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Wednesday, 4 November 1992
Page: 2530


Mr ROCHER (11.32 a.m.) —The Banking Legislation Amendment Bill seeks to implement the Government's decision in the `One Nation, One Job' economic statement in February to further liberalise the entry of foreign banks into Australia. It also makes a number of other significant changes to the various pieces of banking legislation to facilitate foreign bank entry and to enhance Reserve Bank prudential supervision of the Australian financial system. The Bill provides for the removal of restrictions on the entry of foreign banks into Australia, so there will now be no formal limit to the number of foreign banks allowed to operate here, although Reserve Bank approval will still be needed. There will be no time limit within which applications for banking authorities will need to be made, so there will now be virtually continuous freedom of entry for foreign banks into Australia.

  The Bill will also allow foreign banks authorised under the Banking Act to operate as wholesale banks in the form of a branch. This is a change from the current arrangements which require foreign banks to be incorporated locally as subsidiaries of the parent bank. Because a branch of a foreign bank cannot be subject to the same degree of prudential supervision as a subsidiary, foreign bank branches will be restricted to wholesale banking operations. If a foreign bank wants to conduct retail banking operations in Australia it must continue to be incorporated locally as a subsidiary. The Bill makes changes to the Banking Act to highlight the fact that depositors with foreign bank branches will not be subject to the depositor protection provisions of the Banking Act.

  The Bill also provides for the creation of a second Deputy Governor of the Reserve Bank to assist with the Reserve Bank's prudential supervision of the banking system. The new Deputy Governor will be known as the Supervisor of Banks and will chair the new Council of Financial Supervisors which will consist of the Reserve Bank, the Australian Financial Institutions Commission, the Insurance and Superannuation Commission and the Australian Securities Commission.

  These measures to permit the entry of more foreign banks into Australia represent a long overdue continuation of the deregulation of the financial system which began in 1983. In 1985, some 16 foreign bank licences were issued, which first enabled foreign banks to operate in Australia as incorporated subsidiaries. Since that time the Government has steadfastly refused to allow further entry of foreign banks into Australia, despite the boost to the competitiveness of the Australian financial system that could be expected to flow from the addition of more foreign banks to the Australian marketplace.

  It is widely understood that the limited and controlled entry of foreign banks into Australia from 1985 has injected only a limited amount of extra competition into the Australian financial system. The Government has now finally relented on further foreign bank entry and a significant number of foreign banks have already expressed an interest in commencing branch operations here. This includes existing foreign banks operating here as subsidiaries, as well as potential new entrants. It should be noted, however, that there are still a number of obstacles in the way of foreign banks that want to obtain a competitive position in the Australian market.

  Although offshore banking legislation is currently before the Parliament, there are still a large number of outstanding taxation issues to be settled which affect the operations of foreign banks in Australia. The Government and the Australian Taxation Office have been slow in addressing these issues and in responding to industry concerns. Foreign banks are potentially at a disadvantage when converting existing subsidiaries in Australia into branches because the existing law does not allow them to carry forward losses.

  Some $2 billion in accumulated losses has been notched up over the past three years or so by foreign banks in Australia and so taxation and other legislation to facilitate the conversion of those losses to operations with branch status is clearly of enormous importance to bankers considering that step. The Government announced in June that the necessary legislation would be forthcoming. However, it appears that such legislation will not emerge until the end of this year and, even then, it is likely to be in draft form only. The necessary and proposed legislation is therefore unlikely to be debated until the autumn session of Parliament next year, and obviously risks being caught up in the calling of the next Federal election.

  It is clear, then, that if the Government wants to facilitate the entry of foreign banks into Australia, it is going to have to fast track that legislation or risk generating a great deal of uncertainty for both potential and new entrants and the existing subsidiaries wanting to convert to branch status. The difficulty that arises, of course, is that this is very complex legislation, dealing with a range of complicated tax issues. It is likely that proposed legislation will also seek to integrate the existing banking and related tax legislation into one Act, which will make it a crucial Bill for Australia's financial sector.

  The complexities of relevant legislation necessarily limit the rate of progress, but the point should be made that the Government has been painfully slow in recognising the need to introduce these measures. Between 1985 and the beginning of this year, very little was done to further deregulate our financial market to facilitate the operations of foreign banks or offshore financial transactions. This is despite the increasingly widespread recognition that Australia is extremely well placed to become a major regional financial centre. If the Government had made an earlier start in this matter we would not be facing some of the delays and difficulties that confront the Government today in putting together the necessary legislation.

  It is not just the outstanding taxation issues that are threatening to cause problems for foreign banks in Australia. The Reserve Bank is also erecting its share of hurdles for the new entrants. The costs of compliance with Reserve Bank requirements or foreign banks are considerable and serve to undermine the competitiveness of those banks in the Australian market. These costs also reduce the level of interest in conducting financial transactions in Australia.

  There are a host of regulations and oversight arrangements that foreign banks must meet in order to be able to operate here. For example, there is a Reserve Bank requirement that licensed banks in Australia be required to hold one per cent of all liabilities, other than shareholders' funds, with the Reserve Bank. These non-callable deposits amount to an entry or licence fee for the foreign banks and attract a paltry interest rate from the Reserve Bank. The problem with many of these regulatory and prudential supervisory arrangements is that they often duplicate measures operating in the home countries of the foreign banks requiring the foreign banks to jump through two sets of hoops in order to operate here. The convergence of prudential standards around the world under a number of international agreements should obviate the need for the Reserve Bank to excessively regulate foreign bank operations in Australia.

