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Economics Legislation Committee
Reserve Bank of Australia

Reserve Bank of Australia

ACTING CHAIR ( Senator Dastyari ): I now welcome representatives from the Reserve Bank of Australia. I note that it is the first time that these representatives have come to Senate estimates. So thank you for being here today and starting a tradition of attending estimates. Dr Edey and Mr Campbell, would you like to make any opening remarks before we go to questions from senators?

Dr Edey : I think we are happy to take questions straightaway.

ACTING CHAIR: Dr Edey, I want to begin by acknowledging the fantastic work that the Reserve Bank has done in the Review of card payments regulation—issues paper. I have gone through this, and a lot of my questions are going to relate to the work that the Reserve Bank has been doing in that space so far. I understand that you look after this area within the bank?

Dr Edey : Yes. If you are going to be referring to the document, I do not actually have a copy of that document with me.

ACTING CHAIR: I think the questions are going to be at a high enough level for you to be able to answer. But if needed, I am certainly happy to provide you a copy and I will table a copy. Within this document is graph 6, which is a table of credit card interest rates, which demonstrates what is happening with standard cards, what is happening with low-rate cards and what is happening with the cash. A breakdown of information in that document provided by the Reserve Bank to the Parliamentary Library demonstrates that, at this point in time, the gap between the cash rate and the interest rate being charged on credit cards for both low-rate cards and standard cards has reached a record high. As this is information that you have compiled, could you broadly comment on the data as you see it?

Dr Edey : It sounds as though you are quoting correct data, so I am not disputing the figures. It is a fact that, over recent years, as the cash rate has come down the standard indicator rates for credit cards have come down by less. So that gap has widened. It has always been a wide gap and it is now as wide as it has ever been.

ACTING CHAIR: Could you comment on the stickiness of credit card rates? The professors at Swinburne University have done quite a bit of work on this, and they refer to it as going up like a rocket and falling like a feather. Dr Abbas Valadkhani has done a paper called Downward stickiness of interest rates in the Australian credit card market. Are you familiar with that paper?

Dr Edey : No, I am not.

ACTING CHAIR: I will certainly make sure that a copy of it gets provided to you. What I think is a startling figure is that, on average, over the past 23 years, every time the Reserve Bank of Australia increases the cash rate, 112 per cent of it has been immediately passed on to consumers in credit card interest rate rises but only 53.7 per cent of any rate cut has been passed on. Also, when the rate cuts are passed on there is a two-month lag whereas, on average, increases have been passed on the day after the interest rate rise. Could you explain the relationship between the cash rate being set and what has been happening with credit card interest rates?

Dr Edey : There are a few things that I can say about that. I think the first thing I should say is that I am not here to defend the banks. So, if you want a defence of the way they price these things, you would have to ask them for that. But I will try to make some sensible observations about the way those interest rates are linked. Basically, the cash rate is the main driver of the interest rate structure in Australia for variable interest rates. So, as the cash rate goes up and down, the variable interest rates will go up and down as well. It is not the case, though, that interest rates always moved in lock step with the cash rate. This has been the case for housing rates and other high-profile interest rates as well. There has been a lot of debate about that.

For credit cards, I think it is a correct observation to say that these rates have been stickier than something like the mortgage rates. In other words, they move less in response to movements in the cash rate. It is possible to think of some valid reasons that that might be happening. If you think back over the period that was influenced by the GFC, the entire interest rate structure for variable rates has moved up relative to the cash rate because the banks' cost of funding from other sources has gone up relative to the cash rate.

ACTING CHAIR: But not at the same rate, though, Dr Edey.

Dr Edey : Not to the same extent; that is correct. Another factor that you need to think about is the risk factor. Credit card lending is riskier than mortgage lending for banks. So that is at least a partial explanation for a larger gap between the interest rates for that and the cash rate. It is also quite plausible to think that, in the post-GFC period, the risk associated with this form of lending has gone up because we are in a more uncertain financial environment. So that may justify some widening of margins in that area. I am not going to defend the size of the margin. I am just pointing out that there are some factors that could have influenced it.

ACTING CHAIR: Are you concerned about the size of the gap? You have done papers and that on it. If you have identified it, is it of concern?

Dr Edey : To me, the gap seems high and it is hard to explain why it is as large as it is. From a Reserve Bank point of view, our perspective is monetary policy and the effectiveness of monetary policy. This is not really an issue from that perspective because there is simply not enough debt in this category for it to be a major system-wide issue.

ACTING CHAIR: I want to get to this point: you are saying it is a live and a real consumer issue, but you are looking at it more from a systemic risk issue because the size of it is small. The figures are—these are your figures, I believe—that credit card debt is $48 billion at the moment and debt accruing interest is now $33 billion. Do you want to take that on notice and confirm that they are the right figures?

Dr Edey : They sound broadly right, but we can check those up for you.

ACTING CHAIR: The other point too—if you could check this—is that at the moment the banks' interest income, the interest on credit cards, that they are accruing is $5.4 billion per quarter. Can you check that figure is correct?

The other thing that I think is really concerning, and this is where it comes to an issue for the Reserve Bank, is that the ratio of credit card balances to other personal loans has actually increased from 18.2 per cent in August 2002 to 26.4 per cent in August 2012. Effectively, the amount of people relying on credit as a form of loan or income is something that has been steadily going up. I do not know if that is something that the Reserve Bank has been monitoring?

Dr Edey : I was not aware of that particular figure, so I would have to take that on notice as well.

ACTING CHAIR: Let us take a step back here and just unpack it a bit. As I understand it—and your understanding of this will go so much deeper than mine—at a very simplistic level the entire point of setting the cash rate is to make it cheaper to borrow money and to send a signal through the market. Is that correct?

Dr Edey : Yes, the financial system works through competition. The basic wholesale interest rate is the cash rate, which we set, and then competitive forces will cause other interest rates to move up and down with the cash rate. That is the way the effect of policy is transmitted to the wider economy.

ACTING CHAIR: When there are movements in the cash rate, which obviously the Reserve Bank is responsible for setting, and those movements are not being passed on does not that effectively undermine monetary policy?

Dr Edey : We often get asked that question. I have heard that question put a lot in relation to mortgage interest rates, because there was a period of time, particularly during the GFC, where mortgage rates were not moving one for one with the cash rate as well. The response that we have always given to that is that the cash rate is a still a significant driver of those rates, so it is still having an influence. We take into account movements in the margins between those rates in determining what the appropriate level of the cash rate is. In principle, the same is true for the credit card rates. Referring back to what I said earlier, the amount of credit card debt and interest is much smaller than is the case for mortgages and for business loans, so it is not—

ACTING CHAIR: I can understand why from the perspective of a bank, and the Reserve Bank's perspective, it is smaller in terms of overall impact for the economy. But it is fair to say that for the people who are caught in things like debt traps and who are caught with credit card debt—and they may be small numbers—it is quite significant isn't it?

Dr Edey : It is significant for the people who are paying it. But it is just not particularly big for the economy as a whole. Another thing that has been going on over the last couple of years is that there are interest-free cards, or low-interest cards, that you can get by being prepared to switch if you are on a standard credit card rate. Increasingly, people have been doing that, or they have been paying off their loans more quickly so that they do not incur interest.

