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Wednesday, 15 October 2008
Page: 9229

Ms JULIE BISHOP (Deputy Leader of the Opposition) (5:04 PM) —The financial crisis that has been unfolding in the United States since around August 2007 has certainly sent shock waves around the world, and the alarm bells have rung on a number of occasions in relation to the banking sector of other countries. The collapse of Northern Rock, the collapse of Bear Stearns in March this year, the acquisition of investment banks in the United States such that there are now only two remaining investment banks on Wall Street and the partial nationalisation of banks in the United Kingdom, in Europe and, overnight, in the United States mean that these are indeed unprecedented times. The steep falls in stock markets have dominated the front pages of our newspapers, and it is on the minds of many Australians.

We do not know the extent of the financial losses that have already occurred and we cannot know accurately the full extent of future losses, but we do know that a loss of confidence has contributed to the financial crisis around the world and that rebuilding confidence is a crucial part of recovering from the crisis. In advanced countries governments are relying essentially on three lines of defence to shore up their economies from the impact of the financial crisis: monetary policy—and some countries have more manoeuvrability in that regard than others; fiscal policy—and, again, some countries are in a rather difficult position depending upon the strength or otherwise of their budget, their surplus position and their economy generally; and also direct government intervention that has taken the form of liquidity injections, purchasing the troubled assets of some banks and exposing their balance sheets, if you like, and also the issue of recapitalisation. In advanced economies governments are also putting in place deposit guarantees. The International Monetary Fund, in particular, has been calling for greater coverage not only for retail bank deposits but also for interbank and money market deposits.

These bills, the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008, the Financial Claims Scheme (ADIs) Levy Bill 2008 and the Financial Claims Scheme (General Insurers) Levy Bill 2008, in order to establish a financial claims scheme, provide an unlimited explicit guarantee for bank deposits. It is probably fair to say that most people in Australia assumed that there was already in place at least an implicit guarantee of their bank deposits, particularly with the major banks. But these bills contain important measures to maintain and build confidence in Australia’s financial system.

Australia does have a depositor protection scheme in place whereby authorised deposit-taking institutions must have in place assets held in Australia equal to or more than the deposit liabilities that they have. Depositors in this country also have first claim to the assets of an authorised deposit-taking institution. But in these unprecedented times greater assurance is required, particularly to assure depositors with institutions other than the big four that their deposits are safe, because authorised deposit-taking institutions include building societies, credit unions and the like.

Australia is in a far better position than many other countries to withstand the shocks from the financial crisis. Our financial system is safer than many and we are therefore better prepared than most other countries to withstand the financial crisis. This is not the result of luck. It in fact reflects over 10 years of responsible economic management and the application of measured financial principles by the previous government.

Australia’s financial institutions have served us well and are serving us well at this time. The Reserve Bank is keeping its eye on inflation and providing systemic stability to our entire financial system. The Australian Prudential Regulation Authority, which was set up in 1998 as a result of the Wallis inquiry recommendations, provides the type of intense supervision that perhaps has been missing from some systems overseas. That supervision is of systematically important institutions such as authorised deposit-taking institutions and life and general insurance companies. The Australian Securities and Investments Commission is providing careful oversight of corporate law. It has been called upon to act, particularly in relation to the issue of short selling, during the extraordinary month of September. And of course the Australian Treasury oversees policy. So these institutions are interacting and coordinating to ensure our economy has strong prudential regulation and supervision, and their roles are complemented by the Australian Competition and Consumer Commission to ensure that there is promotion of competition policy, enhancing competition, which is essential for the provision of the best quality goods and services at the lowest prices in this country.

The point is that these are institutions that, in the case of APRA, were created by or, in the case of the others, had their mandates strengthened by the coalition when in government. These bills will be competently administered by one of these institutions—the Australian Prudential Regulation Authority. In the highly unlikely event that an Australian institution collapses, these bills will provide depositors with the security that their funds will be available to them in a short period of time. The guarantee will apply for three years to all deposits in authorised deposit-taking institutions. The scheme will also provide compensation to eligible policyholders of general insurance in the event of a failure by a general insurance provider. Finally, the bills strengthen APRA’s ability to manage a distressed authorised deposit-taking institution, a general insurer or life insurer, should that be required. In addition, the two related bills provide for the imposition of a levy on authorised deposit-taking institutions and on general insurers in the event of the activation of the Financial Claims Scheme in relation to the failure of an ADI or general insurer.

But there are risks with these bills that must be addressed by the government. While the coalition supports the bills, we also recognise that there are risks in providing such a guarantee to depositors. As with all areas of government, the bills will require careful analysis and prudent management once they have passed into law.

