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Wednesday, 8 April 1998
Page: 2851

Mr HAWKER (8:01 PM) —As I was saying before the debate was adjourned, the developments of the Australian Prudential Regulation Authority do rely on a number of very important goals, as the Treasurer (Mr Costello) outlined in his second reading speech. The first one was the maintenance of financial stability, the second was the provision of specialised regulation of conduct disclosure and dispute resolution for financial service providers and financial markets, and the third was the prudential supervision. As I pointed out, what this should be leading to is the fact that not only will Australia have a world class financial regulation system but also that Australia is moving into a position where we will be one of the great financial centres of the world.

I was also very heartened by some comments that the Treasurer made in his second reading speech when he talked about the fact that the prudential regulator will be an independent regulator but, like the Reserve Bank, will be subject to an overriding policy determination power of the Treasurer. He went on to talk about the fact that the prudential regulator will have to produce an annual report. That report will be presented to parliament and it could be referred to a parliamentary committee.

I thought it was quite significant that the Treasurer, in that second reading speech, named the House of Representatives Standing Committee on Financial Institutions and Public Administration as the committee likely to do a detailed submission. I thought that was quite significant because in our report in September of that committee, which I chair, we made a specific recommendation when we were looking at the annual report of the Reserve Bank, and also the ASC and the ISC, that the new Australian Prudential Regulation Authority should be required to appear before the House of Representatives Standing Committee on Financial Institutions and Public Administration at a public hearing once a year to report on prudential supervision of the financial services industry. So I think it is quite significant that the Treasurer has made reference to that in his second reading speech.

I would like now to talk about some of the important issues that will be facing the prudential regulator and the whole new regulation of the financial system. Clearly, with this new system, which has come from the recommendations of the Wallis report—and I commend the Treasurer for taking up those recommendations—we do see some very important challenges that are likely to come before these new regulators. In fact, one might even describe it as possibly a baptism of fire. The concern I have is that in the transition from the existing system of regulation, which I think everyone recognises has served us very well, to the new system of regulation, which I think both sides of the parliament recognise will serve us even better, there is an interesting period facing the financial system in the next year or two. I think all of us are very much aware of what has occurred in Asia in the financial area and we have recognised that so far, because of the very good financial management of this government, Australia has been largely immune from what has occurred in Asia.

Mr Kerr —Let's see what it's like in two months.

Mr HAWKER —That confidence, not only within Australia but right throughout the region and indeed in other parts of the world, is something this government can be very proud of. I did allude to some of the benefits of that good management of the government in an earlier part of my speech.

Mr Kelvin Thomson —This is a `no child will live in poverty' speech.

Mr Kerr —This is a `no child will be living in poverty' significant statement.

Mr HAWKER —But, of course, we do have to look at what is occurring in Japan, which all of us who are interested in these areas—although I am not sure that some of the honourable members opposite are all that interested—know is very serious and could have very serious implications for Australia.

Mr Kerr —I thought you had fireproofed—

Mr DEPUTY SPEAKER (Mr Hollis) —Order! If the honourable member for Denison wishes to participate in the debate he should put his name on the speakers list and the honourable member for Wills should keep his comments until he speaks. The honourable member for Wannon will be heard in silence.

Mr HAWKER —Thank you, Mr Deputy Speaker. As I was saying, what is occurring in Japan is something quite serious and something that all of us should be watching. If you then couple that with some of the other occurrences around the world you will see, for example, that by some measures Wall Street is now exceeding 1929 levels. That does not necessarily mean the obvious but it is a salutary warning. We are also seeing some very timely warnings from eminently respected people in our own community.

I refer honourable members to an article that was in the Business Review Weekly last month. The front page headline quoted Mr Maurice Newman, the Chairman of the Australian Stock Exchange, who is an eminently respected financier in Australia, hold ing many positions of responsibility, and who is very highly regarded, as saying, `I think the world is headed for recession.' I think what Mr Newman was trying to do was to alert people to the potential—and I think that is all it was, the potential—problems that could occur with the millennium bug if (and I underline the word `if') we are complacent about what that could mean in Australia.

In the article there were a number of very clear warnings. We can look at a couple of them. Mr Newman went on to talk about one of the foremost authorities on the year 2000, the Deutsche Bank chief economist:

He is by nature quite an optimistic economist and he says there's a 60% chance of a severe global recession lasting 12 months and in the US real GDP could fall by at least four percentage points from peak to trough.

That is a timely warning and I bring it up in the context of the fact that we will be looking at the transition from our existing financial regulation to the new system. So we should take that warning on board to ensure that that transition is made in a way that does not allow any form of slippage in the question of regulation and, most importantly, does not allow something like that to get out of hand. We should be grateful for what Mr Newman has had to say; nonetheless, we should be warned that there is no room for complacency.

I would like to mention the growth of the use of derivatives in Australia. It is an area that we should be watching very closely. To date it has been very well regulated. Those who operate the derivatives and futures markets and so on have been extremely responsible and have kept a very tight hold on them. Nevertheless, the turnover, for example, in the Sydney Futures Exchange last year was $8.9 trillion, up 13 per cent on the previous year. Of course, the bank to bank use of derivatives is significantly greater than that. In the last four years we have seen a 50 per cent increase in the all up use of derivatives. While one should not see these figures as a cause for alarm, the fact is that the turnover each year on the collective derivative markets in Australia is now around $1½ million for every man, woman and child. That is a very significant amount of money on what is a highly leveraged financial tool. As everyone in the futures game knows, it is a zero sum game: for every winner there is a loser. Most of the use of derivatives is for very sound financial reasons and all of us appreciate the importance of the futures market and the role it plays. We all respect the competence of the Sydney Futures Exchange. We understand that there are very tight margin calls on the Futures Exchange to ensure that liquidity remains. It is recognised that the Futures Exchange coped very well with the stock market problems of 1987. But, I come back to the point that it is timely to consider this when we look at the way financial regulation is going, particularly in the transition.

In the short time that I have left to me I would like to again talk about the importance of the role of the Financial Institutions and Public Administration Committee. In the work that my committee is doing looking at this whole area, we continue to have our half-yearly meetings with the Governor of the Reserve Bank. I pay tribute to the Governor for the way he takes those public hearings very seriously. With the way the committee operates nowadays we are developing our own expertise and we will continue to quiz the Governor on the very important issues of not only monetary policy but also all the areas of financial regulation which currently the Reserve Bank controls.

The committee will be looking, as the new system is brought into place with the prudential regulator and the other arms of financial regulation that the government is introducing, to ensure that Australia can indeed claim with some pride that not only do we have a world-class system of regulation but that we have the right—and indeed develop the opportunity—to become one of the great financial centres of the world, so that Australia can, along with Tokyo, New York and London, be one of the four great financial centres of the world.

This is something that the government, led by John Howard and ably supported by the Treasurer, Peter Costello, has indeed set up as an opportunity for Australia as we go into the 21st century. This set of bills is part of that great development. (Time expired)