ACTING CHAIR: Hang on. That is a furphy of an argument. The point is, and you just agreed to this a minute ago: the gap is at a record high for low-rate cards as well as high-rate cards. For all cards, it is at a record level, isn't it? It is not as if I can go to a low-rate card and I will be okay. Even for the low-rate cards, the gap between that and the cash rate has now reached a record level.

Dr Edey : That gap has gone up as well. But there are also zero-rate cards. The banks do offer switching packages where you can get an interest-free card if you switch banks.

Mr Campbell : For a few months.

Dr Edey : For limited periods. What I am saying is that there are ways you can take advantage of the competition that is there to reduce your interest.

ACTING CHAIR: There is $33 billion at the moment of interest-accruing debt on credit cards. They are your figures, not my figures. The figures are from the Reserve Bank. Those people we are talking about here, and those who are the lower income earners, or those people who have problems with credit history are those who are incapable in many cases of taking advantage of these kinds of opportunities. The worry here is not those who have the $15 billion worth of debt that does not ever accrue interest, which are a lot of people on higher incomes and perhaps differing circumstances. The concern is that those people who fall into a debt trap cannot get out. I worry about the argument that says a handful of people have the opportunity, because they have great credit ratings to be able to move around the market. The competitiveness and the competition within the market does not evenly apply to everybody.

Dr Edey : I do not dispute that. The banks are competing to get the customers that are most attractive to them. If you are a debt-trap customer, as you have described it, someone who is having trouble paying off their debts, the banks are not competing to recruit you, so competition is going to be less effective in those parts of the market. There will be a group of less informed customers who do not know that you can switch banks, or that there are things you can do to reduce your interest, so those people do not benefit from competition in the way that others do.

Senator XENOPHON: The amount of credit card debt is $45 billion to $48 billion—$33 billion accrues interest. We are sort of talking about the numbers of the Rudd stimulus package in 2009. It is a lot of money in the economy. What I am trying to understand is this: you said that the banks say that the interest rate is greater because of the risk factor. Has the Reserve Bank tested, in terms of the default rate for the banks, whether it has gone up over the years, and that is why the gap has increased and turned into a chasm? Have you checked that? That seems to be what the banks are saying: more risk; therefore higher interest rates. Has the increase of interest rates, in relative terms, been due to an increase in defaults?

Dr Edey : We have not tried to test that.

Senator XENOPHON: Shouldn't that be tested though? That is an underlying assertion on the part of the banks.

Dr Edey : I think it is well worth somebody's while to test that.

Senator XENOPHON: Is it worth your while?

Dr Edey : The reason we have not done it at the level of detail that you are suggesting is we do not have separate data on loss rates—

Senator XENOPHON: Have you the right to demand that of banks?

Dr Edey : That would be APRA territory to require—

Senator XENOPHON: Right. But you could liaise with APRA to get that information. Is that right?

Dr Edey : I think so.

Senator XENOPHON: Is that something that you would consider doing as a result of Senator Dastyari's line of questioning? The fundamental assertion, the underlying premise, of the banks' argument is increased levels of default. Correct? There is increased risk with credit card debts and that is why there is such a gap—and the gap has been increasing. Has an increased gap reflected an increased level of risk on the part of the banks?

Dr Edey : I am just saying that is a possible factor. I do not know whether it could explain—

Senator XENOPHON: But it ought to be tested, though. This is an assertion made by the banks. Do you think it is reasonable for this to be tested, given the work that the Reserve Bank has done to have a positive role in testing that assertion?

Dr Edey : I think it would be an interesting thing to look at—

Senator XENOPHON: It is interesting, but do you think you will do it?

Dr Edey : I do not know whether that is a job for the Reserve Bank or for another agency, like APRA or Treasury. But I think it is worth somebody looking at—

Senator XENOPHON: Is this a matter that you would communicate with APRA on, as a result of the line of questioning today?

Dr Edey : I am prepared to talk to APRA about it and find out how easy or hard it might be to do that calculation.

Senator XENOPHON: Sure, because it is the argument of the big banks in particular. Just further to that, if it is found that it is true that interest rates have gone up because there has been an increased default rate with credit card debts—I am not saying whether or not it is—does that raise some other issues in respect of the conduct of the banks, if it is true, in lending to more people or to a significant number of people with an increasing default rate, as to their lending practices in the first place, which means that the gap has increased, if that is the case? Does that raise systemic issues for the Reserve Bank in terms of their lending practices, or is that an APRA matter?

Dr Edey : It would mainly be a matter for APRA or ASIC. Banks need to comply with responsible lending practice standards. That is ASIC turf. Banks need to be prudentially sound. That is APRA territory. It would not be a systemic risk issue I don't think, because there is not enough of this debt and the overall loss rates on consumer lending are not—

Senator XENOPHON: But does it concern you, as Senator Dastyari pointed out, with apologies to Elvis, that in terms of debt people are caught in a trap and they just cannot get out of it? Does it concern you that there are many thousands of Australians who are stuck in a debt trap because of credit card debt and very high interest rates, who will not be able to get on with their lives, will not be able to get a decent credit rating and will not be able to get their first home, because of interest rates that appear to be much higher than a well-functioning market would dictate.

Dr Edey : I think it is a problem if people are in that situation. I do not doubt that there are many people who struggle with that sort of issue. But you need to remember that the Reserve Bank has a top-down systemic risk focus. So if there is enough of that happening that it is a risk to the system as a whole, that is our concern.

Senator XENOPHON: But right now it is a known unknown. We just do not know how many people have been deeply affected by credit card debt, and that itself might point to some systemic issues.

Dr Edey : I cannot put a number on how many people there are, but we know how much debt there is.

Senator XENOPHON: It would be desirable to put a number on how many people are deeply affected by credit card debt, would it not?

Dr Edey : I am not sure why quantifying that is an issue for the Reserve Bank. We know how much debt there is. We know what the non-performance rates are on consumer debt. It is only about three per cent—that sort of magnitude.

ACTING CHAIR: The non-performance rate is only three per cent. Could you explain that? What is the difference between non-performance and the rate of default?

Dr Edey : If a loan is in arrears, it is classified as nonperforming.

ACTING CHAIR: Are you saying that only three per cent of credit card debt is nonperforming?

Dr Edey : Not credit card debt, but non-housing consumer debt. It is that order of magnitude.

ACTING CHAIR: Considering that credit card debt is a quarter of non-housing debt—it has gone up and it is now a quarter—are you saying that only three per cent of the debt that credit card debt makes up a quarter of is nonperforming? We are saying: hang on.

Dr Edey : It is better if I do not get pinned down too much to figures here, because I do not have the exact numbers in front of me.

ACTING CHAIR: Take it on notice—

Dr Edey : What I am saying is that as a proportion of the overall amount of debt non-housing consumer debt is already quite a low number, and the non-performance rate on that—in other words the proportion of those loans that are in arrears—is extremely low. Then, the proportion of that that actually incurs losses is going to be a small fraction of that, as well. I cannot put a number on it but by the time you multiply all of that out you get very small numbers for the losses banks will incur.

