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ECONOMICS REFERENCES COMMITTEE
15/12/2010
Competition within the Australian banking sector

CHAIR —I welcome Mr Norris and the other representatives of the Commonwealth Bank of Australia. I invite you to make an opening statement.

Mr Norris —I would like to introduce the team that is with me. Mr Ian Narev is executive general manager in charge of our business and private banking operations. Mr Ross McEwan is responsible as executive general manager for our retail banking operations. Mr David Craig is our chief financial officer.

I would like to make some opening remarks. The Commonwealth Bank is a major competitor within the Australian banking sector and as such brings to your committee a participant’s view of competition within the market. The bank services over 11 million Australian customers, we employ more than 45,000 people, we manage over five million transactions accounts, we provide over one million mortgages and we handle almost five million personal savings accounts. I think it is fair to say that we can be found in just about every Australian city or town and where we are not present we usually have an agent available for our customers. We operate more branches than any other Australian bank and we have more ATMs than any other bank or network provider. In the financial year of 2010, the Commonwealth Bank provided its customers with over $100 billion in new lending. Of particular interest to this committee and the parliament as a whole is that we are one of the largest individual contributors to the Australian government. In financial year 2010 we paid $2.9 billion in taxes. Over half of our shareholders, indeed some 780,000 of them, are retail investors, many Australian mums and dads and small superannuation funds. We do take our heritage and our position in the Australian community seriously, and we value the longstanding reputation of the Commonwealth Bank. I believe we do operate in a very competitive market, a view that the RBA and Treasury have also expressed to this inquiry.

Today I wish to focus my remarks on three points: first, the increase in banking funding costs; second, bank profitability; and, thirdly, intensity of competition within this market. Firstly, one of the significant outcomes of the global financial crisis is that the cost of bank funding has become more expensive. We explain the sources of funding and the varying pressures on each element in our submission. Banks are now accessing more stable funding but from more expensive sources. These are likely to be structural changes, suggesting we will bear a high cost of funding for some time. One of those sources is deposits and competition in that market is fierce. Deposit customers of course benefit from higher interest rates. This is one element that is also influencing bank profitability.

The bank’s ability to compete well and generate profit has sometimes been painted in a negative light. It is important to understand that the bank is a large organisation with a significant asset base and generates a profit commensurate with its size and its prudent risk appetite. I think it is far too simplistic to just highlight our profit figure without taking into account the numbers behind our business, with more than $600 billion in assets in our banking book. We also on top of that manage and administer over $200 billion in investor funds through our funds management operations. On key measures of profitability such as return on equity and return on assets, the bank’s profit does not look unusually large compared with other major domestic companies.

You may be surprised to know that, although CBA is one of the largest companies by market capitalisation on the ASX, our return on assets ranks at 74 out of the ASX 100. Our return on equity ranks at 28 out of the top ASX 100. We are ranked first for dividends paid to Australian based shareholders, and CBA is one of the top four corporate taxpayers. Bank and corporate profitability in general is heavily influenced by the strength of the economy. Indeed, if banks do not make profits, economies go backwards. There is not a person in this room who would want that. The Republic of Ireland in the past few weeks is a graphic example of the problems of a weak banking system. Importantly, the strength of the domestic banking sector has precluded the need for any taxpayer bailout here in Australia. While banks have used the government’s wholesale funding guarantee, they have paid for that privilege. In the case of the Commonwealth Bank, we expect to pay the government almost $1 billion for the use of this guarantee.

Let me move to competition. There has been a fair amount of discussion recently about competition in the banking industry. My experience is that competition is very strong for market share, for funding and for people. In segments such as mortgage lending, deposits and small business, competition is fierce. I am pleased to say that, since the start of the GFC, the Commonwealth Bank has been at the forefront of financial institutions supporting homebuyers and small-business owners, maintaining lending and supporting the economy. While the Commonwealth Bank is a major lender of funds for homebuyers, it must be recognised that there are over 100 providers offering a wide range of mortgages, with a wide spread of interest rates and fees. The rise of mortgage brokers, who currently initiate nearly 45 per cent of all new mortgages, has broadened that competition. The bank also made the decision early in the GFC to support the small-business sector. We were ahead of our competitors in lending to the sector that is so vital for the Australian economy and job markets. We did this through keen pricing to small business without altering our lending standards. Our depositors have clearly benefited from strong competition. Customers are reaping the benefits of a price war for deposits by getting higher returns on their savings.

The competitive banking sector has been a boon for Australians over the past couple of decades. Naturally, we welcome sensible government policies that assist fair competition. Australia’s banking system passed its greatest financial stress test in seven decades, which highlights the benefits of having strong, well-managed banks and sound government finances in contrast to much of the developed world. Care needs to be taken that any stimulus to boost competition does not come at the expense of financial system stability or government credit worthiness. There is a trade-off between stability and competition. Getting the balance right is absolutely crucial. As the Governor of the RBA recently noted, there is a point beyond which excessive competition can lead to problems, as events in the US and Europe have demonstrated. At the end of the day, what really matters is whether the consumer is satisfied with the service we provide. That is why the bank’s key strategic focus in recent years has been to increase its levels of customer satisfaction. Businesses have to satisfy their customers and shareholders to be profitable, to grow and to be sustainable. We have improved our customer service by changing our culture and investing heavily in people and our technology.

I am proud to say that the Commonwealth Bank has worked hard to improve customer satisfaction levels over the past year—up from under 65 per cent, the lowest in the market, to over 75 per cent today, which is second amongst our major peers. That performance indicates just how well we are competing on customer service as well as on other measures. No-one forces any of our customers to come into one of our branches. We do not steal market share. We grow because we are well managed, secure and compete on the basis of providing excellent service to our customers. Going forward, the Commonwealth Bank Group will continue to strive to surpass our customers’ expectations in what is a highly competitive Australian financial sector. Senator Bushby, we are happy to answer your questions.

CHAIR —Thank you very much. A lot of what you have outlined is incorporated in your submission. After the submission was submitted to the inquiry, of course, the Treasurer, on Sunday, announced a reform package, including a number of measures that the government expects to improve and enhance competition in the banking industry. You have made no comments about that so far today. Would you care to make a general comment about whether you believe those reforms will actually improve the competitive situation in the industry and then any specific comments you may have about any of the particular measures?

Mr Norris —It is really too early to say what impact that package will have on competition. I think these sorts of initiatives are generally best judged through the lens of hindsight. Certainly at this stage it would be very much a prospective view. Some of the elements in the package obviously do assist in providing more competitive access to funding. The initiative around covered bonds is a good one. The additional funding that is provided through the AOFM is obviously a benefit for the smaller players. Therefore there are obvious elements of the package that I think will have a beneficial impact. But, as to the outcome and the quality or the depth of additional competition that creates, I think it is going to be, as I said, judged by hindsight. I also make the point that this is in many ways a very competitive market, particularly if you look at a market like the United States, for example. Net interest margins in the US run at around, on average, over 50 per cent of what they are in Australia. That is a market that has over 12,000 banks. It is also a market where, in the last 12 months, 400 regional banks have gone to the wall.

CHAIR —Almost every week, there is—

Mr Norris —Every week, or virtually every day, you will get a regional bank going to the wall. That is obviously an issue for the US system, but the margins there, as I say, are nowhere near as keen as they are in Australia. Certainly 12,000 competitors do not seem to have brought those margins down.

CHAIR —Despite the fact that, with those margins, there are still banks that are falling over. In the banking reform package, is there anything in particular that the Commonwealth Bank does not agree with?

Mr Norris —I do not think there is anything at this stage that we would get particularly exercised about.

CHAIR —Were you consulted by the Treasurer or the Treasurer’s office prior to its announcement?

Mr Norris —No, other than to say that the announcement would be made on Sunday.

CHAIR —But you had no prior knowledge of any of the—

Senator WILLIAMS —Don’t do a first!

CHAIR —Most of the witnesses that we have had before us have been asked that question and we have had a similar answer.

Senator BRANDIS —The Treasurer does not talk to many people.

CHAIR —No. The Reserve Bank governor told us on Monday that, without the independent increases in the interest rates by the banks over the official cash rate, the current cash rate would probably be about 100 basis points higher than it is. If you and other banks had not increased your rates at a greater level, and this 100 basis point increase in the official cash rate had actually occurred, to what extent would that have covered your increased funding costs?

Mr Norris —If we had not?

CHAIR —If you had not increased yours independently and if the Reserve Bank had increased its official rate by 100 basis points, to what extent would that have covered your increased funding costs?

Mr Norris —I will go back to a presentation that was given by the Deputy Governor of the Reserve Bank in December 2009—about a year ago today, actually—where he made the point that, if the banks had not increased their interest rates over and above the OCR, the banks would have gone into loss. There is a chart in that presentation and it is on the—

CHAIR —But that is assuming that the OCR was where it was.

Mr Norris —No. That is above the OCR—

CHAIR —Regardless of where it was.

