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Wednesday, 15 October 2008
Page: 9117


Mr SWAN (Treasurer) (9:01 AM) —I move:

That this bill be now read a second time.

In recent weeks the global financial crisis has entered a new and dangerous phase, with inevitable consequences for the Australian economy.

Over the past 12 months we have witnessed the unfolding of significant dislocation in global financial markets which had its beginnings in the US subprime mortgage market.

This has led to unprecedented actions being taken by central banks and governments around the world.

The need for early and decisive action by governments was a central theme of all of my discussions at the IMF and at the G20 over the weekend.

Ministers also noted the importance of countries moving in a coordinated fashion, so as to avoid being negatively impacted by the responses of others.

As a result, a number of governments have moved in the past few days to strengthen their banking systems and protect depositors, including Australia.

We have not experienced the same degree of dislocation as in other markets, but, as I have said on many occasions, we have not been immune.

The Australian banking system continues to demonstrate its resilience to the international financial market turbulence.

Australian authorised deposit-taking institutions (ADIs) remain sound, well capitalised and well regulated with high asset quality.

No depositor of an institution supervised by APRA, or before that the Reserve Bank, has ever lost any money.

Nevertheless, confidence is fragile following the failures of a number of large international institutions and has caused significant falls in global equity markets and elevated spreads in international and domestic funding markets.

Our job in this time of unprecedented turbulence is to ensure the confidence in Australian financial institutions is maintained.

We also have a responsibility to ensure that our strong institutions are not placed at a material disadvantage to the weaker institutions of other jurisdictions as a result of the actions of other governments.

The government has therefore announced unprecedented action to deal with developments in global markets to ensure stability for Australia’s financial system, to maintain our institutions’ ability to attract new funds for investment in the Australian economy, and to enhance and strengthen Australia’s regulatory framework for managing financial institutions in distress.

The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 implements the measures announced by the government on 12 October and 2 June this year.

It legislates for the government’s guarantee of deposits in Australian banks, building societies and credit unions and Australian subsidiaries of foreign owned banks.

This will operate for a period of three years and is being implemented as part of the Financial Claims Scheme.

As noted by the Prime Minister on Sunday, the government will examine a cap on the guarantee after three years.

The Financial Claims Scheme covers deposits offered by ADIs and general insurance products offered by Australian Prudential Regulation Authority (APRA) regulated insurers in the event of an institutional failure.

It will ensure that depositors and beneficiaries under an insurance contract have access to funds in a timely manner following the failure.

The bill also includes changes to the regulatory framework to enhance the powers APRA has to more seamlessly manage distressed financial institutions.

Interaction of deposit and wholesale borrowing guarantees

In addition to the guarantee on deposits, the government will also guarantee eligible wholesale borrowing of Australian banks, building societies and credit unions and Australian subsidiaries of foreign owned banks.

The government is consulting on the interaction between this guarantee on eligible wholesale borrowing and the guarantee on deposits.

If desirable, the government will proceed with measures to clarify the intersection of these guarantees and facilitate their operation.

This intersection is particularly important in relation to the market for short-term bank securities.

The government will ensure that the short-term money market remains viable and that the deposit guarantee does not provide disincentives for market participants from operating in this market.

The context

While global market conditions have heightened the need for change, some measures being introduced have a history that dates back to the recommendations of the HIH Royal Commission in 2003.

A review in 2005 by the Council of Financial Regulators—which includes the heads of the APRA, the Australian Securities and Investments Commission (ASIC), the Reserve Bank of Australia (RBA) and the Treasury—found a strong case for introducing a mechanism to provide both depositors in ADIs and policyholders in APRA regulated general insurers with access to their funds in a timely manner should a financial institution fail.

In 2006, the International Monetary Fund (IMF) encouraged jurisdictions to improve their management frameworks and recommended that Australia continue to develop formal processes to manage the failure of institutions and broader disturbances.

In April this year, the Financial Stability Forum in its Report of the Financial Stability Forum on enhancing market and institutional resilience recommended that governments worldwide should review and, where necessary, strengthen deposit insurance arrangements.