Senator XENOPHON: Which begs the question as to whether or not the assertion of the banks as to why the gap has increased is accurate. Further to that, does this indicate that there are some systemic issues or issues of, if not market failure, market dysfunction when it comes to issues of credit card debt? Is that something the Reserve Bank has an interest in.

Dr Edey : I think in the first instance you should be challenging the banks upon this. As I said, I am not here to defend the banks—

Senator XENOPHON: We do not have the same access to information that the regulatory authorities would have.

Senator CANAVAN: Can I just confirm, Dr Edey: do you look at this in terms of its consumer protection impact or potential fraud, or are you only focused on the macro-economic impact of potential bad lines?

Dr Edey : It is the macro-impact.

Senator CANAVAN: That is why, when you say, 'a small number' you are saying small relative to the economy, not small relative to some households' potential particular situation.

Dr Edey : That is right.

Senator BUSHBY: The reason why you look at the macro-economic is because that is your legislative remit, your charter—that is what you are actually required to do.

Dr Edey : Yes. We are interested in the question of: 'Is this a big enough phenomenon to have a material impact on the economy as a whole?' That is a separate question from asking, 'Are there significant numbers of households that are in distress from a human point of view?'

Senator BUSHBY: Which is a relevant question, but there are other parts of government to look more specifically at this.

Dr Edey : Correct.

Senator WHISH-WILSON: It sounds like it is price gouging, which would be ACCC or APRA—

ACTING CHAIR: I just want to be very clear, Dr Edey, on what you are saying. I want to be able to walk away from this and get a good understanding. The point you seem to have been making is this—and I want to put this together; tell me if this is incorrect. Firstly, what you are saying, from the evidence that you seem to be presenting, does question some of the assertions that have been made as to why the gap is so high. The point you seem to be making is: 'Yes, we are talking'—and you are going to get us the exact figures, but the default rates are quite small; the non-performance rate is quite small. We want to get to the bottom of how and why the gap between credit card rates and the cash rate has reached a record level. We are asking you, Dr Edey, whether it is something the Reserve Bank is prepared to look at, and it seems to be that the answer you are giving us is, 'No.'

Dr Edey : No, I am not saying 'No' at all. All I am really saying is: somebody should look at it, and I think that we should consult with our colleagues in other agencies to determine who is the best placed to lead it.

ACTING CHAIR: On the topic of somebody looking at it, I just want to put to you what Treasury Secretary Fraser said earlier today. Secretary Fraser said, 'My personal view is that this is an issue well worth further deep investigation and consideration.' The secretary also said, 'It was not directly considered in David Murray's inquiry into the financial system.' Are they both assertions that you would agree with?

Dr Edey : Yes; I think they are fair comments.

ACTING CHAIR: So it is something that is worth further deep investigation and consideration?

Dr Edey : Yes.

ACTING CHAIR: You are also telling me that it appears that responsibility for the further deep investigation and consideration seems to be across a series of different agencies. Is that fair? You are saying that Reserve Bank is not solely responsible for this, because you are looking at risk. Senator Whish-Wilson is making mention of the ACCC and price gouging. Senator Bushby, was it you who was mentioning ASIC or APRA? It was APRA and other agencies. Is part of the challenge here how you get everyone in the room together to actually have a proper investigation and get to the bottom of what has happened?

Dr Edey : I think the financial regulatory agencies are quite capable of coordinating amongst themselves to work out who is best placed to investigate this. So I do not think that is a particular problem.

ACTING CHAIR: But they have not.

Dr Edey : The reason why it has not been looked at is: we do not have an interest rate regulator in Australia. We do not have regulated interest rates. What we do have is an ACCC that can investigate uncompetitive conduct if they see it, but they clearly have not seen it in this market.

ACTING CHAIR: They have not, no. But the question is not—and I do not think there is an assertion of things like price collusion; that is not the assertion that has been made. The question is: how do you make sure that you have the right regulatory environment and framework to make sure you have as much competition as possible in this market to put downward pressure on interest rates? I understand that competition in this market is complicated, but the ACCC does not look—again, we will talk to the ACCC about this—at the framework in terms of whether or not there is a competitive enough environment. They look at the behaviour of firms within that environment.

Dr Edey : The regulators that we have got have to operate under the existing laws. We do not have laws for the regulation of interest rates. Now it may be that as a result of the work of this committee there is a political demand to investigate this area, and I think the financial regulatory agencies collectively are quite capable of doing that. The Treasury secretary has agreed that it is a good idea to do it.

ACTING CHAIR: And you believe that it is a good idea for us to have a proper investigation of what has gone on with credit card rates, and the gap between that and the cash rate?

Dr Edey : I think it is a good question and it should be looked at.

ACTING CHAIR: Dr Edey, you chair the council of Australian regulators—no, you don't; the Reserve Bank does.

Dr Edey : The Reserve Bank governor chairs that.

ACTING CHAIR: Is that an appropriate place for these kinds of issues to be discussed? Or is that more looking at systemic risk rather than consumer protections?

Dr Edey : No, this is the sort of thing that could well be discussed at the council, because the council is basically just a coordinating body for anything that involves cross-agency work.

ACTING CHAIR: If you don't mind, could you take on notice what the process is for getting something on the agenda of the council of Australian regulators. I know the Reserve Bank chairs it. I know you do not personally chair it, so you may need to take on notice what the process is. Can any agency bring something and put it on the agenda?

Dr Edey : Yes, the Reserve Bank acts as a secretariat for the council, so we coordinate the agenda but any agency can request any item to be put on the agenda.

ACTING CHAIR: There are a few other related matters that we want to get to. Dr Edey, I do want to thank you again for the incredible data you have provided. I also want to draw to your attention—and I will get this sent to your office too—a report by IBISWorld. Have you seen this report into credit card issuance in Australia?

Dr Edey : No, I have not seen that.

ACTING CHAIR: I will get a copy for you and I will table it for the committee, if that is appropriate, with the consent of the committee. It makes reference to the barriers to entry and the lack of a competitive landscape within the Australian credit card market. It makes the case quite strongly that there are barriers—they are not the most common barriers—to enter into the credit card market and that perhaps a deregulatory approach to the credit card market may be the best way to put downward pressure on credit card rates. I will table that for the purpose of the committee and try and get a copy for you. Dr Edey, to take a few steps back, in your own words can you explain why, as you agreed with, we need a deep and thorough investigation of this matter.

Dr Edey : You have asked a good question about why the margins on these interest rates are as high as they are. We do not really have a good answer to that, because, to me, the margin does look high. If people are interested in knowing why that is, then we are happy to have a look at it and find out more about that.

ACTING CHAIR: I might leave it on that issue. I have a few other questions.

Senator WHISH-WILSON: I have got a couple on exchange rates and a few other things. We had a statement today from the head of Treasury that Sydney's housing market was unequivocally in a bubble, and the same applies to some parts of Melbourne. Do you agree with that statement?

