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Wednesday, 4 November 1992
Page: 2538


Mr WILSON (12.10 p.m.) —The Banking Legislation Amendment Bill amends a number of pieces of legislation, including the Banking Act, to enable the State Bank of New South Wales to apply for a banking licence, and the Reserve Bank Act to pass legislation to appoint an additional Deputy Governor to the bank. I want to deal with those two aspects and some of the matters that the Parliamentary Secretary to the Minister for Foreign Affairs and Trade, the honourable member for Macarthur (Mr Martin), has just dealt with.

  It is interesting to note that on 8 October this year the seventh International Conference of Banking Supervisors was held in France under the chairmanship of Gerald Corrigan, President of the Federal Reserve Bank of New York. I wonder whether our Reserve Bank had a senior representative at that conference; I hope it did. I have a doubt in my mind whether it would have regarded it as sufficiently significant, but time will tell, and we will no doubt find out in due course. In his opening remarks, Mr Corrigan said of bank supervisors:

. . . we cannot relax our surveillance, inspection and examination programs as they pertain to traditional concerns about asset quality and concentrations. For many supervisory authorities—certainly including the Federal Reserve—these dual concerns with new and old sources of problems will mean that still greater and more sophisticated resources—people and technology—will have to be devoted to the supervisory process. This will be costly but the alternative would be even more costly.

I bring that quote to the attention of my colleague on this side of the House who spoke a few moments ago, the honourable member for Curtin (Mr Rocher), and to the honourable member for Macarthur.

  Supervision will be costly, but the lack of it will be far more expensive to taxpayers, to bank depositors and to the community at large. In the report of the Standing Committee on Finance and Public Administration, the banking inquiry, we recommended that the Reserve Bank appoint a second Deputy Governor with specific responsibilities for prudential supervision. I was glad to hear the words of the honourable member for Macarthur when he emphasised that this would be the role of the second Deputy Governor. I am disappointed, however, that that role is not reflected in the words of the legislation. It is my view that this legislation creating the position of a second Deputy Governor should have legislatively specified that the second Deputy Governor was to be entitled the Supervisor of Banks, for only in that way will we sheet home the very heavy responsibility that we want the second Deputy Governor of the bank to shoulder. Until the legislation is appropriately amended—as I think it should be and hope it will be in the future—it will be up to this Parliament to constantly remind the Reserve Bank and its second Deputy Governor that his role is that of supervisor of banks. The responsibility that goes with that should be fully recognised by him.

  The honourable member for Macarthur and I have had some differences about the issue of deposit insurance. I will touch on that matter very briefly now because he creates a paradoxical situation. He says that the community must know that the banking system is sound and must be sure that it is safe. One of the great difficulties for bank supervisors is that, as they go in to supervise, they create what bankers call a `moral hazard'. There is a perception created in the public's mind that, because they are supervising, the bank is safe; the deposits are guaranteed. If honourable members go out into the streets of Wollongong and ask any person going into or coming out of a bank what that person believes about his or her bank deposits, I believe they will find a substantial majority of those depositors believe that those bank deposits are guaranteed. Yet the legislation makes it quite clear that there is no such guarantee.

  The Reserve Bank constantly reminded us during the inquiry that it did not guarantee bank deposits. It said that no depositors had lost their money. That is true: no depositor had under a regulated system. But depositors have lost it under a deregulated system, not as depositors but in their role as taxpayers in the State of South Australia, in the State of Victoria, and I guess right throughout the country because of the financial disasters of the State Bank of South Australia and the State Bank of Victoria. That moral hazard creates a massive problem because in the next breath the honourable member for Macarthur says the customers should identify the weak banks and keep their deposits away from them and go to the strong banks.

  Yet, if the bank fails, what happens? My guess is that, if any Australian bank of any significance were to fail, this Parliament would have to do exactly the same thing for every deposit as the Congress of the United States had to do for American banks, and I distinguish American banks from the S&Ls. Yet, in this country, when Pyramid went down, we did exactly the same in the State of Victoria for Pyramid as the Congress did for the S&Ls. There is a parallel between those institutions.

  I hold the view that to ensure some flexibility within the whole finance industry there needs to be a level of deposit insurance beyond which we let the buyer beware; below which there is a formal parliamentary Reserve Bank—either legal or de facto—guarantee because of the deposit system. We need to have confidence in the system. There is confidence at two main levels—the household level and the commercial business level. I am talking about the household level. Let the commercial level be judge as to which are the risky banks and which are the safe banks, but let the depositors of the households be sure that their household working balances are guaranteed. They can be guaranteed at the expense of the industry—at the expense indeed of the risky banks—if the system is structured correctly through an insurance scheme.

  There is a knee-jerk reaction when one talks about deposit insurance to say that it has failed in the United States. It has, because it has been structured wrongly, not because of the system itself. It is interesting to note that, in the developments that are going on in a unified Europe, the European banking system regards it as important to have as an integral part of that system a form of deposit insurance. It does not say that deposit insurance should replace supervision; rather, the reverse. It says that the supervision should be aided by an effective, sensible, well-structured system of deposit insurance. What has been happening in a deregulated market is that banks have taken on riskier and riskier portfolios. It has become more and more difficult for supervisors to ensure that no bank will ever fail.

  Let us look at the primary roles of a supervisor. The primary roles are, firstly, to ensure the safety of the financial system as a whole, and, secondly, to use best endeavours to protect deposits. I think it is absurd that these endeavours should be expected to preserve the deposits of a huge financial conglomerate which, instead of having its activities only over the banking area as previously, now has its activities into the finance company area, almost into the pawnbroker area, as well as into the securities industry and into insurance.

