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Wednesday, 4 November 1992
Page: 2534


Mr MARTIN (Parliamentary Secretary to the Minister for Foreign Affairs and Trade) (11.51 a.m.) —How delighted I am to hear a member of the Opposition speaking in such glowing terms about the possibilities for Australia developing as a financial services centre, particularly flowing from the legislation which the Government has introduced today and the legislation which was debated yesterday on the OBU legislation. The honourable member for Curtin (Mr Rocher) is 100 per cent correct when he says that there is an opportunity for Australia now, that we must seize it with both hands and that we must take advantage of those very distinct comparative advantages that Australia enjoys. He listed most of them and there are probably some others. I would just hope that those people in government who are looking at this—and I am certainly doing my best to facilitate that—will take into consideration the very detailed reports that have come from Mr Alexander's committee, from Price Waterhouse, from the New South Wales State Government and from others. I am talking particularly about some of the other issues which go to taxation and other matters, because I think they are relevant. We should not lose the opportunity now to proceed in developing Australia as a major financial services centre.

  The legislation that we are dealing with is particularly relevant to foreign bank entry into Australia. The honourable member for Curtin in his commentary indicated that, largely as a result of decisions taken in the early 1980s, we saw a more liberalised regime in our banking system. Foreign banks were given licences, albeit a limited number—16 licences were issued and only 15 were taken up—and, interestingly, at the time those foreign bank licences were given, they were given on the basis that those banks were supposed to establish a retail banking network. The concern of the Government at the time, after a couple of reviews, was that the big four banks in Australia needed to be subjected to further competition. It was felt that, by giving a limited number of foreign bank licences so that other banks could come into Australia, that opportunity for improved competition would be granted: the foreign banks, with the resources that they would have behind them, would get into the comparative areas and offer benefits to consumers.

  The other side of that equation was that, when we allowed those 16 foreign banks to come in, we said they had to be incorporated as subsidiaries and not operate as branches. The fallacy of that was that it limited the supply of capital which the Australian subsidiaries of those major banks had. Therefore, to think that they could compete against NAB, the Commonwealth Bank, Westpac and ANZ was at the time misdirected enthusiasm on the part of those who made the recommendations. Interestingly, following on from that was the need then to review those decisions. I was pleased to chair the Standing Committee on Finance and Public Administration, which did that. I would just remind the House that that inquiry—the banking inquiry, as it was referred to—tabled its report in this place in November last year. The report was entitled A pocket full of change. We made some substantial recommendations—103 in total—to improve, in our view, the banking system as it presently operates in this country.

  I am therefore very pleased to be able to speak on this legislation today. It is from this report and the recommendations contained therein that this legislation has emanated. I think that says a couple of things. Firstly, it says that this Parliament, through its committee system, with a bipartisan report—as this one is—can bring down recommendations which the Government can then act upon. In this case the Government has said, `Well, all right, we made a mistake in the mid-1980s and issued only 16 banking licences for foreign banks. Let's redress that situation based on the weight of evidence that has come from a parliamentary inquiry and let's change it.'. In fact, recommendation 10 said that there should be a removal of the formal limitation on the number of licences issued.

  The Committee made that recommendation not so much because it thought there would be a major flood of new entrants coming into the market—because economic circumstances perhaps are not right for that—but because some of the entrants that are already here, and those entrants that the honourable member for Curtin referred to that have sustained considerable losses since they have been operating in Australia, may in fact choose to go from Australia, to exit the market now, but to come back again in the future when things improve. That is one option that might be available. That is not to say that we do not want them here, but it certainly provides them with that ease of entrance and exit which we presently do not enjoy.

  When those 16 licences were available, it almost became an option; it almost became a selling point that it was a once in a lifetime opportunity for foreign banks to get into Australia. Of course, as we have seen, that was to the detriment of those banks, simply because when the four major Australian banks saw them coming they decided, `Well, we are not going to allow this to happen. They have to have retailing; we are not going to let that happen either'. So they really started to market themselves. The end result was that they ended up with 75 per cent of the retail banking in this country and the rest of it went to the non-bank financial intermediary sector or to the State banks. It is interesting, therefore, that as time has gone on, as we have had a chance to reflect on financial deregulation in Australia, we have seen a need to change the approach.