Dr Edey : Reserve Bank staff have tried hard in the last couple of years to avoid getting into discussions about whether you call this a bubble on not, mainly because different people have different definitions about what the word 'bubble' means. Sometimes people sensationalise it, if you use that word. I know that a lot of people do think it is a bubble; serious people think that. We agree that this is a situation where the market is strong; it is overheated; it is a risky situation. Some people call that a bubble.

Senator WHISH-WILSON: In terms of looking at instability and risk in the financial system, has it officially come onto your radar in the sense that, for example, you may have had discussions with government about policy settings around interest rates. I know that you control interest rates and that is separate from the government, but there are other things that may be contributing to the level of investment in real estate. Have you had any discussions?

Dr Edey : It is a matter of public record that we have been in discussions with APRA about measures aimed at reinforcing lending standards for housing-related investor lending. That process has been going on for some time, and I can talk more about that if you want. As a result of those discussions APRA put some measures in place at the end of last year to promote a set of a lending standards in that area. We believe that is starting to have an effect on the behaviour of the banks.

Senator WHISH-WILSON: Obviously dropping cash rates is designed to stimulate the economy—is it common that this kind of potential over-pricing occurs in market segments and in an asset class such as real estate? Have we seen this before? Does it pose risks from a historical perspective?

Dr Edey : Housing markets both in this country and around the world are highly cyclical. They have the characteristic that the stock of dwellings that people are bidding for does not change very quickly because it takes a long time to build enough to add materially to that stock. So when demand gets up a head of steam that pushes prices up and people then start to buy-in because they think that they want to get in ahead of further price rises—that is a dynamic that is seen all over the world in cycles and it works in reverse as well and it can be a destabilising influence for the economy as a whole. That is why we take an interest in that from a macro-economic point of view and APRA is interested in it because these cycles are associated with leverage—it is the combination of leverage with the house-price cycle that can get households and financial institutions into trouble if the cycle is severe enough.

Senator WHISH-WILSON: Are you concerned that government policy settings such as negative gearing and capital gains concessions may be contributing to overinvestment in asset classes such as housing? You control interest rates but have you assessed the financial instability impact of other policy settings?

Dr Edey : I am not really an expert on tax policy. The Reserve Bank has made comments in this area in the past to the effect that the tax system's longstanding configuration has tended to encourage debt-financed asset purchase—that is part of the system that we have and it has been like that for a long time. It is hard to blame that for any particular episode because it has not changed in a way that you would think could have triggered any particular episode, but it is something that is there in the background. I think as far as tax is concerned these things need to be looked at holistically—so I do not really want to get into a discussion about one particular—

Senator WHISH-WILSON: So, a whole of government approach. Evidence suggests that sub-prime mortgages and lax lending practices contributed to the GFC in the US—you are obviously very familiar with that—but recently there have been some interesting studies that show high gasoline prices provided the trigger that actually burst the bubble around the GFC and the mortgage securitisation market. Has the RBA modelled the impact on mortgages of a rise in fuel prices to pre-GFC levels? Have fuel prices ever been an issue that you have looked at in terms of instability?

Dr Edey : Fuel prices are one of the variables that our economic forecasting team would take into account. I am not actually responsible for that part of the bank so I cannot comment on the detailed work that they would have done in that area, but I do know that they are looking at different scenarios all the time along with the effects of different variables. I am sure that is something that they would be taking into account as part of that work.

Senator WHISH-WILSON: The exchange rate has been a bit stronger, especially compared to the US dollar, than many financial market pundits have been forecasting. Have you got any feeling on whether that is because the flat quality argument—that it is investors buying equities or Australian government bonds—or is it related more to trade flows like exports?

Dr Edey : It is very hard to comment on things that drive the exchange rate, and probably dangerous for me to do so, as well. Interest rates have come up in this discussion, and now the exchange rate, and I should make the comment at this stage that we have a Reserve Bank board meeting tomorrow and we have a very strict blackout policy on public comment about matters that are closely related to that.

Senator WHISH-WILSON: My bad. I did not know you had a meeting tomorrow.

CHAIR: It is Tuesday.

Senator WHISH-WILSON: Yes. I totally forgot about that. In relation to the blackout, though, have you got any comments about the suspicious spike in the Australian dollar prior to your last interest rate decision, which ASIC were talking about investigating? Is that something you have had an internal investigation into?

Dr Edey : ASIC has investigated that, and we had our own internal investigation. No impropriety was found, and we have reviewed our processes for the control of that information. Did you want to comment on that?

Senator WHISH-WILSON: What does 'an extraordinary trade' mean? I suppose people can speculate on these things, so how do you know—

Mr Campbell : An extraordinary trade, in this circumstance, means that the market seemed to anticipate a very short time ahead of the announcement being made, and in a profitable direction, what the announcement was going to be. It occurred in February, March and April. It did not occur in May. In each instance, the pre-emptive move just before the announcement was in a profitable direction. You may know that early in May ASIC made available its preliminary findings on its investigation, which were that these movements in the Australian dollar seemed to be the result of normal market operations in an environment of lower liquidity immediately ahead of the RBA announcement. What that means is that, as the announcement approaches, people—traders—typically get out of the market. There is no-one on the other side of the market and a relatively small trade going through will move the market by more than it normally would. That is ASIC's preliminary finding.

ASIC's investigation continues. We have conducted our own internal investigations and the conclusion from that work is that we found no evidence of any unauthorised access to this information before the announcement, nor is there any evidence of any unauthorised disclosure of the information. It has been a very extensive internal investigation, as you would expect.

Senator WHISH-WILSON: Was it low liquidity because people were holding back, not transacting, waiting for the decision, and someone obviously stepped in and—

Mr Campbell : That is usually what happens. That is what we think happened, but we await the final findings of ASIC. I imagine ASIC will have more extensive access to market information than we have, and they will bring their conclusions forward in due course.

Senator WHISH-WILSON: You have a function for daily smoothing of the market, and maintaining an orderly market. Does that fall outside the remit of your role as providing stability for the dollar?

Mr Campbell : When we smooth the market we do so at our initiative. This was a shock—an unanticipated move. It does actually fall beyond the remit of smoothing the market, yes. It is appropriate, when a policy announcement is being made, for the Reserve Bank to be out of the market, because our presence in the market would send a signal we may not want to send. So the signal we want to send is in the announcement itself.

Senator CANAVAN: Thank you Mr Edey and Mr Campbell for coming here today. Could I go to asking some questions about those macroprudential tools that we touched on with Senator Whish-Wilson. In particular, could you give the committee an update? We had Ms Ellis in here, perhaps eight or nine months ago, to discuss what was happening. There have been some developments since then. What is the current status of APRA's guidelines or communications with the banks? What are they exactly being asked to do or asked not to do, I suppose, in this instance?

Dr Edey : APRA announced its measures in December last year. I am sure you are familiar with what is in those. We are now in a period where APRA is following up with the banks to investigate further the way the banks are responding to that, and also to make sure that banks have consistent information systems so that they can implement the controls that APRA has asked for. That is the position at the moment. There have been some well-publicised responses by the banks which show that they have moved in the direction of making their pricing for investor lending less favourable because they are now less willing to lend in that area. In that sense, the measures are already starting to have an effect, but it will still be a while longer I think before we see what effect that might have on something like investor credit growth, which is one of the key variables, as part of the framework.