Mr Norris —because of the fact that our funding costs are over and above the OCR.

CHAIR —That is what I wanted to get to. How are your funding costs independent of the OCR? If the OCR goes up, presumably to some extent that enables you to cover some of your costs?

Mr Norris —Some of the costs, but the point is that the OCR effectively acts as a base. There are three critical elements here as to the funding. One is obviously the issue around wholesale funding costs and what has happened over the period of crisis over and above the OCR. The second element is the fact that banks have moved from cheaper short-term funding in their balance sheets to more expensive long-term funding, so you have this rollover effect that funds that were borrowed prior to the crisis were borrowed at very low rates which, as they roll over, are more expensive. Thirdly, there is the issue about deposit rates. Mr Craig would be able to give you a more expansive explanation around that.

Mr Craig —The majority of our costs at the moment are not moving in line with the OCR. For example, consumer deposits in our consumer bank have increased around 137 basis points—1.37 per cent—more than the OCR since the beginning of the GFC. Wholesale funding, which is primarily from overseas, has also increased substantially; it has come up about 1.33 per cent more than the OCR. It is very easy to understand that international funding bears no resemblance to the Reserve Bank cash rate, but, similarly in Australia, because of the intense competition for consumer deposits, consumers have benefited significantly during this period as rates have gone up.

CHAIR —I understand completely that some of your costs have no direct relationship with the official cash rate, and I also understand it is more complicated than the way I am going to ask this question. If the official cash rate had gone up by another one per cent, that would have enabled you to raise your rates by another one per cent. What I really want to know is this. If, following the Reserve Bank, you raised your rate that other one per cent in accordance with the official cash rate, to what degree would that have covered your increases in funding costs?

Mr Craig —Very little, particularly in home lending. Because home lending is long-term lending you have to fund that out of long-term borrowing and the long-term borrowing rates are not greatly affected by the OCR. Shorter term lending that is done in other parts of the business is a little more related to the OCR.

CHAIR —It is not so much the OCR affecting those rates; it is what those rates are in an absolute sense.

Mr Norris —The point is that the OCR is effectively a floating rate. These other costs—

CHAIR —So there is a margin on top of the OCR with some of those?

Mr Norris —This margin floats on top of that, so there would have been a very—

CHAIR —You are saying the size of that margin has changed?

Mr Norris —There would have been a very slight diminution of that margin, so it may have been a few basis points, but not anything significant. These rates are pegged off the bank bill swap rate, which is then linked to the OCR. Therefore, as that moves up the other rates are still a premium over and above—

CHAIR —So, in effect, at least with some of your costs, if the official cash rate goes up it actually pushes your costs higher?

Mr Norris —Yes, correct.

Mr Craig —For the retail bank, about one per cent of our borrowing is based off short-term overnight rates, which is absolutely the OCR. That would have moved just in line with it and, to the extent that that had gone up, that would have helped—

CHAIR —So, in the absence of a change in the official cash rate, your evidence is that your funding costs have increased. If you overlay an increase in the official cash rate, your funding costs would increase even further.

Mr Craig —Correct.

CHAIR —The RBA evidence that we received on Monday was that the major-bank funding costs had risen largely in line with the official cash rate since about mid-June last year. Their argument was that, although there is still an ongoing increase over and above the official cash rate in your long-term wholesale funding, there has been some fall since the peak of the global financial crisis in the short-term wholesale funding and also in the price that you have to offer to attract deposits. That has largely offset the long-term wholesale funding since mid-June 2009. That is the conclusion drawn by the RBA on the basis of the information they have. Do you agree or disagree with that? If you disagree, why?

Mr Norris —I think the issue is that spot rates have largely stabilised—there is no doubt about that—but what we have is a situation where our funding book is not a book that can be repriced as spot, so what you have is a funding book that has a duration of terms built into it. Therefore, we have a significant amount of money that has had to be repriced as it has increased. The analysis about the spot is correct, but the fact of the matter is that there are three other factors that impact upon that—firstly, the rollover of existing funding that was in the book at a cheap price. For example, three-year money was 17 basis points over; it is around 90 basis points over now. So that cost increases as you roll that cheaper money from earlier investment—

CHAIR —Which is more the long-term funding—

Mr Norris —Yes, it is long-term funding; it is this three- to five-year funding. We have also reduced a significant amount of our short-term funding into longer term funding, which has meant that there is a higher cost there.

CHAIR —That is partly because of the Basel III requirements that basically provide a more conservative approach to your funding?

Mr Craig —That is right, and also because of our overall stance that we need to be more conservative, having learnt lessons from the GFC.

Mr Norris —Therefore, we have also taken on new funding durations that are seven years, 10 years, which we did not fund at before. Those durations are significantly more expensive than the three- and five-year durations that we were funding. So that also adds to the cost.

CHAIR —Presumably, though, the RBA is aware of all that and they are also aware of the changes in spot fees and the shorter term funding that you have looked at, and the deposits. They concluded—and made quite an explicit conclusion—that the major banks’ increasing costs have run basically in line with increases in the cash rate since mid-June 2009.

Mr Norris —There is a chart in our submission that makes a lie of that.

CHAIR —Just to be clear, you disagree with that?

Mr Norris —I disagree with that interpretation. I do not disagree that the Reserve Bank is right in the fact that spot rates have largely stabilised.

CHAIR —The conclusion they draw at the end of that—

Mr Norris —I have not seen that conclusion. I have seen comments made by the Reserve Bank.

CHAIR —It is actually written in their submission.

Mr Craig —My understanding of their submission is that it is saying that the price at which you can raise funds has stabilised, and that is absolutely correct. But we have to continue to roll over funds. That is only the wholesale funds. Retail consumer deposits have grown very significantly in price over that period. I do not think they comment on that.

CHAIR —The evidence from the RBA is that they certainly did over that period, but in recent times they have started to drop. Is that the experience that the Commonwealth Bank—

Mr Craig —They move up and down.

CHAIR —I know they move up and down, but recently they have begun to fall.

Mr Craig —On average, in the last little while they have fallen a little bit. But of course they tend to be term deposits, so you do not get an immediate benefit from that.

CHAIR —But you are right that, in terms of the new business, you would be getting benefits from term deposits?

Mr Norris —We are getting some fractional benefits.

CHAIR —Moving beyond that, we will take your evidence as read that your costs continue to increase. When do you think that that will peak?

Mr Norris —I think we are talking somewhere around another 12 months before we will peak.

CHAIR —Beyond that point, you will start to seek new funding which will replace funding that you took at the peak when things were quiet and which is now a bit lower?

Mr Craig —That is on the wholesale side. That is absolutely correct, yes. On the retail side, of course we do not know. It depends.

CHAIR —You do not know exactly where things will go.

Mr Norris —The issue here is that I think interest rates are going to be significantly impacted by RBA decisions which will revolve around how the economy is performing.

CHAIR —What is the Commonwealth Bank’s current prediction for the official cash rate over the next 12 months?

Mr Norris —Our view is that it will increase.

CHAIR —Do you have a figure that you have published?

Mr Craig —Yes, our economist thinks that by the end of next year it will be 100 basis points higher.

CHAIR —In terms of your decision to put up interest rates over and above the official cash rate—and the most high-profile example of that was in November, on Melbourne Cup Day—your argument is that it is because of the increase in funding costs, which we have just examined to a reasonable degree. Have you been asked by the Treasurer to justify why your interest rates needed to go up, given that the Treasurer has clearly stated that he thinks it is not justified?

Mr Norris —He has not asked me specifically.

CHAIR —Has anybody from the Treasurer’s office contacted the Commonwealth Bank to ask that?

Mr Norris —Not that I am aware of.

CHAIR —And there has been no request to provide any explanation in writing?

Mr Norris —No.

CHAIR —Treasurer Swan was sitting in the meeting yesterday saying that the major banks are upset about the reforms that he proposes. I have already asked you about your assessment of the overall reform package, but I take it from the comments that you made with regard to that package that you would not classify your response to that reform package as being upset.

Mr Norris —I think that we have to be very careful that we do not end up tilting the playing field and having a situation where the government ends up with an unacceptable degree of risk. We also have to be careful that we do not end up in a situation where poor behaviour is encouraged in lending markets. I think it is fair to say that we have just come through what has been one of the most disruptive periods in world financial markets, which has been caused by poor lending decisions, poor regulation and poor oversight.

CHAIR —But not in Australia.

Mr Norris —Not in Australia. We have a banking system that has performed very well. I think we have to be very careful that we do not end up creating an environment that would lead to some of the unfortunate outcomes that have happened in other markets—in Ireland, the UK and the US—through poor lending standards and a situation where you end up with competition which is a race to the bottom.

CHAIR —But, presumably, you do not see anything in the reform package that you think is likely to upset you in that way.

Mr Norris —Not at this point. It seems to be a well-considered set of initiatives.

