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Friday, 10 May 1985
Page: 1728

Senator JACK EVANS(10.24) —The Australian Democrats have been consistent in their opposition to the massive entry of foreign banks to this country. We believe that the repercussions will have a deleterious effect on the economy and more particularly will reduce the effective control of the economy by the elected government. To put into perspective some of the arguments against the entry of foreign banks, particularly 16 in one hit, we need to look at their impacts. The first and most significant, which we are already witnessing with the prospect of the entry of foreign banks, is an increase in interest rates. Theoretically, competition should reduce interest rates in the long run but, of course, in practice competition does not necessarily have that effect. Australia is a classic illustration of that. Interest rates have been consistently lower in our controlled banking system compared with the interest rates in the United States of America which has a deregulated banking system.

We need to recognise that, even though the theory may be acceptable that interest rates may not be as high in the long run, what happens in the meantime in the short run? The Australian people ought to know those short run effects of 16 foreign banks being allowed to come in, and their impact on Australian interest rates. The facts are quite irrefutable. Interest rates are already rising because of the Government's decision to admit foreign banks, and there is worse to come. Do not imagine that we have already reached the peak. The payoff to our domestic banks for admitting foreign banks is for the Government to lift controls on those interest rates. Hence, we see right at this moment pressure on interest rates going up and up. The first step has already been taken. Small businesses with overdrafts and people with personal loans have already been abandoned by this Government to the market mechanism at a time of a general interest rate increase. This already brings into doubt the statement of the Prime Minister (Mr Hawke) to the Australian Labor Party conference in 1984. Honourable senators may recall that in arguing for a change in ALP policy on foreign bank entry the Prime Minister stated:

The questions of foreign bank entry and interest rate deregulation are very much separate issues . . .

They are not separate issues. Domestic banks cannot compete with foreign banks unless they are freed from interest rate controls. How can it be claimed that they are separate issues? If that was not so foreign banks would monopolise the most profitable areas of the market at the expense of the domestic banks. It is a political reality that the Government is not going to allow that to happen, at least in the short term.

The next deregulatory measure will undoubtedly be for the Government to lift interest rate ceilings on home loans and, to quote the quotation of 1984, as sure as night follows day that will happen. Home loan interest rates will be deregulated and current and prospective buyers will be forced to pay the same interest rates that businesses currently pay. I doubt that many people in Australia have any idea of the impact on their mortgage repayments that that is likely to have. Of course, home owners do not have the ability to claim interest payments as a tax deduction, so they do not get the alleviation that businesses get when the Government in fact pays up to 40 or 50 per cent of that expense by way of tax deductibles. Home owners are going to be forced to suffer the full effects of the interest rate increases without deductibility. The Government might decide to make interest rates tax deductible, but at such a massive cost that it is obviously out of the question in the short term.

Foreign banks are going to be difficult to control. They are huge transnational corporations and despite our Government's assurance that they will be required to comply with Australian laws, regulations and prudential standards, I ask: Does the Government really believe that it can control a bank like Citibank which has been investigated by the United States Congress for illegal currency dealings and tax avoidance? I will detail the activities of Citibank to put this in context, because this is one of the 16 banks which the Government has invited into Australia. However, Citibank is not the only culprit. Many of the foreign banks have already taken advantage of the different tax rates between countries.

Senator Peter Rae —Were they found guilty in those investigations?

Senator JACK EVANS —I will come to that. The growth of off-shore banking centres in the Bahamas and Cayman Islands is a response to the tax havens in those countries. Banks which have subsidiaries in tax havens are able to engage in a form of transfer pricing. The method is quite simple. For practical purposes, a local subsidiary lends to an Australian with funds raised in Australia. However, on the books of the foreign bank's subsidiary a loan is recorded to the tax haven branch and the tax haven branch makes the formal loan to the Australian borrower. In this simple way the profits are recorded in the tax haven rather than in Australia.

Let us realise that foreign banks could lead to greater financial instability within our system. The term 'financial instability' hides the gut problem, which is that when a bank fails the depositors lose their money. That is the bottom line of instability in the banking system. The Continental Illinois National Bank and Trust Company of Chicago, which is eight times larger than our Westpac Banking Corporation, had to rely on United States Government intervention to save it from bankruptcy last year following a run on deposits fuelled by rumours of insolvency. The foreign banks, which unwisely invested their depositors' funds in Third World countries, also threatened, and in some cases still do threaten, the viability of the world's financial system. According to the World Bank the total debt of developing nations stood at about $970 billion last year. Argentina, Mexico and Brazil collectively owed nearly $250 billion. Because their debts have now been rescheduled they can continue to borrow to enable them to pay off their interest debts on past loans.