  As I have said, recommendation 10 of the Committee's report, that the formal limitation be removed, has now been adopted. Recommendation 11 was a corollary of that. The report suggested that foreign banks should be located in Australia as subsidiaries rather than branches, and that also was adopted by the Government. As we have seen, the Government has now moved to enable these foreign banks to come in as branches.

  Mr Wilson interjecting


Mr MARTIN —As my friend and colleague the honourable member for Sturt, who was Deputy Chairman of the inquiry, rightly points out, but not in retailing. I will address that issue. Like he, I probably would have preferred to see it go the full way in terms of both.

  Mr Wilson interjecting—


Mr MARTIN —As he is again interjecting and rightly reminding me, we in fact recommended that very thing. But the point is that recommendation 11, on branching not subsidiaries, is an issue which I think is worthy of a deal of consideration. The branching structure as proposed in our report was put forward on the basis that we would have a much more substantial volume of funding available to the foreign banks, so that if we were looking at real competition against existing Australian banks those foreign banks would provide that.

  The Government has decided that it will apply that only in wholesale banking. To some extent and upon reflection, some of the arguments can be seen as to why that is the case. For example, as I have already illustrated, when the original licences were given it was expected that retailing would be part of the foreign banks' operations in this country. One or maybe two tried to do that by getting involved with an arrangement with an Australian bank, but all of them failed. In fact, only one foreign bank—and there is some criticism as to whether it is even a bank—in this country actually made any money out of the deal in the last five years. So whether or not it is wholesale or retail now is a moot point and can be debated.

  Other recommendations that came from our Committee inquiry have been acted on and have already been referred to in debate this afternoon. Recommendation 34 suggested that a second Deputy Governor be appointed principally and solely to be involved with prudential supervision. Recommendation 38 referred to the need for the establishment of a Council of Financial Supervisors so that prudential supervision amongst all financial intermediaries within Australia—the banking sector and the non-bank financial intermediary areas dealing with building societies, credit unions and so on—would all have some common basis of supervision.

  I was particularly concerned, as, I am sure, are most Australians, about the apparent losses—indeed, what has been proven to be substantial losses—incurred by major banks in this country as a result of decisions taken where perhaps prudential supervision was not up to the mark. I am not saying anything that I have not said in the past and which our Committee was somewhat critical of. The view that was expressed by the banking inquiry was that there was a need for a specific purpose Second Deputy Governor whose responsibility was to ensure that prudential standards and prudential supervisory regimes of accounting standards and auditing functions were put in place. We have moved to do that, and this recommendation has been acted upon and translated into legislation which is the subject of today's debate.

  The Council of Financial Supervisors was equally important because we felt that within Australia, with so many financial organisations doing what essentially was banking business, there was a need to ensure that the Commissioner for Superannuation and Insurance, and the new AFIC organisation to supervise the building societies and credit unions, interplay with each other and with the Reserve Bank so that each of those organisations had an idea as to how the other was prudentially supervising financial institutions in this country. I take the view that a strong and dynamic financial sector of the Australian economy underpins our economic and social well-being. But to have confidence in that, we must have confidence in the ability of the supervisory regime that is in place to meet the needs of the system. The second Deputy Governor's position will go some way in doing that.

  When we take into consideration other recommendations that we made, which this Deputy Governor presumably will put in place—such as having audit teams and flying squads, groups that would look at banks' accounts and perhaps do more than simply give a nod and a wink to bank administrators—we may not see the situation of the 1980s eventuate, where almost every bank in this country, in a lemming-like rush, attempted to buy overvalued assets. If the Reserve Bank and the other Council of Financial Supervisors members see, by examination of the books of their respective organisations, that there is an overcommitment in certain areas, then that nod and a wink might be taken a bit further and suggestions made to them that they should divest out of that particular area.