CHAIR —You mentioned in your opening statement that you believe there is a trade-off between stability and competition and that we need to get that balance right. I do not think anybody would argue with that. The evidence that we have had before this committee over the last couple of days suggests that there was an additional level of competition in the banking industry in the late 1990s and early 2000s, particularly driven, I guess, by the non-bank lenders like Aussie Home Loans, Wizard and RAMS and so forth. Do you think that the level of competition that existed then was excessive or pushed that balance in any way?

Mr Norris —I think if you looked at what the outcome has been over the balance of the decade then you would come to the conclusion that it has not been excessive. We have not seen any bank failures, but I think it is fair to say that a lot of the non-bank lenders were able to take advantage of what could be regarded as very low funding costs—

CHAIR —With the securitisation market.

Mr Norris —which did not take into account, potentially, the true cost of risk. So I think that what we are seeing internationally now is a realisation that a lot of the problems that were created internationally were based on the mispricing of credit. That is why at the moment the international securitisation market is a market that is not particularly active because of the fact that lenders into those sorts of vehicles expect a higher level of return because the risks are greater than what they had previously appreciated.

CHAIR —Given what you just said, do you think that it is likely that the securitisation market will in the near term approach the levels of activity that it did at an international level, with particular reference to interest in Australian securitisation products, or do you think that the business models that they were based on were unsustainable and it is unlikely to get back to that point.

Mr Norris —I think for some of those providers it was an unsustainable business model going forward. I think that securitisation will come back but it will come back at a higher cost. Also, the provider or the lender will be expected to hold a higher level of risk, whereas previously on those securitisation vehicles they were able to effectively pass all of the risk on.

CHAIR —Skin in the game, so to speak.

Mr Norris —Yes, they will have skin in the game, which will mean that they will have to price in the additional cost of that risk that they are holding as well.

CHAIR —Pricing in the additional cost of that risk I guess increases the cost of funding for those institutions that will be looking to fund banking products through securitisation, which will make it harder for competition.

Mr Norris —I think the point is that if you go back to where we were, we may have been in a situation where that market was a market that, as I said, was mispriced. Therefore, there is a well-understood situation that is now prevailing in most developed markets that the cost of credit has to take into account the risk premium, which, to a large extent, was competed away. We withdrew from a number of transactions that were in the business and institutional banking market in 2006-07 because our view was that the pricing just did not reflect the underlying risk in those transactions. I think that our view was borne out by what happened a few short months later.

CHAIR —One of the reasons why I am asking this is because you stated that you believed that the banking industry is competitive as it stands today. The Reserve Bank and Treasury have both said that, as you noted. One of the questions that I have been asking some of the witnesses is the degree to which that current state of competition—whatever it may be—is a legacy of the period of high competition that was driven by those non-bank lenders in the late 1990s and the early 2000s. Without a similar sector of the industry continuing to drive competition, will the current state of competition remain or begin to dry up?

Mr Norris —It is quite interesting to look at the underlying figures. If we go back over the last decade, we have seen a situation in which the net interest margin for banks has fallen by 100 basis points. If we look at our own mortgage portfolio and look at the net interest margin return on that, since prior to the crisis—so going back to early 2007—to where we are today that margin has dropped 15 per cent. I would suggest that if there had been a situation in which there was not sufficient competition in the market then it would be hard to understand why we would see that.

CHAIR —That answers the first part of it, with you saying that we are competitive now. Do you think part of the driver that brought that net interest margin down was the impact of the non-bank lenders?

Mr Norris —The bulk of what we have seen in the last three years has been since the non-bank leaders exited the market. Our margin on mortgages has fallen 15 per cent in that period.

CHAIR —But that was a very unusual period.

Mr Norris —The funding costs are part of that. We have had a situation in which we have not passed on all of the additional costs. There are still over 100 mortgage providers in the market. Go on the net and look at rates.com and people like that and you will see a great variety of product and a great variety of providers.

CHAIR —There is no doubt that there are a great number of providers. We only have limited today and there are a number of senators who want to ask questions. We could go into some considerable detail in terms of the quality of competition. Treasury, in their red book advice to the incoming government this year, advised that the banking industry is oligopolistic in nature, despite of the fact that there are over 100 lenders. That is primarily because of the market share held by the four majors.

Mr Norris —I would like to address the oligopoly issue. Since I have been Chief Executive Officer of the Commonwealth Bank, we have been very focused on customer satisfaction. We have spent billions of dollars on upgrading our branches and our products. We had a situation back in the early 2006 period where only a handful of our products were five-star rated by CANSTAR CANNEX. Today, all of our retail products are rated at five stars. At the same time, we increased training and spent a lot of money on systems and processes. That has cost billions of dollars. If this was an oligopoly, why would we as an organisation spend billions of dollars on customer satisfaction just for the sake of doing it? Why we have spent those billions of dollars is to make us a much stronger competitor. As a result of that, we have seen our customer satisfaction levels improve, we have seen the number of products per customer improve on the back of the fact that our customers have a stronger linkage with us as an organisation, we have seen our complaints to the banking ombudsman go from a 33 per cent share of all complaints to them in March 2006 to 11 per cent in March 2010. If as a chief executive and a hardnosed businessperson I was to take the view that I could get a return through operating an oligopoly why would I and my board spend that sort of money to get those sorts of results?

CHAIR —It is a fair comment. One of the witnesses from earlier today suggested—and I do not necessarily agree—that the reason why you do that is because there is competition on certain levels to maintain market share. Effectively, by doing that you are creating a barrier to entry for other potential competitors—that is what they are saying. As I said, I qualify that by saying that I do not necessarily agree. But there are arguments as to why you would do that in terms of trying to deliver a commercial return that does not necessarily prove that there is true competition in the market.

Mr Norris —I would suggest that there has never been a time when there has been more intense competition between the four majors than there is today. You also see that in the different strategies that being led by the different banks. We have seen one of the banks taking very much a price led approach to competition. We as an organisation are taking a very strong view around quality, customer satisfaction and investing in our business to make sure that we are achieving that. We are investing hundreds of millions of dollars in a new banking platform, which will be the most modern in this part of the world and the biggest migration of any information system in the history of Australia’s banking industry. All of that is about making us a more formidable competitor going forward. It is not to ensure that we remain part of some oligopoly.

CHAIR —I would love to ask you more questions, but we have a number of senators waiting. I have a final one. There has been a lot of talk in the media and suggestions by particular politicians about the benefits of a potential broad based inquiry into the banking industry and how that might proceed. I asked the Banking Association about it yesterday and I also asked the National Australia Bank about it on Monday. What is the view of the Commonwealth Bank of the potential benefits that could be delivered from a broad based inquiry that examines where we currently stand, given that we have not had one for 14 years and we have just been through a period of major change?

Mr Norris —My view is that if an inquiry takes place we will be very happy to cooperate and take part in it.

Senator HURLEY —There is nothing simple in the financial industry. On the one hand, we had the situation that it was very useful during the global financial crisis that we had large, stable and profitable banks in a banking system that could see us through the world instability. However, we are starting to come out the other side now and people have been looking at the profits of the banks. You and other banks have made points about return on equity, which we have heard are around 13 to 16 per cent. You have talked about comparisons to other top 100 companies in Australia. However, the difficulty for the banking industry is that so much hangs off what happens within the banking industry. Small to medium businesses and individuals are paying interest rates are starting to cause them some difficulty now. The view from many of those people is that the banks should not be looking to come out of that global financial crisis early and return to pre-crisis levels of profitability.

Mr Norris —If we look at profitability, our profitability on a return on equity basis is below what it was prior to the crisis. It is certainly still running below on a return on assets basis. If you look at what has been the international benchmark—and this is looked at very closely by rating agencies—it is obviously the profitability of a bank. Its ability to absorb shocks comes from its ability to generate profit. If we look at where our return on average assets is in our banking business, it is about 75 basis points after tax. If we look at that in comparison with other industries, in the retail grocery industry the best of the supermarkets have a return on equity that is more than double the average of the banks. We also see resource companies with returns significantly above those of the banks. It is fair to say that the reason why banks have been successful during this whole crisis is because the Australian banks were profitable and had strong capital bases and this meant that we were attractive to offshore investors to provide funding. For virtually all of its history, Australia has run a current account deficit. That current account deficit has been funded through offshore debt providers. If we have a banking industry that is seen as potentially weak or as having problems then the banking industry will be downgraded by the rating agencies, and in fact the cost to borrowers will increase because our funding costs will be increased by virtue of the fact that we will be seen to be lower rated.

So, as you said, these things are not simple. We have a number of elements that mesh together to create a situation where, given that our returns over the last 15 to 20 years are pretty much consistent with where they are today, unfortunately the issue that is going to have the greatest impact on borrowers, going forward, will be the performance in the Australian economy, and the decision as to whether interest rates rise or interest rates fall will be in the hands of the RBA. I think that that will be the most significant impact, going forward, on borrowers.

Senator HURLEY —Okay, well let’s talk about those interest rate levels again and this discussion about whether the interest rate rises by the banks are justified in terms of their funding costs. You were talking about net interest margins before and about a decrease of 15 basis points—

Mr Norris —No, 15 per cent.