Hitherto Australian banks have stayed out of this quagmire of deceit, corruption and fast bucks. They did not chase the profits in that way. They are now not threatened because of massive bad debts as a result of being controlled by the Australian Government. I again ask the question: Why do we need to import this madness into Australia at the very time when most countries are beginning to realise that foreign banks are impossible to control? We must remember that if a bank looks like failing governments are then faced with allowing the financial system to collapse or using taxpayers' money to bail out the bank. That is the only option available. The taxpayers pick up the tab or one allows the whole economy to collapse. We need to remember that normally governments opt for the later alternative and the taxpayers pay for banks' mismanagement.

I will touch on something that is very relevant to this debate right at this moment and that is the exacerbating effect that foreign banks have on our unstable exchange rate. Since early this year we have watched the rapid devaluation of the Australian dollar. We must realise how susceptible our currency has become to speculation. Foreign banks are in a position to readily transfer funds from currencies they expect will devalue to currencies they expect will appreciate. The effect of, say, a foreign bank getting out of Australian dollars is likely to generate expectations of declines in the value of the Australian dollar. These expectations are likely to prove self-fulfilling as the pressure to get out of the Australian dollar causes falls in its value. It certainly seems likely that other people dealing in foreign exchange would closely watch the behaviour of large international banks from which they would then take their lead. As a result of this measure the Australian dollar will become even more volatile to the extent that its value will be determined more by speculative monetary flows than the real underlying forces which reflect trading strengths, cost advantages and other factors that are normally taken into account. As a result, Australian businesses will be exposed to international competition and will be unable to make rational investment and production decisions. They will constantly have to look over their shoulder to see not just what is happening but what the speculators are dreaming up and what is likely to happen. Furthermore, a volatile Australian dollar will impose either unwarranted gains or losses, bankruptcies et cetera, on businesses which enter into long term contracts set in foreign currencies.

Let us look at what has happened over the few weeks since the Treasurer (Mr Keating) announced that 16 foreign banks would be allowed into this country.

Senator Haines —More than he first said.

Senator JACK EVANS —It is a lot more than he first said. We were looking at four, five or six foreign banks being allowed into Australia until the Treasurer suddenly became frank and had to reveal the truth that the number would be 16. It has to be more than a coincidence that at almost the same time there was a massive devaluation of the Australian dollar. That has to be more than a coincidence.

Senator Watson —The MX missile-

Senator JACK EVANS —If it was only a coincidence, what a dream run for the foreign banks which, six months ago, were able to buy into the Australian financial system when the Australian dollar was at its lowest value imaginable. Nobody would have dreamed six months ago that it would get down to 62c as against the American dollar. Suddenly 16 foreign banks are allowed into our system. Obviously these wanted to buy in at the bottom possible price-bottom it was at 62c-and they need it to stabilise just a little before they consolidated their operations in Australia. The foreign banks will probably settle for 75c Australian as against the American dollar and will let things stabilise. It is coming back up to that now. This is the sort of volatility about which I was talking a moment ago.

I am not sure whether it is fair to blame the five American banks that are coming to Australia for all of this, as has been implied by the interjection that the MX missile was the cause of the volatility of the Australian dollar. If that was the cause it would be quite natural for the United States banks to put pressure on the Australian dollar to pay back Prime Minister Hawke, and that is exactly what has happened. I am sure that Senator Watson does not really believe that that was the real cause; that the United States banks, in response to the United States Government's displeasure at Mr Hawke's decision on the MX missiles, then put pressure on the Australian dollar to have it devalued. There may be a lot of people in this country who do believe that, and, who knows, Senator Watson may be one of them. I do not know.

I will make a few comments on the economic and social morality of two of the banking institutions that the Government has seen fit to invite to Australia. Honourable senators will not be surprised to know that one of them is the company to which I referred earlier. I promised Senator Peter Rae that I would give a bit more detail. Here it is chapter and verse. Citicorp has been investigated in the United States by a House of Representatives sub-committee. This is what it found:

Citibank engaged in shady practices which have accounted for a major portion of their profits.

