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Wednesday, 4 November 1992
Page: 2541


Mr ELLIOTT (12.30 p.m.) —The amendments that are before the House this afternoon represent a very important reform of our banking system. They follow from the report of my colleague the honourable member for Macarthur (Mr Martin), A pocket full of change. I certainly believe that the impetus that that report has given to significant change in the way the Government addresses banking issues and the way industry addresses banking and bank customer issues is of vital importance. If there were more time, I would take issue with the honourable member for Sturt (Mr Wilson) about two or three points.

  Suffice it to say that these amendments do a number of things to enhance the supervisory capacities of the Reserve Bank. As a result of the parliamentary committee report, we recognise that there was a need for the Reserve Bank to be proactive in the area of prudential supervision. There was a need to recognise that deregulation was critical for the future expansion of the financial system and the economy of Australia but, at the same time, some of the supervision requirements needed to be updated much more vigorously with the growth of the financial services area, the blurring of the lines between banking business and non-banking business, the development of financial conglomerates and so on.

  The best way of doing that was to ensure first of all that the Reserve Bank enhanced its supervisory capacity. We made recommendations that the Government has picked in this legislation to appoint a second Deputy Governor to the Reserve Bank with direct responsibility for prudential supervision and to have a Council of Financial Supervisors to coordinate the range of supervisory officials across the financial sector and enhance the Reserve Bank's supervisory capacity on site in banks and so on.

  We can look at models all over the world, but it is fair to say that the experience of the 1980s shows us that not one of those models is fail safe or without problems. Even allowing for the imperfections in the deposit insurance system in the United States that the honourable member for Sturt mentioned, there is precious little evidence, I suggest, to say that a change of that sort of itself will ensure the sort of prudential standards that are required.

  This Bill provides for the correction of one of the areas of weakness—that in relation to the State Bank of New South Wales. This measure is complementary to New South Wales legislation. It is an important Bill. We can relate back to all of the difficult experiences of the past with State banks and can sheet home the blame wherever we like. What matters is that there is this complementary arrangement; that there is the capacity for the Reserve Bank to be involved and to enhance its supervisory and prudential capacities.

  The Reserve Bank has acknowledged the need to do that, and I think the capacity for vigilance and increased flexibility in that regard will be important. But not all of the responsibility for Tricontinental and all the rest can fairly be put at the feet of the Reserve Bank. Clearly that would be inappropriate. I am not suggesting that that is what was said by the honourable member for Sturt. The Reserve Bank does have an important responsibility in that regard. That much I endorse entirely. But equally there needs to be an acknowledgment on the part of all the supervisory agencies of their important role in ensuring to the satisfaction of the community the safety of funds that are held in whatever form of deposit.

  This is a constantly expanding and developing process. As the nature of the relationships in the financial sector changes, the need for the Reserve Bank and the other supervisors to change to meet those competing and new challenges will be greater, and that is fundamental. This legislation will provide the Reserve Bank with the capacity to do that.

  There is no evidence, for instance, that just by going to a mega-supervisor in this sort of case we are going to achieve those objectives, or that just having the huge cost associated with something like the US Federal reserves or the in-house facility in every banking institution across the country is going to change the comparative safety of depositors' funds. There is no good evidence in history to support that particular line of thinking.

  But what does matter is that we enhance that supervisory capacity; that we ensure that there is coordination between the institutions. In particular, we must ensure that where there are subsidiaries of banks the same sorts of standards are applied in terms of capital adequacy and the safety of funds as are applied to the banks themselves that have the banking authority. We could draw a distinction in terms of capital adequacy, rather than saying that the threshold of capital adequacy that the existing banks have to meet is too low, but I am not sure that is the case in actual fact. But what I do stress is the importance of ensuring that all of the non-banking business cannot jeopardise what is done by those banking institutions carrying out traditional banking operations. There can be no increased risk because of those functions. I think that is going to be a far more significant issue. Even looking at what has happened up to now, it is the merchant banking arms and so forth that really have created most of the fundamental problems.

  It is also true to say that a lot of the State banks were ill prepared for the sorts of changes that occurred post-deregulation, and undertook expansionary processes that they just did not have the managerial capacity to deal with. Some of the responsibility must be put in that category. So the feature of the Bill that deals with prudential supervision is an important enhancement. As time goes on those matters need to be kept under constant review, and the need for vigilance to take account of the changing nature of our financial sector is important.

  The other key changes in this particular package of amendments relate to the important decisions to enhance the competition that we do regard as critical for the Australian financial system. The further opening up of the system, with the foreign banks going into branching, will be important—again with the qualifications we have placed on it regarding supervision. These important supervisory functions do pose extra challenges for the Reserve Bank. Indeed, international banking is going to need to become more prudent in the way it goes about supervisory arrangements because of the internationalisation of the banking system, and the branching decision is an important one in that regard.

  This means that foreign banks will not be in a straitjacket, they will have the options of coming and going. Some will grasp those opportunities, I am sure. There is significant interest in this issue. We have had the added protection built into the arrangements from a prudential standpoint of ensuring that the arrangements for branching relate to wholesale banking. That should be an important protection for our banking system. But, again, it does highlight the need for the Reserve Bank to develop systems and to have a pro-active role in that particular area.

  The further points that are important in the Bill relating to foreign banking come back to the issues that the honourable member for Macarthur was talking about earlier. The capacity for Australia to really get the full value out of the reforms in financial services relates to our capacity to develop as a regional financial headquarters and to our capacity to develop offshore banking units that are competitive. We have to ensure that the increasing focus that most of these areas share in terms of the opportunities in our regional community are enhanced because of the open view about our willingness to be involved in the Asia-Pacific region in banking services.

  Banking and financial services are not areas that people automatically assume are export oriented industries that we can utilise for the future economic growth and well being of Australia, but they certainly are. It is important that the arrangements that we develop, coming out of the decisions in the One Nation statement, relating to foreign banks be used to enhance that capacity of both our domestic banks and the foreign banks, representing important opportunities for us in the region in technology and in the area of the broader expertise in financial services, and we should be encouraging that to occur.

  I shall refer just very briefly to two other matters. The fundamental principle behind the whole change that is occurring relates to creating more competition in the banking system, at the same time marrying that with the need to ensure that bank customers, depositors at banks, can feel secure about the institutions they are investing with. The way to achieve that is first of all to have a vigilant Reserve Bank; secondly, to provide more information to customers so they can make informed decisions about that; and, thirdly, to ensure that the types of products that are developed are well targeted to segments of the market place.

  In regard to the foreign bank issue there is a capacity for foreign banks to look further afield than has occurred with subsidiary banking in the mid- to late 1980s. There is a capacity and opportunity there for them, and they should be trying to utilise that. As far as the State banks are concerned, it is imperative that they be treated on an equal footing with the federally supervised banks. If all those things are done and the Council of Financial Supervisors does achieve the full role that our committee established it should be seeking to achieve over the next few years, we can have confidence in the restoration of our banking system, and I think in a model that will be emulated around the world rather than one that we have to say is second best to others around the world. I know my colleague the honourable member for Oxley (Mr Les Scott) wants to speak, so I will conclude my remarks at that point.