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Thursday, 19 October 2017
Page: 11272


Mr MORRISON (CookTreasurer) (09:48): I move:

That this bill be now read a second time.

There are few greater threats to the economic wellbeing of the Australian people than a financial crisis. Financial crises have the ability to devastate an economy, leading to mass unemployment and plunging asset prices. In a crisis, credit markets may seize up, meaning no loans for home buyers or small businesses. This would have a severe effect on the wellbeing of ordinary Australians.

Today, the Turnbull government is taking action to put in place a far-sighted framework to protect Australians against an uncontrolled financial collapse in the future.

Australia has avoided a severe financial crisis since the Great Depression of the 1930s and has not experienced a recession for more than 26 years, an enviable record around the world today. While good fortune always plays its part in these outcomes, it can honestly be said that this period of success can be attributed to prudent economic management, in particular of our financial system, which enabled us to withstand the most recent world economic crisis. The strong budget surpluses accumulated by the Howard government had paid off debt as we entered that crisis, ensuring that we had the firepower on the Commonwealth balance sheet to navigate the global financial crisis.

Even more importantly, Treasurer Costello implemented reforms recommended by the Wallis financial system inquiry, establishing the twin peaks system of our financial regulation. Treasurer Costello's forward-thinking structure proved to be the world's best practice during the crisis, and he deserves significant credit for our ability to move through that period. We had a prudential regulator in place in APRA that shepherded our major financial institutions away from the worst excesses that we saw overseas. APRA's excellent supervision and robust capital requirements meant that Australian institutions navigated the crisis relatively unscathed. In short, the Howard government and Treasurer Costello in particular took the tough decisions during the 'good times', which meant that the Australian economy survived the 'bad times'.

The Turnbull government is taking the same approach. Prudent fiscal management is working to repair the budget.

We are also responding to the Murray inquiry into our financial system, established after the coalition took office in 2013. The Murray inquiry followed in the footsteps of the Wallis inquiry, making key recommendations to enhance the stability of the Australian financial system, and I commend Treasurer Hockey for instituting the financial system inquiry undertaken by David Murray. In July I was pleased to welcome APRA's initiative to ensure that capital levels at Australian banks were 'unquestionably strong', in response to the first recommendation of the Murray inquiry.

The government will continue to support APRA's efforts to ensure that the Australian financial system is resilient. The resilience of the financial system is the first line of defence against financial crises.

The Murray inquiry also recommended that government implement appropriate crisis management powers over banks and insurers, and the bill does just that.

These powers will ensure that APRA can effectively prepare for and manage a crisis should it befall one of our banks or insurers.

The prudent time to strengthen crisis resolution powers is when the financial system is healthy. As we've seen, you need to put the effort in during the good times to be ready for the difficult times. The government has done the necessary heavy lifting, from the work of the Murray inquiry through to the substantial volume of legislation I am introducing today.

This bill will significantly enhance APRA's crisis resolution powers.

There are two core themes for this bill.

The first theme is enhancements to the resolution planning framework. Resolution planning refers to the process of banks and insurers working with APRA to ensure that they are ready for stress events. APRA already puts considerable effort into resolution planning, but the legislative framework does not give APRA clear powers to make prudential standards for resolution. We are addressing this gap.

Done right, resolution planning will substantially reduce the cost to the taxpayer of a stress event. It leads to the best chance of a private sector solution or an orderly resolution of the entity. Orderly resolutions reduce the risk of contagion leading to a runaway crisis of confidence in the institutions.

The second theme is resolution powers. Resolution powers are the financial system equivalent of a defence force. You never want to have to use them but, if you need to, you want them to be powerful and you want them to be flexible.

Australia's powers are starting from a reasonable base. APRA can already take control of a failing bank or insurer when needed, and this bill further enhances these powers. However, larger banks and insurers tend to be part of a complex financial group. Group entities will often house critical services, like staff or infrastructure. To ensure an effective resolution, APRA needs to be able to either direct or take control of all of these necessary group entities. This bill makes amendments to the legislative framework to ensure that this is the case.

International experience has shown that the role of directors and senior officers of a distressed institution is critical. A crisis can put these individuals in difficult legal circumstances, where the regulator's attempts to institute a resolution may conflict with 'peacetime' legal obligations. This bill ensures that APRA's resolution actions should be considered paramount, and directors and senior officers will be protected when pursuing these directions in all reasonable circumstances.

This bill also improves APRA's ability to manage a foreign bank branch or insurance branch that is in distress.

Large institutions also tend to have a wideranging amount of complex legal arrangements with sophisticated counterparties. These arrangements often contain default provisions which allow counterparties to break or 'close out' their position with the distressed institution.

Regulators need to be able to 'stop the music'—in other words, to buy time to institute an effective resolution strategy. This bill ensures that APRA is able to freeze the rights of counterparties of a financial group in appropriate circumstances to carve out the time necessary to effect a resolution. This is achieved in a way which preserves, to the extent possible, the certainty of counterparties when dealing with Australian banks and insurers.

This bill makes a number of technical amendments that ensure the machinery of government operates as intended during a resolution event. This includes technical enhancements to the operation of the Financial Claims Scheme and the efficacy of the legal framework for the conversion of capital instruments under the Basel III framework. These mechanical fixes will increase efficiency and certainty in the event of a crisis.

Taken together, these themes represent a significant leap in APRA's capability as a resolution authority, accompanying its traditional core role as a prudential supervisor. They will ensure that Australia's regulatory infrastructure is in line with international best practice.

Whilst government will continue to work to do everything in its power to avoid financial crises, through our prudent economic management, we are taking the prudent step of safeguarding the system for the wellbeing of current and future generations.

I want to thank the Treasury officials for their support in the preparation of this legislation. I also wish to commend and thank APRA; the APRA chair, Wayne Byers; and all of those at APRA who have assisted with the preparation of these measures.

Full details of the measure are contained in the explanatory memorandum.

Debate adjourned.