business practice—to revalue and reprice the loans with the attendant pain? Or was it unacceptable business practice?

Mr Murphy : I do not think it is for a Treasury official to comment on those business practices. I would say that there is a framework there. This may not be solace to people who feel aggrieved or who feel that they were not given a fair shake. But there is a framework there for them to be able to take action if they feel that, in terms of the current laws of the land and in terms of what is fair and reasonable, that did not occur. We have to face the reality that this a commercial contract between borrowers and lenders. I suppose the thing that makes us consider this matter is that, to some extent, you had an intervention—the GFC—that took a lot of people by surprise. I could well imagine that borrowers, before the GFC, were planning their business on the basis of what they had seen previously, and lenders were planning their business on the basis of what had been up to then. It is not surprising that some issues have been raised from this event.

From the government's point of view, it was clearly placed in a position whereby HBOS withdrew its funding for Bankwest, and that is on the public record. One of two things needed to happen. One option was the winding up of Bankwest, which would have caused great difficulty and big concerns not only for Bankwest customers and the business but also for the rest of the financial system—it would have raised huge worries and concerns in the community. So the government faced the situation of whether to have Bankwest taken over by someone or to let it fail. The government went through a process. The financial regulators were involved—the Treasury, the Reserve Bank and APRA. Then the ACCC did a proper competition analysis, and in its view there would not be a lessening of competition if Bankwest were merged with CBA. At the macro level, I suppose, that is what has happened.

Going on from that, you then move into questions about whether the receivers acted appropriately, whether the valuation on the property was done correctly and whether there has been any unconscionable conduct by the lenders. What government does is set in rules and obligations on all the elements of the system, and one would hope that those rules are tight enough to ensure fair results for everyone, whether it is the borrower or the lender. So I can understand that people may have found that the actions of CBA were not to their liking, or that people were very critical of them, but I think there are arrangements in place whereby they can take action if they feel that way.

Senator MARK BISHOP: Does the response of CBA when it had been through the loan book and made its own commercial assessment of the state of Bankwest, which it had purchased—and then its process on revaluing, repricing and bringing forward some repayments—strike you as being a rational and necessary response on the part of the new owner in the environment we are in?

Mr Murphy : I would have thought so. It is prudent to do that. In terms of their capital requirements and in terms of liquidity, I would have thought that the regulator would be oversighting what was going on there. You would have thought that anyone in the same situation would do that.

Senator MARK BISHOP: I have one final question. In that context, then—in that process of revaluation, repricing and establishing new business models and repayment schedules for borrowers—have you been informed of any illegal or grossly improper behaviour or activity on the part of the new owner, such that you thought it appropriate to alert the relevant minister or ministers?

Mr Murphy : I am aware of these issues, especially in relation to one of the commercial property developers in south-east Queensland.

Mr Beckett : I think you could say we have had some ministerials about the issues. In those cases our practice is to try to help people out by describing the framework and describing the relevant remedies that are available to them. I have seen a couple of articles in the newspapers about the outcome of a couple of court cases.

Senator MARK BISHOP: No, I don't think you have quite got the question. The question was whether the new practices, instituted by the new owners of Bankwest in both parts of New South Wales and southern Queensland—which have received the majority of press attention—were such that they could be categorised as illegal or grossly improper to the extent that you thought it within your purview to advise your minister or the relevant minister of such behaviour.

Mr Beckett : We do not make judgments about whether things are illegal or not. That is a matter for the courts. People have claimed that some of the lending practices under Bankwest were less than prudent in some cases. I am aware of those. In terms of the action that CBA has undertaken since, we have not formed a view that any of that conduct is illegal. But, again—

Mr Murphy : It is not for us to find that. If that were to come across our desk now—

Senator MARK BISHOP: Okay, so it is not your function.

Mr Murphy : We would refer it to ASIC.

Senator MARK BISHOP: Which is the agency that I should ask that particular question of, then? APRA? Or ASIC?