Senator HURLEY —Fifteen per cent, sorry—since 2007. Let’s go back a bit further. The year 2007 was the onset of the global financial crisis. What about something like 2004? I understand from other sources that your net interest margin, the overall net interest margin, is the same as it was in 2004.

Mr Norris —I will pass on to our chief financial officer to answer that.

Mr Craig —There is a figure in a Reserve Bank diagram in our presentation, on page 8, which shows that there has been a steady decline in net interest margin really for the last 20 years.

Senator HURLEY —Twenty years?

Mr Craig —Yes.

Senator HURLEY —But at what level do you want to maintain it? If you are getting a net decline, at what level do you stop and say, ‘Okay, we won’t decline below that’?

Mr Craig —We are trying to run a bank that is profitable in a very competitive market and, as Mr Norris said earlier, we have not in fact recovered all of the increases in costs that we have had in our retail bank. We have still left some on the table for our customers; we have tried to share the pain. And we think that at the moment that is a fair position to be in.

Mr Norris —I make the point that since 2000 there has been a drop of around 100 basis points in net interest margin in our business. We have worked very much on the view that we would see a diminution in the margin of about 10 basis points per annum, and that was our view right through until the global financial crisis.

There is one element that has actually come into play as a result of the global financial crisis, which is this whole issue of risk and the fact that risk based pricing has come back into vogue. The reason for that is that we saw the world awash with liquidity during the early part of the 2000s and through to 2006-07, which saw credit being woefully mispriced in a lot of markets. As a result of that we saw a situation where lending criteria were loosened substantially, which had resulted in a situation where subprime loans would be written, CDO instruments were being created and all the rest of it, on the back of what was a very poor assessment of underlying risk.

What we have seen since the crisis began is the fact that every market, every debt provider, has now taken a significantly closer look at what they are prepared to lend money at. And, as a result of that, there has been an increase in what is called the risk premium. In our business bank, our institutional bank and markets operations those margins have gone up and they have gone up because there has been, through our risk management practices, a much tougher view of what should be the risk premium applying to any loan in those particular areas.

Senator HURLEY —I am sorry; I am not quite following you. Are you saying that because other institutions are looking at the risk premium they are requiring you to have a better net interest margin?

Mr Norris —They are lending money to us at a higher rate and that is where our funding costs have gone up.

Senator HURLEY —How does that relate to the net interest margin?

Mr Norris —The net interest margin is all part and parcel of that. On one side, we have the money that we borrow; on the other side, we have the money that we lend at. The difference between them is the net interest margin. If interest rates go up on the funding side and we do not put the rates up on the lending side, the net interest margin reduces. What we endeavour to do is to keep the net interest margin in line by—

Senator HURLEY —Your chart shows that at around 2004 your net interest margins are about the same compared with now. It did decline but it is now trending back up.

Mr Norris —I think you have to look at the net interest margin on a trend basis. From 2004 it fell as well. I think the situation is that you cannot take a one-year view. If you go back through any series, you will see troughs and peaks and you have to look at the overall trend. The overall trend has been down. When I joined this business back in 2005 we had a net interest margin which would have been around two—

Mr Craig —Yes. What you are seeing in this chart is the net interest margin for the Australian group. So it takes the two elements that Ralph has been talking about. On the one hand, our margins in our retail bank—which is obviously charging rates to consumers for home loans—have dropped by 15 per cent; on the other hand, our margins in our business bank have increased somewhat to take account of risk. That is what Ralph was describing. When you are looking at that 2004 number, you are seeing risk incorrectly priced for business lending. So those margins have gone up a bit. Offsetting that, margins have declined in the retail side.

Mr Narev —We should note, again going back further, that since 2009 business margins have also reduced 23 per cent in the long term.

Mr McEwan —On that chart on page 8, you will see there have been a number of peaks and troughs. I think you are seeing cycles of business. But the long-term trend on that chart is downward, and we suspect it will continue to go down with competition. That is what we have seen. We have certainly seen that from the retail banking point of view where there has been considerable competition for retail deposits. Our retail deposit business makes up about 60 per cent of our funding for home mortgages—the big pressure on that side of the balance sheet and we suspect that that will continue while there is demand for funding.

Senator HURLEY —It is going up now but you expect it to come back down again.

Mr Narev —It has come down in the retail bank, but it has gone up slightly across the group for other reasons like business banking.

Senator HURLEY —Let’s accept that and talk about the second part of your costs and something that the RBA talks about—that is, bad debts. Your bad debt ratio has gone down, so that reduces your costs.

Mr Norris —Our bad debts are still not down to where they were prior to the crisis. They are still running at higher levels, but our view is that that situation will obviously improve.

Senator HURLEY —So it should continue to improve and that will reduce your costs?

Mr Norris —Hopefully, if economic circumstances continue and we do not get obviously exogenous shocks like we have seen over the last two or three years. We seem to get one every few months. One month it is Ireland and it is Greece another month, or whatever. Hopefully with a stable environment and a world recovery then one would expect to see a much better bad debt outlook.

Senator HURLEY —You would agree that that would reduce your costs?

Mr Norris —That would reduce the bad debt costs, yes.

Mr Craig —Our returns were well below the long-term average obviously during the GFC. This is a cyclical business and we take a real hit and our shareholders take a real hit during bad financial times. Our dividends were frozen and indeed reduced, as was the case with many bank dividends at that time but now they are returning to more normal levels.

Senator HURLEY —You mentioned that as competition increases your margins will come down. I know it is very difficult to predict, particularly in these times, but where would you see increased competition coming from given that a number of your competitors have reduced in size, or even dropped out or been taken over.

Mr Norris —I think, as I said earlier on, our greatest competition at the moment comes from the other majors, who are well resourced and certainly are providing a lot of very strong competition. I think that because we have four large banks—we have two large supermarkets, we have, I think, three or four major oil companies—it is fair to say that if you looked at the pricing strategies of all of the banks I do not think you would find a time when there has actually been a greater level of difference in the approach, which I think is a good sign of competition and effect. It is also interesting to note that, if you do a lot of comparisons with other financial institutions, a lot of the smaller banks in particular have not had the lowest prices. They have generally had interest rates that have been above the rates of the major banks throughout the crisis.

Senator HURLEY —They can put pressure on you through service and other things.

Mr Norris —That is one of the reasons why we are putting a lot of effort into our own business around customer service and satisfaction.

Senator XENOPHON —Mr Norris, the RBA has announced nine increases since February 2009. Is it correct that, of the big four banks, your bank has been the first to increase rates on five of those nine occasions?

Mr Norris —I do not know specifically but I would not argue with that.

Senator XENOPHON —I think Westpac did once and NAB three times, making up nine. Can you explain why is it that the CBA has been first cab off the rank when it comes to increasing and passing on interest rate increases to consumers?

Mr Norris —We make decisions based on commercial reality and we have made a decision at those times to, obviously, increase our rates because our funding costs had reached a point where we felt that we needed to. I think it is fair to say that we have made that decision probably more quickly than our competitors in those five instances that you outlined.

Senator XENOPHON —Because you had more pressure and funding costs?

Mr Norris —I think it is fair to say that when the Reserve Bank increases the OCR all banks end up moving. It comes down to the timing of those moves.

Senator XENOPHON —And the extent of the movement as well; is that a function of your funding costs?

Mr Norris —It is absolutely a function of our funding costs.

Senator XENOPHON —The Australia Institute, in evidence earlier today, extrapolating from your 2009-10 annual report says that interest expenses fell as a percentage of both assets and liabilities. So you spent less money on interest in 2010 rather than 2009. How do you correlate that with the issue of increased funding costs?

Mr Norris —I will ask my CFO to comment on that.

Mr Craig —Interest expense and interest income dropped because the interest rates that the Reserve Bank set were lower. All they are reflecting are that the rates in the market during the GFC were lower because the Reserve Bank dropped rates and then they went up again. I think that is merely a reflection of the interest rate not the margins.

Mr Norris —The OCR fell through that period to three per cent and now has gone back up.

Senator XENOPHON —You are saying that overall it is still costing you more despite your spending less as a percentage of interest.

Mr Norris —The number is distorted. The main reason for that number is the fact that the Reserve Bank was decreasing the OCR.

Senator XENOPHON —We look at interest rates overseas in the UK, the US and Japan which are significantly lower than our interest rates. Can you understand that the public feels aggrieved when it comes to our level of interest rate rises compared to other countries?

Mr Norris —The decision on interest rate settings is a decision taken by the RBA. In the US, the net interest margins for banks have a three in front of them, rather than a two in front of them as they do in Australia. So the fact is, while the interest rates in the US may be down at less than one per cent on an OCR basis, the banks add on top of that a margin of over three per cent. Here in Australia, the banks add a margin that has a two in front of it, so our margins are more efficient than they are in the US but our rates are higher because of the OCR setting.