  There has been a major increase in the regulatory burden forced upon financial institutions by the Reserve Bank in recent times, largely as a response to the irresponsible borrowing and lending by some financial institutions which took place in the 1980s. It is ironic that these events of the 1980s should lead to increased regulation by the Reserve Bank since it was arguably the Reserve Bank, through the excessive liquidity growth it allowed to take place during the 1980s, that was largely responsible for the borrowing and lending activities of the time. That excess liquidity growth was highly inflationary and led to the asset price spiral that was brought rapidly unstuck when the Government slammed on the monetary policy brakes towards the end of the past decade.

  When the Assistant Governor of the Reserve Bank responsible for financial institutions complains, as he does in the most recent Reserve Bank bulletin, that the 1980s became a period of excessively rapid growth in financial intermediation and in asset prices, we have a bad case of the pot calling the kettle black. It can be argued that if we had a more independent Reserve Bank that was focused on price stability instead of doing the Government's bidding in manipulating the business cycle, we would have less need for prudential supervision of financial institutions since business would not be vulnerable to the boom and bust policies of governments that insist on manipulating monetary policy for political ends.

  We should also be mindful of the cautionary note sounded by the retiring Deputy Governor of the Reserve Bank, Mr John Phillips, on the cost of prudential supervision. Mr Phillips reminds us that prudential supervision is not cost free. Such costs, if they are incurred by the financial institutions, are passed on to their customers. If they are incurred by the Government, they are paid for by taxpayers. It is all very well for us to say that there should be more prudential supervision of financial institutions in Australia, but the costs of such supervision must be measured against the benefits. Those benefits can be difficult to quantify, even more so than the costs, since they are systemic in nature, deigned as they are to protect the banking system as a whole as much as to address the specific problems faced by the particular financial institutions.

  There are, however, some things that prudential supervision cannot guard against, such as financial institutions making bad loans or bad decisions. We should not kid ourselves that the arrangements we are putting in place now will stop many of the things that happened in the 1980s, whatever the ultimate causes of those circumstances might have been. We should not encourage depositors to abrogate all responsibility for exercising their own prudential supervision and making their own judgments as to the viability of the financial institutions with which they have dealings. The information problems in this regard are often exaggerated and more attention needs to be paid by the clients of financial institutions to the sort of information provided by the various ratings agencies as a part of their commercial decision making.

  We should also bear it in mind that some people might actually prefer to utilise high risk financial intermediaries in return for cheaper financial services or a higher rate of return on their assets. This is a rational part of any large and well-managed portfolio and we should not be imposing our value judgments on people who may have a real commercial need for high risk and high return financial intermediation. We have a related difficulty, which is the ridiculous situation under this Bill whereby foreign banks that convert to branch status and new entrants which commence operations as branches will be confined to wholesale operations because branches of foreign banks cannot be subject to the same degree of depositor protection. This will be achieved by instituting a threshold initial deposit of $250,000, above which branches will be able to accept funds from any sources. With such a high threshold, there will be very few such deposits from households and there will be little by way of retail banking under these distortionary arrangements.

  According to the Assistant Governor of the Reserve Bank, Mr Graham Thompson, the reasoning behind this decision is that the decision to restrict branches in their deposit raising from the retail sector stems from the Government's view that the savings of average household depositors should continue to be subject to depositor protection by the Australian authorities. These depositors would also, generally speaking, be less able to make well-informed judgments about the relative merits of dealing with a branch or a locally incorporated bank. That suggests that Australians need to be treated like children in relation to retail banking by foreign banks and cannot be trusted to make their own assessment as to the implications of the lack of depositor protection for foreign bank branches.

  Arguably, it should be none of the Commonwealth's business what people do with their money in this context. It does not say much about our maturity as a nation or our ability to act as a major provider of financial services that we take such a dim view of the average retail banking client. It is ironic that this distortion should be introduced into the operations of foreign bank branches, because one of the principal rationales for granting entry to foreign banks under this Bill is the lack of a major impact on retail banking by the existing foreign banks in Australia. This is typified by the well known case of the foreign bank in Sydney that has a sign out front saying, `No cash kept on these premises'. Many of the new foreign banks will not be interested in retail banking, but this Bill will not even provide the option to foreign bank branches.

  Australia, and Sydney in particular, is well placed to become a major regional financial centre, and we should be making every effort to ensure that it comes about. The provision of financial services promises to be a high growth industry in the Asia-Pacific region over many years to come. The economies of the Asia-Pacific region are not only growing at a rapid rate but also becoming increasingly sophisticated in their financial needs. The demand for skilled financial services within the region will thus grow in line with the already strong economic growth rates within the region. Australia has a very good skills base in financial services and our financial sector is generally very competitive. We also have a number of distinct advantages over other major regional financial centres that, combined, make Australia an attractive place to do business.

  We do not have the high overhead costs associated with operations in Tokyo or Singapore, nor do we have the political uncertainty that presently clouds the future of Hong Kong. Australia is well located in terms of international time zones and has an advanced legal system and highly developed financial markets, including, after Tokyo, the region's leading financial futures market. The only major drawback from which Australia suffers is what Mr Vic Alexander, Chairman of the Australian Financial Centre Committee, has called `our Neanderthal tax structure', although some progress has been made on that front since that comment was made.

  It is worth noting that any tax concessions granted to encourage a greater share of the region's financial transactions through Australian markets and Australian-based financial institutions will more than repay the revenue over the longer term. That will be because of the increased level of economic activity that financial markets will bring to Australia, which will generally be taxed at the company tax rate of 39 per cent or at the various, typically high, personal income tax rates. So there is no excuse for Australia not becoming a major financial centre in the years ahead. We will have only ourselves to blame if we fail to capitalise on our distinct comparative advantage in the provision of financial services to the rest of the world and to Asia in particular.