Mr Murphy : If there is unconscionable conduct in relation to lending practices, it would be ASIC's role because there are protections in the ASIC Act for small business. They are narrow, because you are cutting across what are basically commercial contracts between people.

The only other point I would make—and I am trying to be helpful—is that where an individual defaults or a bank forecloses or whatever, it is not in the bank's best interests for that to occur because they will lose possibly 40 per cent of the loan. There are many safeguards or pressure points in the system. It is not to contain the enthusiasm of the banks or to have checks and balances in there to protect the borrower. It is just the commercial realities of it all.

Senator MARK BISHOP: Thank you.

Senator WILLIAMS: You said in your opening statement that the Australian government did not have to bail out any of our financial institutions. Did they have to prop up any?

Mr Murphy : I would not say that what the government did was propping them up. As I said, the government guaranteed the wholesale funding of our system, largely because every offshore market had guaranteed their own banking system. So we sort of put ourselves back on a level playing field.

Senator WILLIAMS: Did the Reserve Bank or Treasury lend any money to Bankwest in the period from August 2008 through to December 2008? Are you aware of that?

Mr Murphy : No. You would have to ask other people about that.

Senator WILLIAMS: Ask the RBA?

Mr Murphy : I would think so.

Senator WILLIAMS: Surely AOFM's purchase of residential mortgage backed securities was a prop-up of the small institutions?

Mr Murphy : I do not know whether it was a prop-up. I just think we were trying to keep the securitisation market alive.

Senator WILLIAMS: Because it had collapsed, hadn't it?

Mr Murphy : It had not completely collapsed. In the securitisation market, at least 30 per cent of the funding comes from foreign banks offshore. That closed. So I suppose we were trying to keep alive a patient who needed oxygen. To some extent, it is still disappointing that the securitisation market has not got going again as strongly as we would like. It was always going to be around five per cent of funding in the whole system, but it is important because it does help some of the smaller lenders. But I will just finish on that point. I think internationally people are now seeing that they need to have a securitisation market, so I am hopeful that it will pick up again.

Senator WILLIAMS: When those batches of loans were grouped and sold off to AOFM, I think they bought about $14 billion worth. Who scrutinised the quality of those loans? We hear about the low doc loans and no doc loans. I have got some stories. As this inquiry goes through, I can assure you that stories of loans to 98-year-old ladies and 30-year loans will come out. Who scrutinised the quality of those loans? You will hear more about this matter from a witness this afternoon, Denise Brailey. Were they AAA? Were they good loans or did those financial institutions pack up the bottom of the bucket and palm it off to the taxpayer?

Mr Murphy : In Australia there is an extremely low incidence of so-called non-conforming loans, an extremely low incidence of defaults on mortgages, plus the AOFM would only take AAA-rated—

Senator WILLIAMS: Who rates them? You say they will only take AAA-rated loans. Who rates those loans as AAA?

Mr Beckett : Generally the major rating agencies.

Senator WILLIAMS: Such as?

Mr Beckett : Standard and Poor's and—

Senator WILLIAMS: A similar lot to that which rates the subprimers. There are AAA investments in America?

Mr Murphy : But you have got to go back down the chain. In terms of the lending requirements and the requirements that APRA puts on banks for evaluating the capacity of the borrower to pay back the loan, the difference between Australia and, say, the US is that even if the bank is acting through an intermediary my understanding is that the bank retains the responsibility of ensuring the capacity of the borrower to repay the loan. They cannot delegate it to a third party, a mortgage broker or whatever. The bank has to take that responsibility. That is under the prudential standards.

Senator WILLIAMS: When AOFM buys these packages of loans—let us say, 10 loans at $100,000; $1 million worth of loans—the bank might be charging seven per cent to those customers and they might sell them to AOFM at six per cent. Who collects the money? The bank collects the money at seven per cent and pays six per cent to AOFM? Is that how it works?