Mr Craig —Which is because the economy is stronger. High interest rates in Australia are a function of the fact that the Australian economy is strong. There are low interest rates in the US because they are still recovering.

Senator XENOPHON —You do not believe that, if we had a more competitive market, that would—

Mr Craig —It is not a question of competition; it is a question of the relative strength of the economy and the settings of the Reserve Bank and central banks in those economies.

Senator XENOPHON —So you do not think competition has any role to play in terms of the fees banks—

Mr Craig —The absolute level of interest rates in this country compared to the interest rates in other countries is a function of the health of the economy and the actions of the central banks.

Senator XENOPHON —But the margins?

Mr Craig —No, the margins are higher in the US than they are here.

Senator XENOPHON —Sure.

Mr McEwan —The other issue, Senator, is that Australia is having to borrow considerable amounts of money from those very countries that have the cash. We are having to import that money to support our home lending book, for example, and we are having to pay for that money. We do not get it at the rate of 0.25 per cent or one per cent.

Mr Norris —Because the money has to actually be swapped into Australian dollars and the interest risk has to be taken into account. So it is the hedging cost that actually gets the rates here up to where they are.

Senator XENOPHON —The Commonwealth Bank has a 33 per cent share in Aussie Home Loans. We heard some quite feisty evidence from John Symond yesterday in relation to that. Can you indicate to what level the Commonwealth Bank, with its 33 per cent shareholding, have a say in either the day-to-day running or the long-term strategic decisions made by Aussie Home Loans?

Mr Norris —We do not have any influence over the day-to-day operations of Aussie Home Loans. As you found with Mr Symond yesterday, he is very much his own man, and we have a representation on his board of two people out of six. John has 67 per cent of the vote; we have 33 per cent of the vote.

Senator XENOPHON —What about long-term issues—do you have a say in the long-term strategy of Aussie Home Loans?

Mr Norris —Mr McEwan here is one of our nominee directors on the board of Aussie Home Loans so maybe Ross would like to talk about that.

Mr McEwan —Very clearly, the day-to-day management of the business is done by John and his executive team. We have no involvement in that at all. All of our third-party relationships are at arm’s length with him. For example, the head of our third-party broker team does not sit on his board and has an arm’s length relationship. John is involved—

Senator XENOPHON —So you do not regard Aussie Home Loans as a subsidiary of the Commonwealth Bank?

Mr Norris —No, it is an investment.

Senator XENOPHON —You are aware that the government has, in terms of the AOFM’s involvement—

Mr McEwan —Correct.

Mr Norris —John certainly made me aware of that.

Senator XENOPHON —So your view is that they are not a subsidiary in any reasonable sense of the word.

Mr Norris —No.

Senator XENOPHON —Therefore, the decision made not to allow Aussie Home Loans to participate by virtue of your investment you regard as an unfair decision.

Mr Norris —I can see why John is aggrieved.

Senator XENOPHON —Do you regard it as an unfair decision?

Mr Norris —I think the decision should be reviewed.

Senator XENOPHON —Finally, going back to the issue of the percentage of bank funding costs, you are saying that in 2009 interest expense as a share of liabilities was 3.6 per cent and as a share of assets was 3.4 per cent. It has now gone down to 3.3 per cent and 3.1 per cent respectively. You are saying that is not relevant in terms of your costs of funding.

Mr Norris —It is the margin above. I think the issue here is that it fell on both sides, on the earning side and also on the deposit side, because of the impact of the OCR.

Senator WILLIAMS —Mr Norris, I think it was on 21 August that it was written up in the media that you said you were likely to raise rates above any Reserve Bank cash rate movements. Is that correct?

Mr Norris —I do not know where that was printed. There have been comments attributed to me which were attributed in error and have been—in the AFR, for example—retracted. So I do not know—

Senator WILLIAMS —Did you make statements to the media or publicly around August that the Commonwealth Bank may have to raise their rates above the Reserve Bank cash rate?

Mr Norris —I have certainly made comments about the fact that our cost of funding was continuing to increase and, obviously at some point, something would have to give—yes.

Senator WILLIAMS —Did you make those public statements to soften up your customers or to signal to your competitors that you would be moving above cash rates or to prepare the public for an injection of pain?

Mr Norris —There is a combination of factors. One is obviously our investors, and also our customers, but it was not intended to be what has become known as some price signalling device—no.

Senator WILLIAMS —It was not intended for that. The other banks would have said, ‘Hey, it’s pretty obvious that the Commonwealth Bank is going to move above Reserve Bank cash rates,’ and it certainly sends a clear message to your competitors, doesn’t it?

Mr Norris —I think it is fair to say that all of the bank chief executives have said at some point—including those of some of the smaller banks—that funding costs were an issue and have made similar statements. We see a situation where this is an industry-wide issue. It is not something that is specific to the Commonwealth Bank.

Senator WILLIAMS —We are talking about competition and banks. That is the reason for this committee inquiry. If you can raise your net interest rate margins, doesn’t that clearly show that it is not very competitive? If I have a retail shop in a street in a country town and raise my prices, that is certainly saying that there is not a lot of competition—if you are in an industry where you can do that.

Mr Norris —Senator Williams, I think we have already made it quite clear that, during this period of the crisis, our retail margins have actually dropped 15 per cent, so we have not had the ability to claw back that compression in our net interest margin in our retail bank. As we said earlier, where the overall margin has been impacted and either maintained generally or has come down somewhat, is through the higher risk premium than is being afforded to business. It is important to realise that we look back to the past and we will have another Basel III and all the rest of it. I do not think anybody should be of the view that we do not risk, in the future, another crisis in banking or finance. We have seen them previously. In the future you will see them, particularly if we end up in a situation where there is a propensity for people to lend money inappropriately and mispriced. Certainly, from my perspective, I make no excuse for being prudent. We are looking after our depositors’ money. Our depositors want to be able to come to the bank, get their money and have security of receiving that money back. It is up to us to make sure that we lend that money prudently and appropriately. Certainly, from the point of view of business banking—and this is where we have seen a significant amount of loss over the last three or four years—it comes back to having inappropriately priced for risk. Some of those transactions would not have been done if those organisations had to pay a price which was more equivalent to the underlying risk of what they were going to use that money for. I think it is particularly prudent for a banker in this day and age, particularly having seen what has happened over the last three years, to price appropriately for risk in business and institutional banking.

Senator WILLIAMS —If a small business wants to borrow, even if they put up their house for security, they pay a higher rate than, say, an employee of that business. Here is the situation: if I worked in a small business and earned $60,000 a year and my wife was earning the same, and I had a deposit, I could get finance far cheaper than the business owner could, but if the business goes broke I lose my income as an employee of that business. How is it that the business pays such a price and yet employees of the same business get a far cheaper rate when they borrow money? Are they both at risk?

Mr Norris —It comes down to probability of default and what the loss would be given that default. I will pass that question on to Mr Narev, who is the head of our business and private banking operation.

Mr Narev —Senator Williams, it is a fair observation and a discussion that we also had at the committee inquiry into the access of small business to finance in April.

Senator WILLIAMS —Exactly.

Mr Narev —We do have a differential of 50 basis points between a residentially secured business loan and a personal home loan. Through the crisis, that has been by some considerable distance the lowest of all the major banks, showing there is quite a bit of price competition in the market. The reason we have that difference, notwithstanding that there is residential security, is that over the long term—which is how we look at the probability of default for business lending—the difference in the likelihood of a default on a business loan, because it is taken out for business purposes, is roughly 50 basis points above what it is for a home loan. So, consistent with Mr Norris’s comments about the importance of pricing for risk, we add those 50 basis points to the standard variable home loan rate, and that gives us our residentially secured business rate.

Senator WILLIAMS —Okay. You were a witness at the Senate Economics References Committee inquiry into access to finance for small business, and one of the recommendations of that inquiry was that banks abolish exit fees. Now, we have already seen the National Australia Bank and ANZ abolish their exit fees. They may well have establishment fees. You would probably say, ‘If we abolish our exit fees before the four years are up then we will have to put on establishment fees.’ I know it stifles competition, because I went to change banks two weeks ago and it was the exit fee that prevented me from getting an interest rate that was ¼ per cent cheaper. So why have the two biggest bank lenders, the Commonwealth and Westpac, who have the greatest share of home loans in Australia, retained your exit fees?

Mr Narev —I will ask Mr McEwan to comment in a minute on residential loans. What I would add is that we do not have, and we have not had, exit fees for people with business loans. It suits some of our competitors to draw the committee’s attention to residential loans, not business loans, but our practice has certainly not been to have exit fees for business loans.

