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Wednesday, 27 October 1971
Page: 2585

Mr CREAN (Melbourne Ports) - The Opposition supports this Bill because it regards it as a sensible enough move. The Treasurer (Mr Snedden) in his second reading speech described the Bill as follows:

The purpose of this Bill is to implement the Government's decision announced on 1st May 1970 to introduce legislation to ensure that the

Commonwealth had adequate power to control the acquisition of local or overseas interests of large shareholdings in banks incorporated in Australia.

The Treasurer, in the next paragraph, went on to say that 'banking is a business in which the nation has special interests'. I agree wholeheartedly with that. Banking is a business in which the nation ought to have special interests and it should have great concern about the operations of this field.

I do not want to say very much about the Bill itself except to state that it aims to ensure that no-one, with one or two exceptions, which I think are technical by reason of the Constitution, of some of the savings banks attached to the private trading banks, or that no single shareholding in a bank shall be of more than 10 per cent - that is to be the maximum holding by one interest. During some discussions we had on this matter one evening I was shown by the honourable member for Mitchell (Mr Irwin), who was formerly with the Bank of New South Wales, and a colleague, that that bank had a clause in what is described as the Bank of New South Wales deed of settlement.

Mr Irwin - What date is that?

Mr CREAN - This was brought up to date in 1965. However, it certainly goes back to the foundation of the bank. Clause 22 of the deed of settlement states:

No person shall be allowed to subscribe for or by reason of purchase or otherwise to hold more than one-twenty-fifth-

Which, of course, is 4 per cent - of the whole number of the shares in the capital of the bank which have for the time being been allotted and if any transfer of shares ahall be executed . . .

This limits the holding in that bank, as one of the major private trading banks, to 4 per cent, so, as far as that undertaking is concerned, it will not be affected by this legislation. Nevertheless, there is the danger that in some circumstances the trading banks, or some of them, could fall into the hands of one dominant group of shareholders or they could be subjected to attacks in the form of takeovers and invasions from overseas shareholders. This would not be desirable and I agree with the Government when it says that it will refuse to allow any new foreign bank to operate as such in Australia. I support that principle on behalf of my own party.

What is causing concern at the moment are the operations of what are sometimes described as near banks or fringe institutions, many of which are partners of the trading banks and many of which have quite substantial foreign holdings. 1 have a list of these institutions which was supplied by my colleague, the honourable member for Hunter (Mr James) and I shall mention only a few of them. The Australian Guarantee Corporation Ltd is a finance company in which the Bank of New South Wales has a 43 per cent shareholding. The Commercial Banking Company of Sydney Ltd has a 42 per cent shareholding in Commercial and General Acceptance Ltd, which is known as CAGA. The National Bank of Australasia has a 60 per cent shareholding in Custom Credit Corporation Ltd. and its profits were reported in this morning's financial Press as being in the region of $10m. ESANDA Ltd is a wholly owned subsidiary of the Australia and New Zealand Banking Group Ltd. Of course, there recently have been rearrangements with the amalgamation of that bank with the English Scottish and Australian Bank Ltd. The Finance Corporation of Australia Ltd is a wholly owned subsidiary of the Bank of Adelaide. General Credits Ltd is a wholly owned subsidiary of the Commercial Bank of Australia Ltd. The Australia and New Zealand Banking Group Ltd, which is the group whose constitution was affected by the recent amalgamation of the 2 banks, had a 21.7 per cent shareholding in Industrial Acceptance Corporation Ltd and it is reported that the First National City Bank, New York plans to acquire a total equity of 40 per cent in this company.

It is about some of these near banks or fringe institutions that I should like to say something this afternoon and I shall cite one or two recent references to this matter. At an address delivered to the Australian Institute of Management at the twelfth general management conference held in Canberra on 29th October 1970, Mr B. B. Callaghan, managing director of the Commonwealth Banking Corporation, made these observations:

But the fact remains that, in the past 20 years, various money markets have arisen in Australia, many of them performing functions that constitute banking in every business sense if not in the sense that the word 'banking' appears in the Australian Constitution as so far interpreted.

Mr Callaghanwent on to say:

Until recently, we spoke of fringe banking institutions but, nowadays, I think we should forget that term and recognise that each institution dealing in money is, in fact, a part of a money market, for the establishment of other money markets followed the emergence of the finance houses as very profitable money markets. These new markets also are largely beyond the constitutional control of the Australian monetary authorities.

Of course, when Mr Callaghan wrote that in October 1970 we did not have the decision in the Rocla pipes case and it seems that as a result of that case it has been affirmed by the majority of judges in the High Court that what the Australian Labor Party had asserted for a good many years was necessary, but which was always howled down as unconstitutional, was in fact constitutional all the time. The Labor Party suggested at least 10 years ago that hire purchase, consumer credit, fringe banking or whatever you like to call it should be regarded as banking and legislation should be enacted accordingly, and if anybody wanted to challenge it in the High Court, he could do so. The Government should not have refrained from legislating in that field. The recent decision in the Rocla pipes case would suggest that we could legislate in this field.