Mr Beckett : Through the process the loans will be taken off the balance sheet of the bank and put inside a securitisation vehicle that will issue a bond or a series of tranches of bonds. AOFM will buy one of those alongside other, private investors. Mortgages are serviced, the money is paid—

Senator WILLIAMS: When you say mortgages are serviced, who do those who have the mortgage pay the money to—the body issuing the securitisation or the bank they get it off?

Mr Beckett : It will depend on how it is done. It sort of varies. Sometimes it will be the bank or whoever, has an obligation to pass it on to the entity, which will pass it on to the bond holder. They just have to pay the coupon on the bond and it is generally a three-year bond. So they will pay a coupon and the bond will amortise and there will be a repayment of principal at the end of three years, which is how the process operates.

Senator WILLIAMS: It is complicated, isn't it?

Mr Beckett : We had a very successful RMBS market that allowed expansion of credit and innovation in Australia, lending things with incredibly low default rates because of the general quality of the underwriting of the loans that underpinned this market. So I think until 2007 we had a very well-functioning RMBS market. We did not have the problems that the United States had because of the quality of the underwriting and other factors that would reduce the risk of losses on different tranches.

Senator WILLIAMS: I want to take you to the small players in the financial world, those non-ADIs. They never received the deposit guarantee. I warned Senator Conroy and Senator Sherry that, if you do not guarantee these non-ADIs, people who are in a state of panic simply pull out their money out of those non-ADIs and put them in the ADIs. That is exactly what happened. It made it very hard for those non-ADIs. I have friends who have loan books of LVRs of 40, 42 per cent with real security. They did it very tough. Some went broke. Surely, that was an act of the government that actually eliminated some competition, given that some of those small players went broke because people withdrew their funds?

Mr Beckett : Small players do not accept deposits like ADIs. That is how they generally fund themselves through warehousing facilities, but basically they have a funding pipeline for a major bank and they use that to issue loans and securitise—

Senator WILLIAMS: I am looking at people who run their businesses, then people invest in them at seven per cent and they lend money out at nine per cent.

Senator WILLIAMS: I know in regional areas, especially with farm loans and so on, these are the people who suffered because of that rule, whereas I believe New Zealand also covered non-ADIs. So surely that helped to eliminate competition from the small end of—

Mr Murphy : It is hard to know whether, if the government had stepped in, it would have made much difference to those things.

Senator WILLIAMS: I know it would have to some.

Mr Murphy : It was an issue that was addressed. The guarantee was applied to approved deposit-taking institutions.

Senator WILLIAMS: Exactly.

Mr Murphy : Under Australia's framework, finance companies and other entities of that ilk are not prudentially regulated. They are regulated under a conduct disclosure, ASIC. A clear, bright line was needed. During the global financial crisis we actively worked with certain finance companies and small lenders in regional areas to try to assist them through the banking system.

Senator WILLIAMS: One group I referred to is a (indistinct) group. I know them. I spoke at their AGM last year. How did you assist those groups?

Mr Murphy : It is a long time ago. I actively sought to talk to regional lenders in terms of certain regional finance. That was during the global financial crisis. The government was concerned about that.

Senator WILLIAMS: Yes, and so they should have been because the Bidgee Finance merger fell over as a result of it. This was a direct result of the government not covering those non-ADIs as well. They could surely have covered those ones of real security?

Mr Murphy : I do not know. I think to some extent they were operating a business and they had a business model which was like a banking model but was not taking deposits. I do not think the government caused their demise or the difficulties they faced. It was actually the change in the market conditions that caused their problems.

Senator WILLIAMS: Those people I mentioned actually take deposits from just ordinary household investors. That is where they get their pool of funds from.

Mr Murphy : But they are not real deposits. They are not deposits according to the banking regime. They are debentures. They look like deposits but they are actually debentures. I know in regional areas that has been a successful model for a long period but probably the impact of the GFC questioned that model. That was the difficulty.

Senator WILLIAMS: One last question. You say there is a lot of competition in the home loan market. I agree with you. But in the business lending market we saw interest rates fall substantially when the global financial crisis hit, but farm loans and small business loans hardly went down. Is there competition lacking in the business world? I saw interest rates go down three per cent on home loans and I saw farm loans go from nine per cent down to 7.8 per cent. They hardly moved—one per cent.