Senator CANAVAN: When do you think we will know the impact on investor credit growth?

Dr Edey : We had been saying, I think, the second half of the year. We are getting fairly close to that now. Realistically, it will be a few more months; maybe another three months or so—that is just off the top of my head—because for one thing there is an information lag with credit. We really want to get a good sense for how credit growth is performing in this area over, say, the first half of the year, and we will not really know that until August. This is all ongoing, so there is no particular trigger time where there is going to be a re-evaluation.

Senator CANAVAN: When you say 'these measure'—and I am not familiar with all the details, Mr Edey—I can slightly recall hearing about a 10 per cent growth cap on investor lending. Is that correct? Is that the measure that you are mostly talking about and the measure you are mostly talking about with what your benchmark will be with investor credit growth?

Dr Edey : It was really a three-pronged—

Senator CANAVAN: Do you mind detailing that for us?

Dr Edey : It was a three-pronged set of measures where APRA is basically looking at three sets of tests to see whether banks are maintaining prudent control of their lending. One of those prongs was growth in investing credit outstanding, relative to a benchmark of 10 per cent growth. That is not a hard line in the sand, but it is a benchmark for assessing whether banks have been prudent in that area. Another area that they are looking at is floors and buffers in the evaluation of serviceability so that when you go for a loan a bank will test whether or not you are capable of servicing the loan by looking at what proportion of your income the interest is going to take up and also it will assess your ability to withstand a rise in interest rates of some prudent amount—maybe two per cent or something like that. So a bank—

Senator CANAVAN: I think he was describing what they do now and might have been going on to say, 'What are we doing additionally on top of —'

Dr Edey : That is what they do now, but APRA will be looking to ensure that banks are setting those tests at prudent levels. A third area is a more general area of high-risk lending, like high LVR lending or—

Senator CANAVAN: Low doc loans

Dr Edey : Yes, low doc or loans that are interest only. If banks are expanding their lending in high-risk areas that are identifiable that would be another potential red flag. The way that APRA will treat all of this is to evaluate across all of those areas for each bank and assess whether the bank is behaving prudently, and if not the potential is there for APRA to impose a capital surcharge in response to that.

Senator CANAVAN: You believe there is enough discretion in the system to allow for the very different housing market environments across the country? I believe—I was not here—that the Treasury secretary, while stating that there is a bubble in Sydney and parts of Melbourne, said that that is not the case in most of Australia, and certainly not in Queensland. Is there enough discretion in these rules to say that the Bank of Queensland or Suncorp in Queensland are not unduly restricted from lending in areas where we actually need economic activity and investment?

Dr Edey : Yes, there is plenty of discretion there. We have talked to APRA quite a bit about this and the approach has been to avoid being more prescriptive than you need to be. The way they have handled this for well over a year now has been, as they became more concerned about imprudent practices, to increase the amount of encouragement they are giving the banks to reinforce their lending standards. They did that early last year with a prudential practice guideline and then late in the year with this series of measures. There is the potential for these measures to be toughened up further if they need to be, but at this stage the approach has been: do not be too prescriptive if you do not need to be. We will see how things go and there is the potential to take more—

Senator CANAVAN: Other countries have been more prescriptive—New Zealand, for example. You do not think there is a need at the moment to adopt the New Zealand type approach in this area?

Dr Edey : They have their own reasons for adopting that particular approach. One factor in New Zealand is that they do not have the same prudential capacity to distinguish between investor related lending and other forms of lending—so they have not been able to attack it in the same way we are. What they have done is try to identify what they think is the main area of high-risk lending for them—which is high-LVR loans—and attack that.

Senator CANAVAN: Have you or the bank done any assessment of the effectiveness or appropriateness of the New Zealand response?

Dr Edey : That is mainly a task for the New Zealand authorities, but I think you can see, even from an outsider's perspective, that as time has gone on they have had to look at ways of toughening it up. They are seeing that, with the first round of measures—even in the face of that—the Auckland market has remained very strong. They are still in the process of looking at ways they can strengthen the measures they have already taken.

Senator CANAVAN: Dr Edey, I was reading a speech you made about payment systems reform. I did not get through all of the speech, but we have taken evidence in this committee, through a digital currencies inquiry, about some developments in moving towards a more real-time, 24/7, clearing house type system. How far away is that for Australia? When will we be able to get to a system where I can transfer money to my mum instantly rather than have to wait overnight or over the weekend?

Dr Edey : There is a collective industry project called the New Payments Platform, the NPP project. It is well underway at the moment and it is currently scheduled to be completed by the second half of 2017. That will deliver the immediacy you have just described.

Senator CANAVAN: That is being funded by the industry, is it?

Dr Edey : Yes, the Reserve Bank is participating as a bank—because we are a banking institution as well. Each bank is funding its own contribution and there is also a collective investment in the hub that sits at the centre of it which all the banks have contributed to. We have contributed to that as a bank.

Senator CANAVAN: Is there anything like this elsewhere in the world right now, or are we a leader?

Dr Edey : There are a few countries doing this. We think we are close to the lead on this, but there are some other countries that are already doing it. But we will have a feature that some countries do not have, which is that we will be linking the industry hub to a continuous settlement hub run by the Reserve Bank. The industry hub exchanges payment messages between the banks, and then the settlement hub, which we are building, allows the banks to exchange payment value in real time associated with that. That is the Reserve Bank component of the project.

Senator CANAVAN: I am excited. Thank you, Dr Edey.

Senator McALLISTER: Following up on the line of questioning by Senator Canavan, there has been some discussion about the approach APRA has taken since announcing its macroprudential initiatives in terms of the level of transparency around which institutions are being involved and if any sanctions are being applied, either in general to the sector or to specific institutions. In the bank's role in chairing the Council of Financial Regulators, is that something that has been discussed within that the group—whether or not that quite secretive approach is appropriate?

Dr Edey : We have not really discussed it from that point of view. Mainly, we have been interested in the extent to which there has been a problem and what the effectiveness is of the measures APRA is taking. So the distinction here is that these are APRA's tools. They are the agency that has the legal power to do it and they consult with the agencies as to whether there is a case to do these things based on general risk assessment grounds. That is the kind of discussion that takes place at the council.

Senator McALLISTER: There is of course an argument to be made. I note that APRA's view is that this is a measure best applied behind closed doors, and there are arguments for that. There are alternative arguments which suggest that having some kind of public discussion about risk management strategies and lending practices in our major institutions is something that ought to happen in the public domain. Has the RBA expressed a view about that in the context of the council's activities or in any other forum?

Dr Edey : Probably not in the way that you have just raised it. As a general comment, I think APRA has got a point: they have to be able to have closed-door discussions with the banks. The alternative to that would be to have a very legalistic black letter approach to bank regulation where you just try to define everything legalistically and set mechanical rules about what banks can and cannot do. The downside of that is it is just an invitation for banks, because you cannot possibly specify every possible risk-taking activity and every possible control, to circumvent the controls you do put in place.

