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Wednesday, 28 November 2012
Page: 10091

Senator BUSHBY (TasmaniaDeputy Opposition Whip in the Senate) (16:12): I present a report of the Economics References Committee on the post-GFC banking sector together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be adopted.

Senator BUSHBY: This report builds on the Senate Economics References Committee's work over recent years on the effects that the global financial crisis has had on Australia's financial sector. In particular it follows on from the major inquiry into banking competition that the committee completed in May last year. Most of the recommendations made in that report have yet to be implemented, despite their impact in terms of increasing competition in the banking sector being just as strong now as when the report was delivered.

This year's inquiry focused on a number of additional important consequences of the GFC. One issue examined was how Australian banks' costs of funds had changed, an argument regularly put forward by the sector as to why loan rates diverge from movements in the Reserve Bank's official cash rate. It is evident that funding costs have remained elevated since the crisis as risk has been more appropriately priced and banks seek to secure more stable sources of funds. Expected falls in costs as funds sourced at high cost during the crisis are refunded do not appear to be happening due to ongoing economic uncertainties globally and the funding mix shift towards deposits and longer-term wholesale funding which retain a need to pay a premium. Despite this conclusion, this is a subject that warrants close ongoing scrutiny, given the implications for millions of Australians.

Another important topic covered was Basel III, the internationally agreed package of reforms that aim to improve banking regulation and supervision in a post-global financial crisis environment. Basel III is unlikely to be well known or even widely understood outside of banking and financial circles. But the changes that it introduces are important and warrant a public discussion. My concern with these changes has always been that they will introduce answers with consequent costs for Australians to problems that we in Australia have never experienced.

While the committee accepts that Australia cannot deviate too much from what the rest of the world is doing and that the Australian Prudential Regulation Authority has done an effective job at minimising unnecessary impacts on Australia, we are moving more quickly than many other jurisdictions to implement Basel III. The need for this haste is at first glance questionable. Nonetheless, the committee also accepts that the objectives of Basel III are appropriate, given international events in the financial sectors, and that, despite increasing costs to banks and hence consumers, Australian banks are well placed to meet the new requirements.

The implementation of Basel III will help ensure that Australia's banks remain safe and that risk is being prudently managed. Whether the best balance has been achieved between solvency/stability of the system and the desirability of a competitive and lean banking sector delivering credit to Australians at the best prices, I guess time will tell. There do, however, appear to be some commercial implications flowing from the accelerated implementation in Australia, and recommendations have been included in the committee's report regarding added transparency to address this issues, at least in part.

The issues raised during the course of this inquiry also lead to the conclusion that there is a need to further consider the current state of Australia's financial system as a whole as well as the direction it is headed in the longer term. Accordingly, the main recommendation of the committee is that an independent root and branch inquiry into Australia's financial system is needed. The last such inquiry was the 1997 Wallis inquiry. The nature and regulation of the financial system has changed significantly since that time. Australia's banking sector is in transition following the GFC and as a result of impacts of the development of new technologies and products.

While this transition is underway, a clear opportunity to conduct an independent inquiry is available and is needed. Although Australia avoided the worst of the GFC, this should not be allowed to result in complacency about the structure and performance of our financial system. The roles that financial institutions perform are far too important to the health of the broader economy for the sector not to be reviewed at regular intervals. To ensure that the system that we have, even if it has served us well under stress, is the most appropriate and best system as we move forward.

There are a number of critical questions that need to be considered and addressed. The sustainability and implications of the funding mix used by Australian banks is a key issue. Related to this are evident questions about the interaction of the banking and superannuation sectors. Australia's pool of superannuation savings totals $1.4 trillion and is expected to reach $3 trillion by 2020. Yet Australian banks have to borrow significant sums from offshore. An inquiry could consider whether this is optimal and, if it is not, explore ways to reach a better outcome.

The explicit and implicit government support for financial institutions should also be considered, as should means to encourage greater competition, greater choice and better outcomes for consumers. Essentially, a comprehensive debate needs to be had about what the financial system over the next 15 years should look like and what changes are needed to help it achieve that outcome.

I turn now to another distinct issue that featured prominently throughout this inquiry; certainly, it was the most controversial issue. At the height of the GFC, the Commonwealth Bank acquired Bankwest. The committee received sad and distressing submissions from many former small business and property developer customers of Bankwest who ultimately had their loans terminated after the takeover. Besides losing their business, many also lost their home and were made bankrupt, and now rely on family, friends and government assistance.

In examining these cases, it is evident that there are a number of similarities in what occurred in the lead-up to the funds being terminated. The borrower's businesses were revalued and assessed to be worth significantly less than what they had been when the loan was entered or upon revaluation prior to the GFC. High rates of penalty interest were imposed in many cases, overwhelming the borrower.

In the opinion of many borrowers, Bankwest was unwilling to work through the issues and receivers were instead appointed. Separate issues about the conduct of receivers were also received. Of course, there are two sides to every story. The sectors and regions involved were generally experiencing tougher times, and the aftermath of the GFC cannot be dismissed. Banks also are not charities. They have responsibilities to their depositors and shareholders, and should direct credit to where it will be the most effective. Nonetheless, the committee sympathises with the experiences of many borrowers who faced and continue to face difficult and sometimes impossible battles to have their cases reviewed or to seek a fair assessment of their argument against decisions of the bank or of the receiver. There is no doubt that, collectively, the individual cases raised before the committee pose serious questions about the power imbalance between borrowers and lenders in circumstances where factors sometimes outside the control of the borrower trigger technical or more serious defaults under loan agreements.

A Senate committee is not a court, and this point was emphasised by the committee throughout the hearings and in the report. Individual disputes will need to be considered through appropriate processes. What the committee has done, however, is develop a number of proposals to help ensure that future dealings between small businesses and banks are more equitable and that maybe the process for individual dispute resolution might better enable aggrieved borrowers to have their arguments fairly and more cost-effectively heard.

The committee has for sometime believed that an industry code of conduct that specifically deals with small business lending needs to be developed. The Bankwest cases further reinforce the need for action to be taken on this front. The committee has also identified ways to improve the ability of small businesses to have their disputes with banks and receivers externally reviewed.

The experiences of these Bankwest customers should lead to some straightforward but fundamental changes to how banks deal with small businesses. The sector has both the obligation and the opportunity to demonstrate that it takes concerns about small business financial issues seriously and that it is willing to develop a solution. Personally, I am not a fan of government regulation of legitimate private sector activity except where it is absolutely necessary. So I stress to the banks and to the financial sector that failure by the sector to embrace the committee's recommendations to voluntarily move to a small business code of conduct addressing these types of issues will only strengthen the public case for intervention through greater government regulation in this area.

I would like to thank all of the individuals and organisations who assisted the committee during this inquiry. I also thank my colleagues on the committee for their work over the past year and for their contributions to the report. Finally, I would like to pass on my sincere thanks to the secretariat: Tim Bryant, particularly Colby Hannan, and also Kate Campbell for all their hard work and understanding. I commend this report to the Senate.