Mr McEwan —On the exit fees, Senator, I think it just shows the competitive nature of the business, to be quite honest. Different parties respond in different ways. We will be reviewing, as we do, all of our fees, because we have remained very competitive fee-wise and our aim is to stay that way. It is interesting to look at the statistics on people who make a different decision depending on whether or not there is an exit fee. Our stats show that about 10 to 11 per cent of people pull out of a loan in the first year, second year, third year and fourth year, even though there is an exit fee, and it is exactly the same number in the fifth year and beyond. So I appreciate your position, but the stats actually show that it is not a determining figure, particularly when that fee is one of the lowest in the market or has been traditionally. There have certainly been fees from the smaller nonbanks that have been very high, and that has been their competitive position—a lower interest rate but a very high back-end fee. We have chosen to stay with lower fee structures in our portfolios, and that has been our traditional position.

Senator WILLIAMS —Okay. My last question is on small business. I was in small business. It was a Saturday morning. I pulled out my savings account card and put it through an EFTPOS machine. I had my computer open. The EFTPOS was with the Commonwealth Bank, but I bank with St George. I took $5 out of my account and put it into my business. It was gone from my savings account within a matter of seconds. That was Saturday morning. It appeared in my business account the following Wednesday. This morning we heard Mr Strong from the Council of Small Business Organisations say he is with Bendigo Bank and he gets transfers every night—weekends, Christmas Day and everything. Why can’t you do the same; and why does it take three or four days when a weekend is included? Secondly, what happens to that money? It goes out of my account in one second but it does not appear in my business account until four days later. Where does it go?

Mr Narev —In terms of your question about why we cannot do it, we appreciate and have heard from businesses that they do want that—

Senator WILLIAMS —They certainly do.

Mr Narev —As part of the investment of over $700 million in our new core banking system, that will occur, and in fact—

Senator WILLIAMS —Overnight?

Mr Narev —Immediately.

Senator WILLIAMS —Seven days a week?

Mr Narev —Seven days a week. In fact, from the time that comes on board at the end of 2011, all of our merchants will get real-time recognition of their takings, even on a Saturday or a Sunday.

Mr Norris —I am pleased to say that we have now converted all of our retail accounts—all of our deposit, transaction, term deposit and savings accounts and high-rate internet accounts—to this new platform. We converted the last of those accounts last weekend and we now have all of our retail accounts operating in real time, so any transaction that takes place anywhere within our banking network will register instantly. We are the first to do that.

Senator WILLIAMS —Small business will be very pleased to hear that. Thank you.

CHAIR —Senator Pratt.

Senator PRATT —You would have to say that two out of six people on the board at Aussie would allow you to exercise a fair degree of influence, wouldn’t you?

Mr Norris —As I said, I do not think John is somebody who takes kindly to—

Senator PRATT —I am pleased that you have brought senior people along today, and indeed Mr McEwan is a member of the Aussie Home Loans—

Mr McEwan —I am a director of Aussie Home Loans.

Senator PRATT —Aussie has been a significant player in competition and it is clearly trying to beef that up. Surely you would want to be at the heart of watching what is going on there.

Mr Norris —We do not have any influence over pricing. That is something that is done by management and is outside of our control.

Senator PRATT —So what decisions are you actually participating in?

Mr McEwan —We have an agreement with John that any of the long-term strategic issues that involve capital—we do have involvement as John said yesterday but we do not have day-to-day involvement. Our board meetings, which are held every two months or six to eight weeks, revolve around the financials of the position, as we are a shareholder, and long-term positions for that business, not short-term daily.

Senator PRATT —The Treasurer has made it clear that RMBS funds should not go to big banks, in the interests of competition. Clearly, you are trying to put yourself at the heart of what your competitors might be doing.

Mr Norris —I think it is fair to say that we have no oversight on John’s business day to day. He has his own customer base. He has his own pricing. He operates independently in that regard.

Senator PRATT —And you will take a share of those profits.

Mr McEwan —Yes, we do as a 33 per cent shareholder.

Mr Narev —That is why we made the investment in Aussie Home Loans. When we made the investment, we saw a business succeeding on the force of its independence and John Symond’s personality. We would be cutting off our nose to spite our face to try and stop that.

Mr McEwan —John gets his funding from other parties as well, so he does not just look to the Commonwealth Bank. We are one that he will ask for commercial arrangements with just as he deals with other parties.

Senator PRATT —Nevertheless, you have placed yourself at the heart of what you are still arguing is one of your competitors.

Mr Norris —I do not know whether I agree with that.

Senator PRATT —When is the CBA going to lift exit fees?

Mr Norris —The whole point is we will review our fees as we do on a regular basis. When we have made a decision, we will make an announcement.

Senator PRATT —Is there a reason why unlike other banks, like the ANZ and NAB, you haven’t already done this?

Mr Norris —I would have thought that you would have liked the concept of a competitive market where people do not actually move in lockstep. I think just underscores the fact that the market is competitive.

Senator PRATT —Surely if you are offering a competitive interest rate then you could remove your exit fees to allow customers to stay with you because you are competitive.

Mr McEwan —I think you are picking on one piece of a very big jigsaw when it comes to selecting a home lender and why people go with an organisation. There are areas like service, establishment fees, ongoing fees and people take all of those into consideration when taking a home loan. You cannot just pick on one piece. When we do our reviews, we review it across the whole proposition and make sure it is very, very competitive as we have been.

Mr Norris —I would like to make the point also that we had the lowest exit fee in the market. Where there are many other lenders that have many thousands of dollars in exit fees, ours was the lowest, even of the major banks, and certainly lower than banks that have recently removed them. The point is: it is a competitive market and people will make their decisions based around their competitive position and what they are focusing on.

Senator PRATT —But part of that positioning is that you will lock customers in because of that exit fee so they are prevented from choosing a lower interest rate.

Mr McEwan —We have actually got the stats to show that that is just not a reality, unfortunately. There are some individuals that take that but, when you have got a low fee as we have had, I do not think that is the situation. I will give you an example: we purchased part of the Wizard Home Loans book about two years ago. That had very high exit fees on it and as part of that deal we negotiated to have those either withdrawn or reduced to a reasonable level. At the same time, we took that book and we reduced the price people were paying by one to 1.5 per cent to bring them down to the levels that our customers were getting at that time. We understand other players in the marketplace and their positioning, so our view is to make sure that we have got competitive rates right across but it is a package; it is not just one fee. I am very reluctant to be sitting at a Senate inquiry giving my fee structure and fee packaging and how we do it because we will make sure we are very competitive.

Senator PRATT —Why would you be reluctant to explain your fee structure—

Mr Norris —There are obviously issues for us with regard to ASX announcements about impact on profitability or things of that nature that have to be taken into account. If we are going to do anything, we would want to make sure that we carry out our obligations in that regard and also appropriately. At the same time, we are obviously looking at our competitive position across a whole range of products and services. It is interesting to note that we actually provide three million customers with fee-free banking. So we have a significant range of initiatives across a wide range of products and services which do make us very competitive.

Mr Narev —And 130,000 business customers who, as I said to Senator Williams, do not pay exit fees.

Senator PRATT —It is very difficult for consumers to make their own choices about fee structures when companies such as yours keep that information as tactically private as possible—

Mr Norris —That is not true, actually.

Mr McEwan —I am reluctant to tell you what we are going to be doing in the future, because that is something we need to work through and make sure it stays very competitive. All of our pricing is very open and disclosable. So our customers do get all of that information.

Senator PRATT —Could I ask what share of the Australian home loan market the CBA has?

Mr Norris —We have around 24 or 25 per cent.

Senator PRATT —The ACCC has said that there is strong evidence of major banks price signalling to each other that they are intending to raise mortgage rates. Could I ask what your response to the government’s proposed price signalling legislation is? Can you understand public cynicism at the crabwalk of interest rate movements when you are publicly commenting on your intention to raise rates and then other banks do the same?

Mr Norris —I think it is fair to say that we as banking organisations give a significant level of economic commentary. We have very significant economics departments in our organisations that provide economic commentary to businesses and a lot of commentators generally in the economy overall. Part of that is always going to have an interest rate dimension to it. It is like talking about where the price of oil is going to go, talking about where the price of precious metals is going to go—things like that. These are instruments that are critical to the forming of an economy, and I think the issue here is that if price signalling—as it is being described—is going to be part of the ACCC’s mandate to oversight the industry, then obviously if there is a new definition we will abide by that definition. But I think it is important to realise that the future direction of interest rates is something that is critical for a lot of parts of the market from an economic perspective to look at their own strategies and what that means. Retailers, for example, will look closely at what interest rate forecasts and projections are with regard to their future strategy in the short to medium term.

Mr Craig —Just to be very clear: we do not price-signal, and we absolutely have not had private discussions between banks about pricing.

Senator PRATT —I am not talking about private discussions. Mr Norris, you earn in a year what it takes 30 average Australians almost their entire working life to pay back to the CBA so they can own an average Australian home. Can I ask how the CBA justifies this? Can you understand how Australians feel anxious about the overall debate that we are having about competition between banks?

Mr Norris —Senator, firstly I will talk about my package—less than one-third of which I have actually received. Even so, that is still a significant number, but it is certainly not $16 million. That is a number that, if I were to hit all of my performance hurdles between now and 2014, I might well be fortunate enough to receive. But I would have to say that the chances of that are probably less than 50 per cent because of the fact that these are tough performance hurdles that are put in place appropriately by my board.