In order to maximise profits Citibank has avoided prudential reserve requirements, evaded tax and generally circumvented and nullified banking and tax regulations.

The House of Representatives sub-committee report concluded:

The profitability of Citibank's German operations appear to depend disproportionately on its ability to evade domestic reserve requirements.

The House sub-committee staff argued:

The cumulative mismatching of deposits and loans placed the bank in an illiquid position where the bank's exposure relative to its capital was high.

Let us realise the significance of this. Fundamentally, in Citibank's drive to maximise profits by illegal activities it held more money in deposits maturing early-that is, liquid liabilities-than it had in short term loans-that is, liquid assets. However, by underreporting the size of its local lendings in many countries, Citibank deprived itself of an important safeguard. Central banks provide liquidity in the event of unstable market conditions, but this facility is generally restricted to the official scale of operations. By the falsification and underreporting of its operations, Citibank in effect closed this possible avenue of support in times of crisis.

As the world's largest trader in foreign currencies, Citibank makes money speculating on the daily changes in the rates of countries' currencies. When a foreign country limited the amount of money a bank can use for such purposes in order to discourage destabilising speculation Citibank would merely transfer some of its currency holdings outside that country. As a result, Citibank would increase its chances of making speculative profits and would pay less tax since it would record the transactions in the tax haven of the Bahamas, for instance, and not Europe. The crunch question is: Does Australia really need to recruit another professional currency destabiliser and tax avoider into the heart of our financial system? Do we need that additional destabilising effect? Senior Citibank officials, up to and including Chairman Walter Wriston, knew about these activities but did not stop them.

Monetary regulations of nations are ill-equipped to deal with evasion such as that practised by Citibank. That is the difficulty which we are about to enter. I remind the Senate that the countries which were not able to control Citibank included Germany, England, France, Belgium, Italy, Luxembourg, Switzerland, Hong Kong, Indonesia, Japan, Malaysia and, possibly, Saudi Arabia. In both Germany and the United States, Citibank's evasions undermined the monetary prudential regulations established by those governments to ensure stable financial markets and to safeguard local depositors. This cannot be just brushed aside. We cannot ignore this. We are inviting one of the world's international law-breaking organisations into this country. We are inviting it to come to Australia to operate as a bank. As a result of Citibank's evasions, depositors' funds were put at risk. That is the essential ingredient. We are looking at Australian depositors' funds which will be put at risk. We are saying: 'Look, forget its track record, it will behave itself here'.

Citibank's questionable transactions have carried great risks not only for Citibank and its depositors but also for the global financial system. Citibank is one of the largest banks world-wide and the largest player in the Euro-dollar interbank market. It is not just an ordinary bank. When Citibank gambles, the entire financial system is at risk. That is not the only example. I promised honourable senators two just to illustrate the point that this Government is inviting economic monsters into the country. The Bank of America's Guatemalan report states:

Bank America has never felt that it was either moral or practical to withhold flows of capital and credit to the people of a country-flows that they need for their development-simply because, in addition to all the rest of their problems, they have a non-democratic government.

This rationale contains two basic flaws. Firstly, the Bank of America in Guatemala-like commercial banks that lend to South Africa or Chile-does not provide capital and credit to the people but only to a small segment of the populace-the very segment with the most money and power. Secondly, these funds do not go for the people's development. By and large, the wealthy Guatemalan businessmen who receive loans from the Bank of America engage only in a certain kind of economic activity-one that is large scale and export oriented, not small scale and aimed at serving the needs of the people of Guatemala. The majority of Guatemalans do not need fancier hotels. They do not need more massive agricultural plantations supplying products to the United States market. Their needs are simple-food and land. They do not get any help from the Bank of America to obtain these. The Bank of America began operating in Guatemala one year after the United States-backed military coup in 1954. According to Amnesty International Guatemala has one of the worst human rights records in the world. Much as it may wish to say otherwise, the Bank of America cannot excuse itself from its share of the responsibility for maintaining the current repressive character of Guatemalan life.

Those two illustrations of the potential influence of the 16 foreign banks that we are allowing to enter this country give the reason for the Australian Democrats' great concern since the announcement was first made. The Australian economy is not just about to be internationalised. It is about to be taken over by the international banking system. We have seen evidence, over many years, of the influence of foreign banks on this country. I quote a person whose words might be most appropriate in the context of this debate when it comes to international control through the banking system of this country's economy: 'You ain't seen nothin' yet'.