In the system we actually have, there are some rules that are like lines in the sand: banks have to have a certain amount of capital and they have to meet certain ratios for liquidity and things like that. But APRA does have to have the capacity to have these closed-door discussions with banks to find out where the risks are and to give them encouragement—short of compulsion, effective encouragement—to pursue prudent standards. I think that system has served us well in the past.

Senator McALLISTER: And in terms of the three-pronged approach that you outlined earlier in terms of the regulated entities, is there any particular one of those where we are seeing more deviation from what APRA or the council considers a desirable and prudential approach? Either in credit growth, serviceability tests or high risk lending—is there any particular area that has been of more concern than any other since the measure was announced?

Dr Edey : The first observation I would make is that in terms of general loan quality we are not really far away from where we need to be. The historical record is that housing lending in Australia has been extremely safe, and the losses that banks have incurred in this area of lending have been very low. That said, we do not want to be complacent about it, because we do have these boom conditions in the housing market, and housing lending is a much bigger proportion of banks' balance sheets now than it has been in the past. That is a reason to focus on it.

APRA has done some investigative work and they have talked about this publicly. They have found some areas where there is a lack of consistency of approach in the way that banks do things like assessing serviceability requirements. That is an area where I am sure APRA will be encouraging the banks to lift their game. There is also the 10 per cent growth guideline; we have been running a bit above that. Again, this is an area where we are not a long way away from where we have said we need to be, but there is a bit of work to be done there. All of these things will happen.

The overall approach that APRA has taken, which I think is very sensible, is not to be overly prescriptive and not to come in in a heavy-handed way that is going to disrupt market practices. It is about strengthening prudential standards from an already pretty strong position.

Senator McALLISTER: Thank you. The capex—the private capital expenditure figures that were released last week—how do they match up with your forecasts in the most recent statement on monetary policy?

Dr Edey : I cannot answer that because that is really not my part of the bank. That is our economic department and we do not have that covered today. As a more general comment, I would also refer back to what I said about the board meeting being on tomorrow. Things that have to do with the immediate economic outlook we probably cannot really talk about today either.

Senator McALLISTER: Sorry, I missed those earlier remarks. I apologise, Dr Edey.

Dr Edey : No worries at all.

Senator BUSHBY: Thank you to the Reserve Bank for assisting us today. Earlier on, we were discussing the margin on credit cards and you mentioned in passing that the margin on other loans has reflected, to a greater degree, the official cash rate. What are the current trends in the net interest margins, particularly on the home loan rate but also for business loans as well? Is the NIM decreasing, maintained or getting bigger?

Dr Edey : I probably cannot really help you with the very fine details about very recent movements, but the big-picture story over a long period of time is that banks' net interest margins have come down a long way over roughly a 30-year period. That is something that is often overlooked in this debate.

Senator BUSHBY: It came down quite considerably before the GFC.

Dr Edey : A lot of that happened before the GFC. That is fact No. 1. That net interest margin—the average difference between what banks receive and what they pay—has been pretty stable over the last few years, even post-GFC. The second big fact is that in the post-GFC period the entire interest rate structure has moved up relative to the cash rate. If you draw a graph of average interest rate received and average rate paid, the gap between those has come down over a long period of time. But both of those lines have gone up relative to the cash rate in the period since the GFC, and that is because wholesale funding costs went up during that period because of all the uncertainty—

Senator BUSHBY: That was going to be my next question. My next set of questions will be about funding of banks and the cost of funds. Just to get it straight: I understand that over a long period of time the NIM has narrowed. During the GFC, it significantly broadened or widened as people priced for risk that was uncertain. After things settled down a little bit, I believe it began to narrow again. I just want to know what has happened over the last year or two. Is it continuing to narrow or is it staying where it ended up, at a slightly larger margin than what it was prior to the GFC? What are the current trends?

Dr Edey : There are a couple of things I would like to say about that. First of all, I do not know enough about the very detailed recent trends—

Senator BUSHBY: Maybe you can take that on notice.

Dr Edey : I think what you are interested in are the little ups and downs. But the point that I have been trying to make is that the NIM is actually not the difference between the lending rate and the cash rate; the NIM is the difference between—

Senator BUSHBY: The cost of funds and the—

Dr Edey : the average cost of funds and the average lending rate. Broadly speaking, that difference has been fairly stable over the last six to eight years. The very detailed ups and downs I cannot help you with, but that is the broad picture. What often confuses people is that rates have gone up relative to the cash rate. So if you are measuring a margin as, say, the mortgage rate minus the cash rate, that has gone up because the whole rate structure has gone up relative to the cash rate. But that is not the same as the NIM concept.

Senator BUSHBY: I understand that. As I say, during the GFC, the NIM did actually become much larger because banks were pricing for unknown risk at that point because there was a lot of uncertainty around it, and after getting quite small prior to that because of the competition particularly coming from MBFIs funded by securitisation.

Senator WHISH-WILSON: Because you had the deposit guarantee as well to factor in.

Senator BUSHBY: That is right—I just wanted to know where that ended up, or where it is ending up. If you can take it on notice, if possible, you obviously do not have the detail today.

Dr Edey : Okay.

Senator BUSHBY: The other aspect of that was the cost of funds. I am interested in any information you have on trends in the banks' cost of funds, short-term and long-term wholesale, as well as deposits, and whether there is any return, to a great degree, of securitisation as a method of funding.

Dr Edey : That is really not my turf either, so I think we would have to take that on notice as well.

Senator BUSHBY: No problem. This one will not be in your area, but you might know anyway. I asked this morning of Treasury about their forecasts for real GDP growth, the use of the forecasts. They discussed the basis by which they arrived at those. Do you have the details of what the RBA's rates of forecasts are and are you able to tell me whether they are substantially different to that which Treasury has forecast?

Dr Edey : Those figures would be a matter of public record in our latest statement on monetary policy, which is only a couple of weeks old. I would have to refer you to that.

Senator BUSHBY: The root of the question is whether they are substantially different to Treasury, but if you are not able to assist me with that we can take it on notice and leave it there.

Dr Edey : I would be surprised if there were any significant differences, but again it is not my area.

Senator BUSHBY: Thank you very much.

Senator KETTER: Dr Edey or Mr Campbell, I just want to venture into the vexed issue of ATM fees and get an update on the work that RBA did in 2009, I think it was, where you recommended some changes that take place with the hope that that would lead to more competition and a reduction in ATM fees generally. Over that period of time, there is some evidence to suggest that that unfortunately has not occurred. In fact, there may even be some evidence that it is on the rise. Is this something that the bank is monitoring? Do you have concerns about this issue?

Dr Edey : We do keep data on that. I have not got that at my fingertips at the moment. Impressionistically, the fee structure has probably been fairly stable over recent years, but we can get you more detailed data on that if you want that.

Senator KETTER: Does that surprise you, that the fee structure has remained relatively static?

Dr Edey : Not really, even if you compare the pre- and post-reform period, the fee structure actually did not change all that much. All that really happened was that the fees became transparent. So instead of your bank charging you, the fee became visible at the ATM if you are using an ATM that is not one from your own network. The point that we have repeatedly made is that that change is actually an improvement for consumers because it gives them the capacity to avoid the fees by making greater use of their own networks.