In regard to my remuneration, the remuneration is not set by me—it is set by the board, taking into account that we are an organisation that has 45,000 employees, operates in 12 countries around the world and has a very complex business model. That remuneration is then tested against the market by the board, by the board remuneration committee, which then takes, also, external advice on that particular level of remuneration—takes advice from them, so that they have professional advice. Then it is up to the shareholders of the organisation, the owners of the organisation, to make their decision as to whether or not they approve the remuneration package that is paid to me. It is interesting to note that 95.5 per cent of shareholders voted in favour of our remuneration report at our last AGM only a few weeks ago.

Senator PRATT —That did not get to the entirety of my question which was, I suppose, to compare that to the situation of your average Australian.

Mr Norris —I am just explaining what I can explain, all right?

Senator CORMANN —Mr Norris, do you at the Commonwealth Bank place an actual value on your Australian banking licence?

Mr Norris —Absolutely.

Senator CORMANN —Sorry?

Mr Norris —Yes. I mean, we would not operate without a banking licence.

Senator CORMANN —No, I mean: do you actually quantify the value of your Australian banking licence?

Mr Norris —Our business would have very little value if we did not have a licence. It is not valued in our books, though.

Senator CORMANN —Okay—so it is not an asset value. So what impact does your Australian banking licence—which comes, of course, with a regulatory framework, access to the RBA, prudential oversight and so on—have on your level of funding costs, compared to countries where, I guess, there is not the same stringent regulatory framework and prudential oversight?

Mr Norris —The first thing is that our costs of borrowing are determined, obviously, by our credit rating. The fact that we reached the point during the financial crisis where there were fewer than 10 banks in the world that had AA credit ratings, after there had been more than 70 banks in the world with AA credit ratings, was the significant determinant as to what we borrow funds at. So if we were rated lower than AA then there would be an increase in funding costs.

Senator CORMANN —So, essentially, in a comprehensive sense, your Australian banking licence contributes to a lowering of, to a downward pressure on, your cost of funds?

Mr Norris —No, it is that the business is assessed by the rating agencies as to the strength of the business, and they have a number of criteria that they will look at. The fact that we operate in Australia is one part of that, from looking at the economic situation, but certainly the major issues around rating are the resilience of the organisation, its sustainability and its ability to continue to generate reasonable returns and profits; those are the factors that are most relevant.

Mr Craig —I think evidence of that is: many of the smaller banks, of course, have banking licences, but they are having more difficulty accessing cheap funds. So it is a function of our credit rating.

Senator CORMANN —You have said before, and told us again today, that the banks’ funding costs justify the increase over and above the cash rate. The Treasurer, Wayne Swan—presumably based on high-level, senior, expert advice—has said that there is no justification for the increase in interest rates over and above the increase in the cash rate. Is the Treasurer wrong?

Mr Norris —I do not know where the Treasurer gets his information from, but I have to say that our information is contrary to that view.

Senator CORMANN —So you are saying that the Treasurer is wrong?

Mr Norris —I am saying that our information is contrary to the information that he has.

Senator CORMANN —So he is wrong?

Mr Norris —Well, he does not have our information. I go back to the fact that, at each time there has been an OCR increase, the banks have had a message that there is no justification for increasing rates. I will go back to the comment I made a little earlier in this discussion: Deputy Governor Battellino made, in his address back in December of last year, a comment that said that if the banks had not increased their rates over and above the level of the OCR the banks would have gone into loss. Do you know what would have happened if the banks had gone into loss? We would have had our credit ratings downgraded. We would have ended up in a situation where interest rates would have gone up significantly. We would have ended up, I think, in a situation that would not be dissimilar to some of the deleterious effects that we have seen in other economies internationally. So I just rest my case on that.

Senator CORMANN —Whenever the Treasurer has made these comments which you say are not consistent with your information, have you ever sought to correct him? Have you ever sought to swap notes with whoever is giving him his advice and whoever is giving you your advice?

Mr Norris —We have given briefings at various times to Treasury officials with regard to our funding costs and what is going on there, yes.

Senator CORMANN —Do you agree with the proposition that your bank is in effect too big to fail?

Mr Norris —I think this whole issue around ‘too big to fail’ is the fact that we are a bank that does not take that view. We are a bank that is run on the basis that we will not fail and the ‘too big to fail’ part does not come into it.

Senator CORMANN —Of course, there have been some very big banks overseas that have failed. If you look at what happened during the economic downturn, governments have rescued and subsidised banks directly and indirectly around the world.

Mr Norris —Poorly managed and poorly supervised banks.

Senator CORMANN —As we see in hindsight, yes.

Mr Norris —But, even so, I think it is fair to also make the point that what led to the unravelling in the UK banking market was not initially a large bank. It was Northern Rock, which was a relatively small bank but had a significant systemic impact on the UK economy. I think in this country we would have had difficulties even if we had had a smaller bank fail—and I think there was a real risk of that back at the time the government decided to put in the deposit guarantee. The issue does not really come down to the size of the bank. I think any banking situation where a bank fails has the potential to have flow-on impacts.

Senator CORMANN —So are you saying that all banks are in effect too big to fail?

Mr Norris —No, I am not saying that they are too big to fail; I think that there are ways and means that you make sure that you have a resolution process. I think that the Reserve Bank, APRA and regulators are well alive to that. My job as a chief executive is to make sure that the risk management systems and the way that we operate our business is such that failure is not an option.

Senator CORMANN —I totally accept that, but do you accept that the perceived likelihood that a government will bail out an important financial institution like yours if it were to get into trouble has actually increased dramatically—

Mr Craig —Lehman Brothers—a small bank in the US—was allowed to fail, and I do not think there is any doubt that, with the benefit of hindsight, the US regulators and US government would have bailed out Lehman Brothers had they realised what a psychological impact it would have on the market for a relatively small bank to collapse. I think there have been very big lessons learned around the world about the importance of having financial stability, and it is very difficult to predict what size is going to cause the problem.

Senator CORMANN —I have a few questions about your financial claims scheme. The wording in the legislation gives the government the right but not the obligation—it says ‘they may’—to ask other ADIs to help out in the event of a failure. How likely do you think it is that this right would be exercised?

Mr Norris —I think that it is a right that may well be exercised.

Senator CORMANN —I ask the question in the context of Steven Munchenberg, the head of the banking association, who made the assertion that the banking industry underwrites itself. Do you agree with that proposition?

Mr Norris —I think in this situation you would have a situation where the banking system would underwrite itself because the participants in the industry would be expected to help, solve and resolve the problem.

Senator CORMANN —Have you made provision for that contingent liability in your budget, in your balance sheet?

Mr Norris —If you look at the assets and liability profiles of banks here in Australia, you certainly see a situation where the assets and deposits are such that you would end up with a work out. It is similar to the situation that we found ourselves in when we bought BankWest. BankWest was, to a large extent, a failing bank. It would have been a failing bank if we had not bought it, because it was owned by an organisation that had carried out lending practices that were highly, I believe, inappropriate.

Senator CORMANN —Which bank was that?

Mr Norris —BankWest. So we took that bank on and we have restructured it.

Senator McGAURAN —Were the lending practices carried out by the parent—

Mr Norris —Under them.

Senator McGAURAN —or by BankWest itself?

Mr Norris —By BankWest, but both. I think if you have a look at the other subsidiaries that were owned by HBOS, the quality of lending in all of those entities was of a poor quality.

Mr Narev —And specifically, Senator, if we look at the way in which they did their business lending in Australia compared to the way we did it, there were significant policy differences which led in part to the difficulties.

Senator CORMANN —I am going to run out of time in terms of my line of questioning and I have some points I want to get to here. What I hear you say is that there is no quantification of the potential exposure for a call to be made on ADIs to help out others in the event of a failure.

Mr Norris —Typically, banks fail mainly because of issues around liquidity. Normally, you are still able to collect on loans which the deposits are supporting. So I think the issue here is that these workouts take time. We have seen in the past that that happened with the State Bank of Victoria when Commonwealth Bank acquired that, which was a failing bank, back in the early part of the 1990s. So these sorts of problems and issues have been resolved before. At a point where a larger bank which has the ability to raise liquidity to support the liquidity needs of the failing institution it can be done.

Senator CORMANN —But does that in effect mean that the Commonwealth Bank would have to guarantee all the net deposit liabilities of any other ADI in the event of a default?

Mr Norris —No, that is not the case with this.

Senator CORMANN —But that is the effect of the legislation, isn’t it?

Mr Norris —The legislation gives an outline of a process, and I think that that process is one that—

Senator CORMANN —If banks don’t underwrite each other’s net deposit liabilities then the banks do not really underwrite each other in the final analysis, do they?

Mr Norris —The banks have a means by which they can come to assistance, but I do not think you can take the view that the banks are providing an open cheque.