  I think it is absurd to expect that that could happen, and yet we need supervision throughout the finance industry. I am pleased that the Government at least has in mind that this second Deputy Governor should be chairman of the Council of Financial Supervisors. However, I am concerned that unless the Reserve Bank gets its act together and does a better job than it has done in the past and is pro-active in its leadership of the finance industry Supervisors Council, there will be a need for us to look yet again at the desirability of doing what the Canadians and many other countries do—that is, have a mega-supervisor.

  One of the major problems in the world's finance industry today is its conglomeratisation and internationalisation. In both respects there are major cultural problems. With regard to the culture and language of the insurance industry supervisor, the securities industry supervisor and the banking supervisor, the words may be the same but they put different meanings to them. The culture and the language of the bankers of France, Germany and the United Kingdom may be the same—the words may be translated into French, German and English in the same way—but when they go home and seek to fulfil their obligations as expressed in that language they do totally different things.

  When I was in Europe a few weeks ago I had discussions about this issue. There is very great concern in Europe about how to get cultural understanding so that bankers of different countries talk the same language and do the same thing in fulfilling the commitments they make to each other. Equally, how do supervisors of different sectors of the finance industry use the same language, make common commitments and then discharge those commitments in a common way?

  In Australia we have a mishmash of unsatisfactory supervision. The role which is now to be that of the Deputy Governor of the Reserve Bank is to bring some order to it and, in bringing order to it, to give this Parliament and the people of this country the sorts of assurances that the honourable member for Macarthur was talking about so that we know that our financial system as a whole has an integrity, a safeness and a soundness about it. But unless the Reserve Bank adopts a totally new approach to the whole system we will experience some of the disasters which we have been experiencing in one or two of the States over the last two or three years.

  I want to talk about two main issues in the time available to me. One relates to the Basle Convention and the capital adequacy requirements. We in this country have assumed that the 8 per cent capital adequacy requirement is not only a minimum but also a maximum. That is a mistake and a total misunderstanding of the Basle Convention capital adequacy 8 per cent ratio rule. That 8 per cent rule was set for international banks. Not every member of the AFIC organisation who is being supervised by AFIC is an international bank. In fact, they are not banks at all. Why then is 8 per cent appropriate for AFIC? In Europe and the United Kingdom the capital adequacy requirement of many of their domestic banks and non-bank financial institutions is substantially higher than 8 per cent. We should draw no comfort from those bureaucrats and bankers who tell us that all our banks satisfy the 8 per cent rule. Many have imposed upon them minimums far in excess of the 8 per cent rule.

  The other aspect about the 8 per cent is that the 8 per cent capital adequacy relates to, and was set in respect of, a bank's or financial institution's credit risk. One of the things that we are failing to do is recognise that there is a series of other risks in respect of which banks and similar institutions should have substantial capital adequacy requirements. They relate to the market risks—the risks of the open positions on traded debt, traded equities and open foreign exchange positions.

  Basle is now looking at that. We should be anticipating it and taking part in the Basle discussions. But we do not. We are in the OECD. We have a Treasury officer in Paris connected with our OECD delegation, but he is not a banker. Can he go along—has he the time to go along—to all the discussions in which the OECD is involved in relation to the setting of capital adequacy standards? Does he or our representative in Bonn always get the opportunity to go to Basle and take part in the Basle discussions? We are not officially a party to those discussions. The Canadians are because they are a member of the G10. We are at a disadvantage.

  I say to the Parliamentary Secretary that if we want this country to become a regional financial centre we have to upgrade our involvement and participation in these discussions with regard to the finance industry in its international context. I think that is a matter of urgency and knowing of his concerns about this whole area, I hope the Parliamentary Secretary will take on board that view because dramatic things are happening in Europe and Basle.

  There is close liaison between Basle and Brussels. There is an attempt to get a convergence of view as to the standards for capital adequacy which cover not only the credit risk but also the market risks to which I referred. But they then need to cover other risks such as the interest rate risk which was not previously regarded as something which should be backed up by a capital adequacy requirement.

  If I had time I would detail more fully how the capital adequacy requirement is now calculated. Essentially, it means that the bank must have shareholders' funds so that if it makes substantial losses it is the shareholders' funds that are used to wipe out those losses and not the depositors' funds. One could go on for quite a while if the time were available, but unfortunately it is not.

  There were also discussions in Europe between the securities industry and the bank supervisors to try to get a convergence of understanding. What is happening here? Are our supervisors in the Insurance and Superannuation Commission and the Australian Securities Commission getting together, learning a common language and learning how to apply a common approach? I do not believe this is happening. I think it is urgent that they do so, otherwise we will experience major losses of Australian household savings and long term savings as well.

  I now turn from that subject because I want to speak briefly about the action being taken to allow the State Bank of New South Wales to get a banking licence in order that the Reserve Bank can conduct prudential supervision in an enhanced way. Let us look at the Reserve Bank's success rate on supervision. Let us look at what the Tricontinental Royal Commission had to say about the ability, effectiveness and success of our Reserve Bank in its supervision in past times. It said:

The RBA should have been aware that its supervision of SBV was regarded by overseas authorities as well as the State Government and Australian financial circles as of real importance in providing reassurance that its prudential requirements were being observed. The fact that the arrangement with SBV was voluntary did not diminish the need to ensure that prudential standards were being maintained. The absence of constitutional authority may explain a diffident approach . . . but it does not excuse it.

But what we have here is a State bank getting a banking licence, with its deposits guaranteed. The Reserve Bank will not supervise that bank effectively because, if it went down, it would not destabilise the financial system of this country and no depositor would lose. Because of the guarantee of the deposits, it can supervise the bank by staying in the Reserve Bank headquarters and not looking at a paper or report from the State Bank of New South Wales. There needs to be a fundamental change in the Reserve Bank's reporting requirements, because it will excuse itself by saying the bank could not fail. (Time expired)