Senator KETTER: I think there were figures last year to suggest that there is still half a billion dollars a year being charged to customers through these fees. Do you see any scope for further reform in this area?

Dr Edey : It is not something that we have got on the radar screen at the moment. A relevant point here is that there are some big networks out there which cover most people. So most cardholders have got access to a large fee-free network and you are incurring fees if you want the convenience of using an ATM that is outside your own network. The system has to allow an incentive for ATM providers to offer that service. Would you rather not have the option at all of finding a convenient ATM or would you rather pay a fee for it? That is the system that we have, but we do not have any particular plans to review that at this stage.

Senator BUSHBY: What about in remote areas like remote Indigenous communities where there is very little choice and no bank that may be in their own network? Is there any work that has been done in assisting people in that area where people may have quite exorbitant fees charged or in the past have had quite exorbitant fees charged, even just for checking their balance to see whether their money has come in yet?

Dr Edey : A few years ago we did a very detailed piece of work on that, in conjunction with Treasury. All of that is published. The conclusion from that work—we actually sent a team out to a remote community to investigate that—was that there was a problem in that particular area. We asked the major banks to work on that and find a collective solution which would allow fee-free access in those areas. I believe that that solution is in place and working.

Senator BUSHBY: Would you take it on notice and provide a little information as to what that solution might be?

Dr Edey : Okay.

Senator BUSHBY: Thank you.

Senator WHISH-WILSON: Before I get to some issues on G20, can I ask: in terms of looking at limits to credit growth in housing investment, for example, are you also looking more broadly at issues around property development? There has been some media recently about predatory practices and very high commissions being charged by, essentially, unlicensed agents flogging housing development packages. Is that something you are looking at as well? I know it is also APRA and ASIC, but I was interested in whether you have identified that.

Dr Edey : No, that is not something we have been looking at.

Senator WHISH-WILSON: I will just read to you a statement from G20:

The G20 powers have launched a joint probe into global financial risks posed by fossil fuel companies investing in costly ventures that clash with international climate goals and may never be viable.

It continues:

The G20 has asked the Financial Stability Board in Basel to convene a public-private inquiry into the fall-out faced by the financial sector … All member countries have agreed to co-operate or carry out internal probes, including—

several countries, and it lists Australia in there. Is this something that the RBA has turned its mind to—the prospect of following the lead of the G20 on this issue on any financial risks posed by the divestment movement?

Dr Edey : I would have to take that on notice as well. We do engage with the FSB processes so I am sure we will have staff that know about that particular exercise.

Senator WHISH-WILSON: So it would be appropriate for you, for example, to consider making a submission to the G20's inquiry, or would it be another agency? If it is specifically about financial risk, that would be your mandate?

Dr Edey : We potentially could do it. We would have to make a decision as to whether it was a big enough issue for us to get involved in that.

Senator WHISH-WILSON: Would you consider the science of climate change might be too political for you to be involved in, or is it more you would need to see evidence around potential financial instability?

Dr Edey : I am not aware of the particular issue that you have brought up here.

Senator WHISH-WILSON: I will give you a copy of it.

Dr Edey : I think as a general concept, from the point of view of our mandate, we would always be approaching things from the point of view of: is it material for financial stability? So we are not going to weigh in on climate change as an issue in itself.

Senator WHISH-WILSON: No, I did not expect you would. You do research discussion papers. How do you decide on a topic, and could this potentially be a topic for an RBA research discussion paper?

Dr Edey : I am not aware of anyone in the bank who is working in that area at the moment. The way we determine research priorities is a mixture of top-down and bottom-up, depending on the interests and training of the people who we have available to work for us. I am not aware of any work on that particular topic at the moment.

Senator WHISH-WILSON: I will give you a copy. It was 29 April 2015 that the G20 announced they were launching this probe. Obviously, Australia is very leveraged with something like coal, for example. They have identified this as a big international stability issue. I would be very interested to follow this up with you at some other time—at the next estimates, or by putting something on notice that is more specific.

Dr Edey : As a general concept we do take an interest in sectoral lending trends, and so does APRA. If the banks have exposure to a particular industry and that industry is going through a shock, that is something that we focus on. We are interested in the exposure of our domestic banks to the resources sector, for example. That is something that we study—APRA looks at that. I am just not sure exactly how it feeds into the G20 process that you have just described.

Senator WHISH-WILSON: I do not have the figures in front of me here, but for a lot of listed equities if there were a collapse in coal prices, for example—that would be something that you have not looked at yet but it is something that you may consider for a discussion paper, for example?

Dr Edey : I doubt that it would be material for a discussion paper. The sorts of things that we are interested in are the composition of banks' business lending. Are they exposed to sectors that are suffering from a large decline in profitability? We look at all those sorts of questions routinely.

Senator WHISH-WILSON: Or increasing trends towards divestment—if not regulation, then certainly more ethical pressures being put on through the investment market itself on companies and their financing of these projects. That is a statement.

Dr Edey : Yes. I do not think that is a major issue at the moment.

Senator WHISH-WILSON: Okay, thank you.

CHAIR: Thank you, Senator Dastyari. The minister is here, so we have nothing holding us back.

Senator DASTYARI: Dr Edey, I did not think we would get time for this and I am really glad that we will. I just want to take a step back and talk about the broader issue.

CHAIR: Why don't you just unpack it?

Senator DASTYARI: Well, I will unpack it too. The review of card payment regulations issues paper—I just want to get my bearings on this right. Effectively, at the moment you are going through a process to look at the technical side of payments. 'Technical' is probably the wrong word; you probably use a better word. Can you explain to me exactly what you are and are not looking at as part of this?

Dr Edey : Basically, we are looking at the regulatory framework that has been in place for card payments. It has evolved since the Wallis reforms and we are asking the question, 'Is it still doing the job, or does it need to be adjusted in some way in response to things that have happened over the period since then?' So the main things that we are looking at are interchange regulation and surcharging regulation. But it is open to any interested party to contribute a point of view which we can evaluate and we will respond to that.

Senator DASTYARI: The broader issue that we talked about earlier, which was about the broader rates and the 'non-passing-on' of the rate—there is probably better language than that—but the failure of the rate to be part of where interest rates go or wherever. That is not being looked at as part of this, is it?

Dr Edey : No, because we do not have powers in that area.

Senator DASTYARI: Yes. But you are looking at the actual things like interchange fees and the regulations around the quirks of the fact that, for instance, AMEX and Diners Club are treated differently within our regulatory system from MasterCard and Visa. Are they the kinds of matters that are being addressed as part of this? I am using those as an example.

Dr Edey : Yes. The big things are interchange and competitive neutrality, which is what you have just mentioned, and surcharging.

Senator DASTYARI: What is the process on this from here?

Dr Edey : We published a discussion paper which sets out all the issues and some possible options for consideration.

Senator DASTYARI: That is the issues paper you have with you here?

Dr Edey : Yes. We have received submissions on that which are now being evaluated. We have had a preliminary discussion of responses to the issues paper at the Payments Systems Board, which met a couple of weeks ago. The next task for us is to complete the consultations with people who have made submissions. We will be doing that over the next couple of months, forming some preliminary conclusions and taking that back to the Payments System Board at its August meeting.