And at the IMF and G20 meetings I attended at the weekend, it was widely agreed that countries should review and enhance the protections offered for their depositors.

Given the broad reliance on financial institutions in undertaking day-to-day economic activity, the ramifications of financial institution distress and current international events are significant.

The Financial Claims Scheme

The Financial Claims Scheme, in the event an institution fails, will provide depositors in ADIs with timely access to their funds and ensure that eligible general insurance policyholders have their claims met.

The Financial Claims Scheme will be administered by APRA.

ADIs

Deposits in Australian deposit-taking institutions will be guaranteed for a period of three years.

Until 12 October 2011, the Financial Claims Scheme will cover these products regardless of the currency in which they are held.

The Financial Claims Scheme will cover these products offered by authorised deposit-taking institutions including Australian subsidiaries of foreign-owned banks.

After three years the general provisions of the Financial Claims Scheme will come into operation.

At that point, the government will consider the introduction of a cap applying to the payments to depositors under the scheme.

General insurance

For eligible beneficiaries under a general insurance policy, the Financial Claims Scheme will mean that if their institution fails they will continue to receive compensation for claims, equivalent to the value of their claims less any excess or deductible amounts.

Policyholders will retain insurance coverage for a 28-day period to enable them to find an alternative insurer.

Funding and recovery of payments

The bill provides appropriations for the Financial Claims Scheme to cover the full guarantee.

However, this is not a handout for the benefit of shareholders, company executives or other creditors at a cost to taxpayers.

APRA will recover monies through the liquidation of the failed institution, with APRA to stand in place of those depositors and policyholders assisted by the scheme.

In the unlikely event that recovery of all monies was not possible, the legislation provides a mechanism for a levy to be imposed on remaining ADIs or remaining general insurers.

This mechanism is introduced under the Financial Claims Scheme (General Insurers) Levy Bill 2008 and the Financial Claims Scheme (ADIs) Levy Bill 2008 which I am also introducing today.

Broader crisis management arrangements

Turning to other arrangements, not only do failed institutions require appropriate management of their closure, in times of crisis there will also be a need to effectively manage institutions in distress—at a time when an institution is not insolvent.

Recently we have witnessed a range of measures being utilised overseas to permit the business of an institution to continue.

The bill builds on existing transfer of business provisions to provide powers that can be used to facilitate resolution options in a wider range of circumstances.

For example, these might include the acquisition of the business of a distressed institution by a healthy institution.

It introduces new measures to allow APRA, a statutory manager or judicial manager to facilitate the recapitalisation of a distressed ADI, general insurer or life insurer, such as by issuing new shares to a new investor.

The bill also introduces a number of measures to significantly improve the prudential framework applying to general insurers.

The bill also provides APRA with an improved capacity to initiate external management of general insurers.

The bill will bring APRA’s powers for general insurers in line with those currently existing for life insurers, and again provide consistent powers to deal with failing institutions across the ADI, general insurance and life insurance sectors.

APRA will have the power to apply to the court to appoint a judicial manager for a distressed general insurer, whose duty will be to protect policyholders and maintain financial system stability.

APRA’s power to intervene in the external administration and winding up of a general insurer in distress will also be strengthened to protect policyholders’ interests.

It is also proposed that statutory and judicial managers be required to inform and consult with APRA where their actions may impact on financial system stability when discharging their responsibilities.

Conclusion

This bill is historic, and it forms part of a concerted multinational response to the impacts of the global financial crisis.

Never before has the Australian government moved to protect depositors in the way in which we are doing today.

The government has a commitment to working families, to ensuring the economic prosperity of the nation, and to ensuring the security of our financial system.

This bill goes some way towards meeting these objectives.

The bill substantially enhances the prudential framework, it puts in place the Financial Claims Scheme, and it gives APRA the powers to respond more swiftly and decisively to deal with institutional distress.

The measures in the bill will allow ordinary Australians, and their financial markets, to move ahead into the future with confidence.

I commend the bill to the House.

Debate (on motion by Mrs Mirabella) adjourned.