While the bills before us have been under consideration for some months, the idea of a financial claims scheme is now considerably changed in scope from the original capped scheme which proposed a limited explicit guarantee of $20,000. It was more about timely access to at least some funds in the event of a failure to meet deposit liabilities rather than ensuring that the entire deposit was covered and available in a short time. I think the government should be up-front and acknowledge that the speed with which these greatly changed bills have been brought forward necessarily means that the analysis available to the government for decision making has been hurried. The opposition has had even less information and less time to consider that information than the government and so there are a number of unanswered questions. I am grateful for the briefing from representatives of Treasury and the government today, but there are a number of issues which will need to be watched very closely. The public and those financial institutions that are affected by these bills, both those that are included and more particularly those that are excluded from its coverage, are largely in a position of just having to trust the government on this one.

I also raised today in this House during the matter of public importance the significance and the importance of having the government level with the Australian people and provide publicly and through this House a full statement of the information and analysis that the government has received on the important decisions that it has been taking over the past couple of days. I refer, of course, to the $10.4 billion package that has been designed to act as a fiscal stimulus for the Australian economy. There is a dearth of information surrounding the announcement of that package. There was a press release and a statement by the Prime Minister, but there are no Treasury papers, no Treasury advice and no revised forecasts—all the usual advice, data and information that one would expect to see supporting the announcement of a $10.4 billion spend. This is effectively going to halve the budget surplus and yet such information is absent. When the coalition asked quite legitimate questions in the House about the revised economic forecasts and the information that the government must have had in order to have made such an extraordinary announcement as a $10.4 billion package, there was just confected outrage that the opposition should be so impudent as to ask these questions. That just causes more concerns in the minds of the public.

These three bills are no exception. They have not been subjected to the normal scrutiny. There is no regulatory impact statement. The government should prepare a clear statement of the costs and benefits and risks of this policy to government, to the financial sector, to businesses and to the public. In such a statement it is essential that the government recognises that this scheme will alter behaviours by creating new incentives and disincentives to authorised deposit-taking institutions and insurers and their customers to act in ways different than they have in the past. Analysis and effective supervision by government will be required so that the increased risks from the moral hazard are minimised. The government has set an expiry date of three years for this scheme to operate without a cap—that is, an unlimited, explicit guarantee for deposits. To achieve this—that is, to set an expiry date of three years for the scheme to operate without a cap—there must be a credible and workable exit strategy. It should be devised now and then reviewed at appropriate intervals between now and the expiry date. There is currently no exit strategy.

I note that the Treasurer’s second reading speech this morning stated that there was interaction between the guarantee on deposits in these bills and the guarantee on eligible wholesale borrowing. He said there was ‘interaction’ there, but at this stage virtually no information has been provided on the government’s wholesale term-funding guarantee. There is virtually no information about that. And, again, I call on the government to make such information available.

The coalition understands the need for a concerted effort to ensure Australia withstands the impact of the financial crisis. But the coalition, like the Australian public, should not be left in the dark, wondering what information the government has that has led it to make these decisions. We will support these bills, but the government must provide this information to the coalition and to the Australian public.

A government should always be wary of adding new laws that are unnecessary or counterproductive. The present financial crisis is, to some extent, a result of poor regulation in the past in various parts of the world. Once a new law is introduced, a government should continue to monitor its effectiveness, its efficiency and its fairness. This is particularly so where a law has been introduced in great haste or in circumstances where none of the normal scrutiny is applied or no regulatory impact statement is provided. In the case of financial regulation, it may be that the immediate circumstances of the present problems are leading to solutions which are not fundamental to improving the workings of financial markets. Many analysts believe that better disclosure of debt is the fundamental requirement for addressing the present problems around the world. That means that banks and corporations and others who have invested in the subprime market would have to declare their level of exposure to current and future losses. It would prevent debts from being hidden off balance sheets.

Inevitably, there will be some financial institutions that will be revealed as insolvent around the world. They may well need to be recapitalised. But in the absence of transparency, even the huge bailout packages in the United States and the United Kingdom will fail to stop the crisis or to restore trust to the financial markets. There must be absolute transparency. In response, many governments, including Australia’s government, are offering these deposit guarantees as an interim step on the way to recovery. We understand that. But it is to be hoped that the world does find a way through this crisis that results in minimal damage to the world economy. It is possible that no circuit-breaker will be found unless the reporting rules are reformed to achieve full disclosure of all balance sheet assets and liabilities.

So our caution, our suggestion to the government, is that whilst we support these bills there are still many matters that need greater consideration, more information. Take the Australian public with you. Level with the Australian public. Give us the detail, the information that we need to be assured that this level of regulation and these bills will achieve the desired effect.