I proceed to a more recent observation on this matter which was, I think, made at about the time the decision in the Rocla pipes case was given. I quote from the latest annual report of the Reserve Bank of Australia which was tabled a day or two after the Budget was delivered. The report states:

Overseas banking and other financial organisations were again active in acquiring equity holdings in existing Australian non-bank financial institutions and in establishing new financial enterprises mainly in conjunction with Australian institutions. At the end of 1970-71, the number of public companies engaged in non-bank financing (excluding insurance companies) in which overseas concerns held substantial equity interests was around 60; a decade ago the corresponding figure was about 10.

The writers of the report go on to state:

At the same time, however, the new non-bank institutions that have been emerging, many linked to overseas banks and other entities of high repute in international finance, have been establishing a place particularly in markets for short term funds. These developments, which are a natural accompaniment to economic expansion, have produced considerable overlapping of the areas of financing occupied by banks and non-banks, and the present pattern raises some important policy issues. In the course of their special relationship with the monetary authorities, benefits are conferred on banks but constraints are also imposed - in part in the interests of monetary policy. To the extent that this singling out of banks affects the pattern of the business they undertake, questions of efficiency in the conduct of the community's financial intermediation arise and on these grounds there is some case for limiting the degree and manner of treating banks differently from non-banks.

I would suggest that, bearing that observation in mind with what Mr Callaghan has said a year or so ago, this really should be conceived as one shading of markets rather than discreet units operating separately in relation to monetary arrangements. Whatever virtues could be seen in limiting the foreign ownership in banks which, after all, are subjected to controls, quite rigorously in their operations under the Banking Act of 1959-1967, surely it is more necessary that there should be similar limitations placed on these other financial intermediaries.

A week or two ago the Deputy Governor of the Reserve Bank of Australia, Mr Knight, in delivering the G. L. Wood Memorial Lecture at the Melbourne University, pointed out the growth of assets of financial institutions during the period 1953-1970. He related the total assets of these institutions to the gross national product figure as some sort of an indicator of the vastness of them. In 1953 the assets of the financial institutions, including those of the Reserve Bank, totalled $8,572m and the gross national product was $8, 372m. Roughly speaking one could say that the assets of the financial institutions aggregated something like the value of the total turnover of goods and services in the community in the 12-month period. By 1970 the total assets of financial institutions had risen to $3 5,480m whilst the gross national product for that year was S30,000m. The total assets of the financial institutions had increased fourfold in those 17 years and actually exceeded the gross national product figure by a margin of something like one-sixth. However, there had been considerable shifts in the relativity of the various groups within the total operations.

The position of the assets of the Reserve Bank is, of course, inclined to fluctuate quite significantly from year to year because its operations in the open market sometimes greatly increase or decrease its assets for one particular year. For this reason one cannot necessarily draw a very firm conclusion about the assets of the Reserve Bank for any one year. If we exclude the assets of the Reserve Bank from the total assets of the financial institutions we will find that there has been quite a significant fall in the percentage held by the trading banks and the savings banks. In 1953 their assets were 58 per cent of the total but in 1970 they had fallen to 44 per cent. The trading banks alone had declined from nearly 36 per cent in 1953 to just a shade under 23 per cent in 1970. Where there had been a considerable increase in assets was in the finance companies whose assets were coming up to the same kind of magnitude as those in the banking system. The banking system, as is pointed out in the report of the Reserve Bank, is subject to constraints, as it ought to be, but as far as these other undertakings are concerned there are no definite restraints.

The report of the Reserve Bank points out that there has been quite a shift in the sort of business that the finance houses are engaged in. Originally they were engaged more in consumer credit but now about half of their activity is in providing business finance, which activity was formerly carried on by the banks. As the report of the Reserve Bank states, this raises quite significant matters of policy. I would have liked the Reserve Bank to spell out a little bit more what the significant matters of policy are. The former Prime Minister, the right honourable member for Higgins (Mr Gorton), in February of this year, I think, made a statement about the economy of this nation. One of the things he pointed out was what appeared to be the large inflow of foreign capital on a short term basis. He said that much of this sort of capital was going into the construction of buildings other than dwellings. The figures for the gross national product as at 30th June 1971 show this trend quite starkly. They show that the total profit position of all company activity in Australia for the year 1970-71 had actually declined but that the profits of the finance section had increased from $240m to $286m or about 20 per cent in that 12 months period when there was supposed to be monetary restriction on the economy.