Senator DASTYARI: Can all of this be done through regulation or legislation? I do not quite understand. Do you then take it to government as a decision for government—or is this all being managed through the Payments System Board? I do not understand the powers. Will you need legislation at the end of this process, potentially?

Dr Edey : We are basically looking at what we can and should do with our existing powers, but, as you would know, there is a broader process going on in Treasury to look at the recommendations of the Murray inquiry—which made some recommendations in this area. One of the things I expect Treasury to be looking at in response to all of that is whether there is a need for any additional powers in this area—and, if so, who should have them. What we are doing as a payments regulator is looking at the way we use our existing powers.

Senator DASTYARI: It strikes me as a bit of quirk, to be honest, that when you look at your charter and what you are responsible for, this regulation of the payments system kind of falls into it. Earlier you were talking about your primary objective being to manage systemic risk. It seems like a bit of a quirk that this is an area that you regulate.

Dr Edey : That was a decision taken post Wallis in 1997-98. You are right that those two things are not very closely related to each other. That is why we have two boards at the Reserve Bank—to handle those two areas. We have the Reserve Bank board and the Payments System Board to handle the two areas. The Reserve Bank Act specifically states that the Reserve Bank Board has a certain charter, which is related to macroeconomic stability and anything that is relevant—except for payments system matters. Then we have the Payments System Board that handles the payments system matters, with a focus on efficiency and stability of the payment system.

Senator DASTYARI: As part of this process—and I know Senator Canavan half touched on this before—is that where you will be looking at things like the developments in digital currency and so on? Is that going to be part of this discussion? Is that happening with the review of card payments regulation?

Dr Edey : It is something we are looking at quite closely, but it is not a card payment so it is not really subject to that review.

Senator DASTYARI: When you say 'card payment', you are talking about the traditional bankcard payment, effectively. That is how you are interpreting it—as opposed to a digital card or a digital wallet or those sorts of things?

Dr Edey : Yes.

Senator DASTYARI: You are saying that falls outside the scope of this review?

Dr Edey : Yes.

Senator DASTYARI: How did this review get initiated? Was it your board?

Dr Edey : The board chose to do it but it did so in response to the recommendations of the Murray committee.

Senator DASTYARI: I think it was recommendation 17. So you only started this process at the end of Murray.

Dr Edey : We had been thinking about these things for quite some time.

Senator DASTYARI: This is not a gotcha question.

Dr Edey : We made a submission and then Murray asked us for a supplementary submission covering these areas. That was part of the reason why Murray then recommended further work be done. We have taken that up in response.

Senator DASTYARI: The point I wanted to make is that the areas we were talking about earlier—there is a part of credit cards you are looking at and a part you are not. The part you are not looking at is, effectively, the gap between the cash rate and credit card rates.

Dr Edey : That is right—because we do not have regulatory powers in that area.

Senator DASTYARI: No-one does.

Dr Edey : I think that is right, yes.

CHAIR: I thank Dr Edey and Mr Campbell for their testimony here today. It was very interesting.

Senator Cormann: Chair, if I may just provide clarification to a question by Senator Wong earlier this morning. You might recall that this morning Senator Wong made the outrageous and inaccurate assertion that the government had cooked the books on the basis of the budget treatment of Future Fund earnings. I have already shared with the committee that the relevant review into the budget treatment of Future Fund earnings had been initiated by the previous government in the 2012-13 budget. There was a discussion paper released by Treasury and Finance in August 2012.

I had reason to go back to the 2012-13 Mid-Year Economic and Fiscal Outlook. You see that it is blue; it has the names of Wayne Swan and Penny Wong on the front cover. If you go to page 321 of that document you will be able to read:

Under the Future Fund Act 2006, earnings are required to be reinvested to meet the Government’s future public sector superannuation liabilities. From 2020, the Future Fund becomes available to meet the Government’s superannuation liabilities. At this time, earnings will be available to meet the Government’s recurrent superannuation spending, and both costs and earnings will be included in the underlying cash balance.

This is exactly what is reflected in the medium to long-term forecast now.

I really hope that Senator Wong is going to do the honourable thing and apologise for her outrageous accusation and that she takes responsibility for the fact that it was her government, with her as finance minister, who made this decision, which has been subsequently implemented in a professional way by Treasury. I hasten to add that I do not criticise in any way, shape or form the decision that was made. In fact, it is fair to say that the budget treatment of Future Fund earnings from 2020 onwards was implied in the Future Fund Act 2006 as such. Obviously, when earnings become available for the government to meet certain liabilities, you would expect that both the earnings and the liabilities are appropriately reflected in the budget papers—and that is exactly what the previous government decided.

This government did not make any decision whatsoever to change the budget treatment of Future Fund earnings—and I just hasten to make that point again. So when it comes to the assertion that Senator Wong made that the government was cooking the books on that basis, well, if there was cooking of the books then she was the cook and she should have known that that was what she did when she was the minister for finance—unless she did not know it was part of her budget papers back in 2012-13.

CHAIR: I agree it was unfortunate language. I suggest it was meant to attract the attention—

Senator Cormann: And it has been faithfully reported by the ABC and the Financial Review since.

Senator DASTYARI: Chair, I wish to make a point of clarification on this issue.

CHAIR: Hang on.

Senator Cormann: You are quite right, Chair. It was made for political effect. And it has since faithfully been reported by both the ABC and the Australian Financial Review. It is an inaccurate slur. It is one that Senator Wong should correct on the record, given, as I have just pointed out to the committee, this change, which she was so critical of, which we were not critical of when she was the finance minister, is one that she initiated and gave effect to and announced during Labor's period in government.

CHAIR: Senator, did you have a point of clarification?

Senator DASTYARI: The point of clarification—and this is my understanding; again, Senator Wong can speak for herself on it at some point; that is a matter for Senator Wong—is that the assertion was being put to you, Minister, as—

CHAIR: What is the clarification?

Senator DASTYARI: The point came from an article today. I thought it was a reference—

Senator Cormann: The article is wrong.

Senator DASTYARI: The assertion was put to you and you have now come back and said the article is wrong. You are entitled to do that. I don't quite care what the issue is.

Senator Cormann: I indicated to Senator Wong last week in Finance estimates and in PM&C estimates, from memory, the exact same point.

Senator DASTYARI: The article was today.

Senator Cormann: The issue has been around for a while. To the extent that the article today in the Sydney Morning Herald and the various Fairfax papers suggests that this government has changed budget treatment of Future Fund earnings, it is wrong. That change was made by the previous government and it was outlined as such in the 2012-13 Mid-Year Economic and Fiscal Outlook. But let me just say again that it was an appropriate change that was made by the previous government, but for Senator Wong to draw the conclusion she did, as Mr Gittens did in his piece today, is completely unacceptable.

Senator DASTYARI: I am happy to move on. It was an assertion that was made and it was put to you and you have rejected it. I will move on.

CHAIR: You have had your point clarified. I am sure that there are people in Senator Wong's office who will report back that you are seeking that apology and she will respond accordingly.