Mr Murphy : I do not know. On the competition angle in terms of small business loans you have to factor in from the lender's point of view that there is a higher risk with a business loan than there is with a mortgage. You have to factor that in. Secondly, what we see from our analysis and hear from the major banks is that between 80 to 90 per cent of borrowers get accommodation from a lending institution.

Senator WILLIAMS: With real farm land, with an LVR of 40 per cent—that is rock solid, more so than a house.

Mr Murphy : Yes.

Senator CAMERON: I am interested in your comment that it is up to the government to question whether the banks are too profitable. What is the role of the Markets Group in advising government on whether banks are excessively rent seeking?

Mr Murphy : It is a judgment as to whether it is excessively rent seeking. It seems on the current analysis it—

Senator CAMERON: I am not asking about what is happening at the moment. I am asking you a question of principle.

Mr Murphy : That is a principle.

Senator CAMERON: You said it was up to the government to determine. What role does the Markets Group of Treasury have in advising government if they see banks excessively rent seeking?

Mr Murphy : We would give that advice; that is our role. To some extent Treasury gives advice, information—whether or not it is advice depends on the government—on market conditions. We would analyse and we have looked for a number of years at bank profit levels and, as I said, to me it is an issue for the community and the government as to what they think are reasonable profit levels. I do not think there is excessive rent taking at present, but that is just my view. I think that could be the prevailing view in Treasury. It depends on the context. You have to compare it with other companies and with offshore, and you have to compare it what you think you really want from the system. You have to compare it with where you were at. We have had a number of mergers to form those four majors. That is the point in time. That is what we have to face the reality of. At the same time you have a competition regulator there. To me, there is an institutional framework in there to protect the national interest.

Senator CAMERON: But you are part of that institutional framework, aren't you?

Mr Murphy : Yes.

Senator CAMERON: So to say that it is simply up to the government is a sort of generalisation that there are these institutional organisations such as your own that advise government on how it makes decisions on these issues?

Mr Murphy : Yes, certainly.

Senator CAMERON: I just got the impression it was a case of: 'Well, that's up to the government; you determine it.'

Mr Murphy : No, it is a decision of government. We can give advice and make recommendations, but it is a decision of the government. My philosophy is that the government should reflect the community standards. That is what my view is: the government should reflect the community. I can understand how the Treasurer has been quiet strident in his views about the major banks, because I think he reflects—and Treasury has provided information—his judgment, but I can very much understand his views. He wants a stable banking system, and a well-functioning banking system, but at the same time he is looking at it from the points of view of the users, the consumers, the borrowers, and he is trying to get the best result for them.

Senator CAMERON: We are used to getting lectures from some of the senior bankers about how we should run the economy, and as soon as the government says, 'Well, here's how you should run the banking system', we are accused of bank-bashing. So I am interested in your analysis that we have to look internationally. I am a bit concerned that the standard we set is that we are going okay because everyone else is going so badly. Look at Europe. We are not like Europe. We are going pretty well—in the broad context we are, compared with Europe. I am not running a critique on Europe here. But there are some systemic problems still in the Australian banking industry. I am getting the sort of feedback from your Markets Group in Treasury that everything is okay—

Mr Murphy : No—

Senator CAMERON: and I just want to clarify that. There are issues in banking.

Mr Murphy : I can go back—I would probably be the same age as you, Senator—to when we had a banking system where we went cap-in-hand seeking to get credit. We have a much better financial system and credit provision for the whole economy, whether it is consumers or business, than we had, say, 25 years ago. The Australian public has benefited from the opening up of the market, the influx of competition from foreign banks and all those big decisions that were made years ago. I won't go into them.

What do we have now? All my points today were to try to say: we should not forget the fact that, at the moment, we have quite a reasonably operating financial system. Yes, if you look offshore you will see a stark contrast. But that does not mean that we are not looking at what the financial system should be to meet the demands, the issues, that the Australian community wants addressed, that the Australian community needs.