As the Chairman of the Commonwealth Banking Corporation, Sir Roland Wilson, pointed out in the 1971 Annual Report a few weeks after the report of the Reserve Bank, the monetary policy being pursued by the Government internally - I am not arguing whether the policy was right or wrong, but at least it was the sovereign right of the Government to impose it - was to a considerable degree nullified by the flow of foreign capital into this country, which as we know affects the liquidity position of the banking system and in effect was working in the opposite direction to that in which the Government wanted its monetary and fiscal devices to go. The effect is revealed quite starkly in the figures given on national income. In 1971 dwelling construction, in real terms, had actually declined. The provision of infrastructure via public works of all governments in Australia had actually declined. However, there was a substantial increase of about $100m in the construction of buildings other than dwellings. There is no doubt that much of this money that was coming in from overseas found quite a profitable haven in finance for buildings other than dwellings or what I have described on another occasion as skyscrapers rather than schools or hotels rather than hospitals. This is not my idea of a sensible allocation of the resources of this nation. I would suggest that it is time that the Government took action in this field.

I commend to honourable members a series of articles appearing, in 3 July issues of the 'Australian Financial Review', written by Mr M. W. Acheson IV, an American, who is assistant to the Managing Director of Ord-B.T. Co. Ltd and deputy representative of the Bankers' Trust Co. of New York. In those articles Mr Acheson described what he called 'the foreign bank invasion'. It is interesting to note that, as the Reserve Bank suggests, whereas a decade ago there were 10 of these institutions there are now over 60. I think Mr Acheson implied that the figure is closer to 100. These are, in effect, banks operating, by one or more removes, in Australia. They are not able to operate directly as banks. In many cases they operate either through banks as partners in some of their ventures, by buying into these finance houses, or by operating in the form of merchant banks. It always seems to me rather curious that there is no very substantial definition of a bank. If one goes to the Banking Act, which is supposed to regulate this sort of operation, one will find it hard to obtain a definition at all. In fact, one is referred mainly to a schedule. We get these other enterprises among which are what is called finance companies, which some people describe as near-banks. Then there is another type that is different again, but which still calls itself a bank, namely, the merchant bank. I would agree with Mr Callaghan that at least there are more similarities between them than there are differences. They are all engaged in this kind of borrowing and lending of money, which is the principal activity of banks. Of course, banks exist by borrowing cheap and lending dear, but at least they are subject to a certain amount of regulation.

When one looks at how some of these other undertakings operate one sees that in the long run the excessive charges are wrought upon the ordinary people in the community, either because mortgage money is hard to get at lower rates or because the undertakings are offering higher rates. People who are able to claim their interest payments as tax deductions are certainly in a more favourable position than the home builder, in whose case the loan is regarded as a domestic transaction and not subject to a tax concession of any kind. Certainly the builder of the skyscraper is at some advantage when it comes to borrowing money over the builder of the lowly home.

One of the great difficulties in Australia is that we do not have in this country anything like the legislation that operates in the United States of America, called Consumer Credit Protection Acts. We certainly have some attempts in various States Acts to limit the amount of interest. In most cases the limit they set is that in the old Moneylenders Act of 4 per cent per month flat which, of course, works out at something like 100 per cent or more on an annual appraisal. Some States have a lower limit than that. I would commend to the attention of the House an article that was quoted here a week or so ago by the honourable member for Cunningham (Mr Connor) titled The Cost of Consumer

Credit' which appeared in the Western Australian publication, 'Economic Activity', volume 15, for July 1971. It says that if people shop around for their credit terms the average family - and it suggests that the average family when its consumer credit financing is taken into account is indebted for something like $700 in the aggregate on which it could pay anything like $140 or 20 per cent in service charges - should be able to get money at about half the price. I would suggest to the Government, which claims to be really concerned about inflation but seems only to see it when wage increases are being sought, that here is a very good place to begin to do something which would affect the average family by $70 a year or near enough to $1.50 a week in excess exploitation by way of credit charges. Because this sort of institution is able to bid high for its money, other people who may have to seek and undertake credit are placed at quite a disadvantage, because either they cannot offer the same kind of rate or they are not in the business to the same extent.

When one looks at the results of the last year - a year of gloom as far as actual physical production is concerned but a very bright year for those who are classified as finance companies, and that includes banks - it will be seen that the banks relatively are not doing so well as some of these other institutions, some of these back door partners as they used to be described. In one case the subsidiary of the Bank of Adelaide returns the bank more profit than does the bank proper. It seems to me that perhaps the banks have not been aggressive enough in seeking competition, and I would commend to the attention of the House a statement that I received the other day, a British Information Service news release dated 13th September 1971 on what ware called the new United Kingdom credit control arrangements in which banks are free to compete against each other as far as interest rates are concerned. The trading bank overdraft rate in Great Britain is substantially less than it is here and banks there have to subscribe to arrangements laid down by the Bank of England. That sort of overall control is applied to these other financial intermediaries as well. I would suggest that 2 things probably are necessary. This kind of activity ought to be brought into the net if, as the Minister claimed in his second reading speech, banking is a business in which the nation has special interests. I think he should acknowledge that he has to widen his sights now as far as the activities of the realm of banking are concerned, that he should apply to the nonbanking type of activity the same restriction on shareholding as he applies to the banks, and that he should consider bringing it within the net of credit control, as has been done with the banking system.

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