  I was also interested in some of the comments that were made by the honourable member for Curtin. I basically agree with a lot of what he had to say. He was talking about the cost of prudential supervision and whether there were benefits. I think the obvious benefit of improving prudential supervision is having confidence in the safety and soundness of the Australian banking industry. If we do not have that, then we do not have a sound economy. I think, therefore, that if there is a cost to the banks or the participants who are in that system and they have to pay fees, charges or whatever it might be for prudential supervision, or if there is an indirect cost which is perhaps not measurable to the banks in having to conform with the guidelines that are established or, indeed, even having international standards in terms of capital adequacy ratios, then so be it. But it should be in their best interests as financial institutions in this country to have somebody watching over what they are doing—not regulating them, but supervising and giving them guidance. If some of that guidance were around in the 1980s, then perhaps the problems in Victoria with the State Bank and the problems in South Australia, which I am sure my friend the honourable member for Sturt will comment on in his contribution shortly, would not have eventuated.


Mr Wilson —You are anticipating.


Mr MARTIN —I anticipate you, my friend, because we have had long discussions about this over a number of years now. I guess that, at the end of the day, we would all want to see a stronger, more competitive financial sector in Australia where there is confidence generated by the supervisory regime so that as consumers, as customers of banks, building societies and credit unions, we know that if we put our money in them it is safe and protected.

  The issue of protection raises another matter. The honourable member for Curtin, in my view, hit the nail right on the head: each and every one of us should take responsibility for the decisions that we make about our financial affairs. If we are in a position where we recognise that prudential standards make our chosen bank, building society or credit union appropriate to meet our everyday needs—cheque accounts, credit cards and all the rest of it—then, provided we have access to appropriate information about the services being provided, the fees, charges and so on which each of those organisations levy on us, we should be responsible for our own activities, our own decisions based on that information.

  In this country we have not had the disastrous effect of the S&Ls in the United States. In the United States early last year a major report was brought forward by the Government, by Secretary Brady, and given to the Parliament for examination, to its Senate and the House of Representatives banking committees. They took the report away and came down with completely different recommendations. When both Houses of Parliament got together to try to sort it out, the only thing they came down with was to plough in many more billions of dollars in the Deposit Insurance Corporation to buy out and to prop up those people whose loans had gone by the by because of the failures of the S&Ls in that country.

  The point which emerges from that—my friend the honourable member for Sturt and I have had quite a number of discussions about this very issue, and I will be surprised if he does not touch on it on the way through as well—is that, as individuals, we must be responsible for our own destiny, provided we have that information. We should not be dependent upon some pool of funds, because ultimately the customer will pay for that. If the bank, under a Deposit Insurance Corporation type arrangement in the United States, has to take money out of the system as a guarantee or some insurance that it is not going to go broke, what confidence do we have in the directors of that organisation to start with? If a person knows that someone is going to be gambling with his funds, I think he would find that to be an unpalatable situation.

  The appropriate supervisory regime that we have in place will protect the system. The cost of prudential supervision is something which cannot always be measured simply in the dollars and cents cost to the banks, because I think that there is something even more important and fundamental than that.

  In conclusion, I hope this legislation, combined with the OBU legislation, will send appropriate signals to the international marketplace about this country's, and certainly this Government's, intention to see Australia flourish as a regional, financial services centre. This is an opportunity to attract regional headquarters of major overseas corporations to this country. They will know that the financial system is sound and safe, that the Parliament of Australia has made a positive contribution in developing this very important and significant inquiry report into the banking system through the committee process, and that the Government has acted in a responsible manner by bringing in legislation of this nature.

  It is a significant part of the ongoing pattern of changing approach, where warranted, to financial deregulation in Australia. It does make us internationally competitive. It takes us to the forefront, I think, in the field of international finance. The legislation is something which I think should and will be carried by both sides of this House without any disquiet.