My second point was that it is a transitional time and I think parts of the financial system at the moment are repositioning themselves. So you can take a snapshot now but, at the same time, I think there is change occurring. One would hope that, potentially, you might get more competition into the system just through these issues sorting themselves out—the major banks increasing their capital, increasing their resilience; and more innovation, possibly coming from the second tier and more innovation coming through other areas of the market. That is all.

Senator CAMERON: It seems to me that the issue of securitisation is not cut and dried in terms of where we should head in the future. I am on the IOSCO website at the moment. They are issuing papers nearly as we speak, discussing how this should work. The one they did in July said that there are some significant issues in terms of securitisation, that there should be an alignment of interest from the banks, in terms of having skin in the game. You just don't say, 'Here's a securitisation product—you buy it, we've got not problems; the downside risk is all with you.' That is one issue.

They say the disclosure statements are also still a big problem. They say the ongoing reporting standards are still an issue. And this is the issue where people are getting taken to the cleaners: there has to be improved analytical tools for investors. They recommend involvement and certification by external independent experts. I am just wondering what discussions have taken place with the Markets Group on these recommendations and what is the type of thinking that is developing on these big issues on securitisation?

Mr Murphy : For one, they seem to me very sensible recommendations and approaches—and that is working its way through. There are a couple of things: (1) it would be a really good thing if there was a standardisation of the requirements in terms of securitisation—to get a securitisation market actively working again, you actually need that to happen, so that would give ample assurance to investors that a securitisation market is worthwhile supporting; and (2) my understanding is that the Australian securitisation market contained the risks that were in securitisation in other markets—there already was skin in the game in Australia. So I do not think we would have great difficulty in meeting the requirements of an international standard on securitisation.

Mr Beckett : ASIC reports on global standards on securitisation. ASIC is the co-chair of that working group, so Australia has been involved in preparing that consultation paper.

Senator CAMERON: I only have 10 minutes, and there are so many issues, but can I put a question on notice now?

Mr Murphy : Yes.

Senator CAMERON: Joe Stiglitz has written a book called The Price of Inequality. It deals, to a great extent, with the role of the banks and the global financial crisis. On page 269 he outlines a number of recommendations relating to reduced rent-seeking and levelling the playing field in the banking industry, and curbing the excesses of the financial sector. That runs through onto page 270. It runs from recommendation (a) to recommendation (f). Could I ask the Market Group to have a look at these recommendations from Joe Stiglitz and to provide us some advice as to whether they have any relevance or beneficial application within Australia?

Mr Murphy : Yes, okay.

Mr Beckett : I will talk to the Treasurer. We will provide that through the Treasurer to you.

Senator CAMERON: Thanks.

Senator EGGLESTON: Mr Murphy, earlier you said it was a better option not to let Bankwest fail. You were also concerned about unconscionable conduct. What role does Treasury have in policing, if you like, the ethics of banking in this country? Do you feel that you have some role in that area? Or are they matters you would refer to other agencies, such as ASIC and so on?

Mr Murphy : In terms of ethical business practices, you would hope—I suppose that is as far as it goes—that that was in a corporate's best interests. The checks and balances on a corporate, whether it is a bank or any other lending institution, would be the laws of the land—but only the laws in terms of what the Corporations Act, which we have gone through; and the ASIC act in terms of unconscionable lending practices—where the government intersects. But, at the same time, you would think that, to some extent, ethical practices might also run into risk-taking, and whether it is excessive or not. So that, to me, may cut across the prudential regulator of a bank, and come to there attention as well. So I think there are checks and balance in the systems, but it is hard to draw distinctions and ethics and commercial bargaining and commercial reality. Where it comes out from a government point of view, is on the question of whether there is unconscionable conduct between the parties, or there has been misleading information provided to the borrower. That is where the protections lie from the policy framework's point of view.

Senator EGGLESTON: In many ways, I suppose that Treasury is closest to government when it comes to these sorts of things—you are more intimately involved with government on a day-to-day basis. We have heard stories, in various submissions from various people, that in the Bankwest matter there were secrecy clauses, that people were not allowed to disclose the terms of loans, that there was stripping of assets, interest rates and things like that. This committee did an inquiry into the liquidators' industry, two years ago I think it was, and there do seem to be some strong similarities between the behaviour of some of the less ethical—and even criminal—liquidators and the sorts of stories that have been spoken of by people who have been involved with Bankwest. I am interested in the degree to which Treasury, as an important arm of government, plays a role in calling attention to what, in effect, it unconscionable conduct within the financial sector.

Mr Murphy : I think the government has done a number of things in that area. One very much heeded the committee's view—I think it might have been to a parliamentary committee on insolvency—where there needed to be a tightening up of the regime, and there were some poor or nefarious practices. So the government released a proposals paper outlining some reforms of the regulatory system in terms of insolvency. That was late last year, to try to make sure that the people who are insolvent practitioners have the right skills, and to try to get the incentives right.

Also, on the credit reforms there has been a seeking to make sure that the receivers act in everyone's best interests, or in the public's interest, if they have to come in and reassess the price of the assets or sell assets. So the government has sought to provide greater safeguards for borrowers in receiverships, through the credit reforms. That said, there are actual provisions there, dealing with unfair contracts and unconscionable contracts. I must say that, up until now, they had been read quite narrowly by the courts. But the provisions are there for someone to seek to get redress, if they feel that they were unfairly treated in a commercial contract.

Senator EGGLESTON: Do you feel our laws and regulations in this area are sufficiently strong to protect individuals? How do they compare internationally, with other jurisdictions such as countries of the European Union, North America et cetera?

Mr Murphy : It is hard to draw comparisons. Oftentimes those arrangements are quite domestically oriented. I think the problem here is where you have commercial contracts entered into between a borrower and a lender, and a dramatic change in circumstances, and then trying to ensure that everyone's interests are taken full account of. So we see that the safeguards on the lender are that, as long as there was a proper process in terms of the loan in the first place. I think in these instances it was not excessive risk-taking by the borrowers or the lenders; it was more likely just a dramatic change in circumstances. Then you have to seek to ensure that the whole thing is addressed—by that, I mean either through extension of the loan, through some accommodation between the borrower and the lender, through receivership or through the winding up of a company. So I think it is very difficult where you have the personal dimension butting up against commercial contracts.

Mr Beckett : What I think we have learnt from consultations on issues relating to small business and banks is that basically you need to balance a number of factors. You need to protect borrowers, you need to provide access to credit, you need to maintain stability in the financial system. As Mr Murphy says, we seek to trade off those different objectives, because you do not want to be excessively conservative.

Mr Murphy : You have to worry about the failures but, at the same time, you have to make sure that all small businesses can get access to credit at reasonable rates, and at rates that make them competitive in their businesses. That is of principal concern.

Senator EGGLESTON: In this situation, given the stories that I have heard, you sort of wonder whether or not the secrecy clauses that people were been asked to sign before they were given loans—the means of concealing unconscionable conduct, in many cases—should be a matter of interest to the government in terms of public policy to protect individuals.

Mr Murphy : I think that would be a matter for the administration, for the regulators, to question. They have oversight of the receivers in the field.

Senator EGGLESTON: They do. I agree that it is not your role, but nevertheless Treasury is a key part of our financial administration.

Mr Murphy : Yes. If they felt that there was a systemic flaw, a problem with the relationship between the borrower, the lender or the receiver versus the borrower's assets, we would be informed and it would be put to the government as to whether you needed to bring in clearer rules, change the incentives in the arrangement or whatever. That is how we would do it.

Senator EGGLESTON: Thank you, Mr Murphy.

CHAIR: Thank you, Mr Murphy, and Treasury officials.

Proceedings suspended from 10:32 to 10:45