Senator CORMANN —But if you look at what governments have done when HIH collapsed, and there have been other significant collapses we have discussed, do you believe it is more likely that future governments will use taxpayers’ money to bail out collapses in the future or do you think they are just going to make an unlimited call on banks like yours?

Mr Norris —I think you have seen with the bank failures that have taken place in this country over the years that there have not been too many situations where government money has been used to bail them out. We have had a number of entities that have largely failed: State Bank of Victoria, Bank of SA—

Senator CORMANN —Who bailed them out?

Mr Norris —They were taken over by other institutions.

Senator CORMANN —Who then essentially covered the whole cost?

Mr Norris —Exactly.

Senator FIELDING —On Sunday, with the Treasurer’s big announcement of the banking reform package, unprompted and on his own he made a clear statement, which I raised on Monday and was raised before, that the banks were not justified in lifting their interest rates above the official Reserve Bank’s movement. You have made it clear today that you disagree with that statement. But can you see why the Australian public are left guessing who is right on this issue?

Mr Norris —Certainly I can understand the angst and certainly I got caught up in the maelstrom of this, because it became very personalised rather than actually debating the issue. I think the point is that we have provided, repeatedly, proof that our funding costs have increased. Our funding costs and our depiction of those funding costs are audited independently by an external auditor and we are prepared at any point to stand up under public scrutiny on that. I have a chart here, which my chief financial officer has, which clearly and graphically explains that.

Senator FIELDING —Is that the one that actually shoots up a bit towards the end? They have come down but they have gone back up. Is that the chart that says ‘Major banks net interest margin’?

Mr Craig —No, that is the margin one.

Mr Norris —The issue is you have to remember that through the crisis the Reserve Bank—

Mr Craig —Have we got that one?

Mr Norris —Yes, that is the one that I am referring to.

Mr Craig —Which we included with our media release when we put the rates up.

Senator FIELDING —Clearly what has happened is that the Treasurer made this statement as recently as last Sunday. You are saying that you have been justified in your position since November.

Mr Norris —Throughout the whole crisis I have made the point that our funding costs have increased. And I made the point when we made our announcement on 2 November that it was due to the fact that our funding costs had increased and in fact our retail net interest margin had actually reduced 15 per cent over the period of the GFC.

Senator FIELDING —So, rather than us debating it here, what if the Treasurer and his department wanted to sit down with you for you to convince the Treasurer—

Mr Norris —Absolutely.

Senator FIELDING —and for him to come out and say: ‘I’ve sat down with the four CEOs of the banks. I’m now convinced that they’re right’? Because the Australian public are left guessing. They are thinking: ‘These greedy banks!’ The Treasurer again on Sunday said you were not justified and in essence we are left feeling that we are being ripped off. So you can see how urgent this is, because the Australian public believe the banking reform package is going to help in that regard with fixing some of the home loan interest rates.

Mr Norris —As far as interest rates are concerned—and I am very conscious of potential price signalling et cetera—there is no doubt that if you talk to any economist in Australia the view of the economist will be that interest rates will increase by somewhere between 75 and 100 basis points over the passage of the next year, and that will be driven by the central bank, not by us.

Senator FIELDING —I have one question on price signalling, but that was a ‘yes’ that if the Treasurer did call and ask the bank to front up and go through the detail then you would open up your books to show why you were justified?

Mr Norris —Yes.

Senator FIELDING —Okay. Hopefully the Treasurer will pick up the phone and actually call.

Senator WILLIAMS —Don’t hold your breath.

CHAIR —He said he already has.

Senator FIELDING —With regard to price signalling, back on 4 November in the Australian it was reported—not your bank—that the ANZ CEO had made some statements clarifying some earlier statements about the bank being reluctant to increase home loan rates over and above the Reserve Bank rates. The CEO of ANZ, Mr Smith, subsequently clarified his remarks by saying: I don’t want to be ‘stuck on my own’. That is a huge concern to me and the general public when we hear statements like that—when we say we have great competition and then we have a CEO of one of the big four banks saying things like ‘I don’t want to be stuck on my own’ when it comes to interest rate movements. You can see the concern that the Australian public have in this regard. Do you think that this move outlawing price signalling in the banks is a good move by the government, or not?

Mr Norris —As far as Mr Smith’s comments are concerned I did not see them; I have not seen that particular article. But obviously Mr Smith will be here this afternoon, so I am sure you will address that issue with him. Certainly I think, as far as price signalling is concerned, there are, as I said, legitimate reasons why anybody should be, from an economic commentary perspective, looking at interest rate outlooks.

Senator FIELDING —But what sort of competition is there when everybody basically follows each other with interest rate movements? People are left feeling ‘Why change’—and, by the way, I should declare I do bank with CBA—‘to another bank when basically they are all the same?’ That is how people are left feeling.

Mr Craig —We are all competing for funds in the same market and the costs are going up. Everybody has got different funding structures, and you will note that the different banks put up their rates by different amounts presumably because their funding costs are a little different, but at the end of the day all that we have tried to explain—and interestingly I think you have done a very good job of pointing this out as well—is that our costs are going up. There is a risk clearly with this legislation that we will not be able to explain that as clearly in the future because it will be seen to be price signalling. But from our investor point of view and our continuous disclosure point of view we think it is important that we are able to explain what is happening with our business, and obviously you believe that as well from the point of view of the Australian public understanding these costs.

CHAIR —I know we are over time, but we will just take a little bit more time and hopefully we can wrap it up.

Senator BRANDIS —I just wanted to tidy up two things very quickly, please, Mr Norris. Let me start where Senator Fielding left off on price signalling. It seems to me price signalling is one of those phrases that people throw around without necessarily there being a common view about what it means. You do not understand price signalling to mean, do you, merely making predictive statements about possible future movements in rates?

Mr Norris —I do not see that as being price signalling.

Senator BRANDIS —No. I do not know if you have had an opportunity or your senior officers have had an opportunity to look at Mr Hockey’s bill which deals with this issue, but you would be aware, if you had had the opportunity to have a look at it, Mr Norris, that in any event the prohibition that it would institute is subject to not only a competition test but a double competition test so that the breach operates upon there being both a purpose of substantially lessening competition in a market and the affect of substantially lessening competition in a market. You would not be concerned, would you, about a prohibition on anticompetitive price signalling that was subject to a strict competition test like that?

Mr Norris —I would not have any problem with that.

Mr Narev —Senator, can I just add one comment on that.

Senator BRANDIS —Yes.

Mr Narev —Mr McEwan and I both sit in pricing committees in the retail bank and the business bank where we make recommendations and ultimately discuss them with the chief executive. In making these decisions we do not trawl through these newspaper articles and see what the chief executives have said. If we work in an environment where under any form of legislation for any reason these comments cannot be made anymore, it will not affect in any way the pricing decisions that we make. We simply do not refer to them.

Senator BRANDIS —I would not want it to be thought that there might be a chill effect on you making appropriate predictive statements to the market either. You do not apprehend that, if it is subject to a strong competition test, it would have such a chill effect?

Mr Norris —With the appropriate test. I do not see that we have been indulging in price signalling and that has never been the intention. I can see how some people would interpret it that way. As Mr Narev has just said and in Mr McEwan’s case, when both of them make decisions with their pricing committees, they will make them based on the economic fundamentals of the business not based on some comments that have been made by people in the marketplace.

Senator BRANDIS —Indeed. Secondly, can I go back to the issue of exit fees. I do not know if you had the opportunity, Mr Norris, to listen to or have a look at the evidence from Jonathan Mott from UBS to this committee yesterday afternoon in Sydney. He made a point, which I must say as a noneconomist struck me as a fairly important one, of the importance of the stickiness of deposits to the stability of the system. If I understood him correctly the point that this particular economist was making was that, if capital flows can be too mobile and deposits can go from one institution to another too easily, then, particularly at a time of panic, it could create a risk of destabilising institutions from which those deposits might be very swiftly withdrawn. He put this in the context of the trade-off that you rightly identified in your opening remarks between pure competition on the one hand and stability on the other hand. I wonder if you would care to address that, Mr Norris?

Mr Norris —I think that that is a valid point. Generally when you find banks failing it is the liquidity issue that occurs because they do not have sufficient liquidity to meet the depositors’ demands for their deposits to be returned. As we know banks borrow and then intermediate and provide loans on the other side of the balance sheet. You cannot liquefy you loans fast enough to be able to satisfy all of your depositors turning up on the same day wanting their money back. Therefore, if you do have a situation where competition is driven to the point where you get this flow of deposits through the system with such a velocity that it does start to threaten the liquidity availability of any given bank, then, yes, that is a very bad outcome.

Senator BRANDIS —So if I put it in layman’s terms: the stability of the system depends, among other things, upon there being up to a point some brakes upon the capital flows.

Mr Norris —I think there is the need for some brakes but the real critical issue that leads to that sort of outcome is always through a crisis of confidence. Generally, it is a situation where the market has concerns about the institution that then becomes widely known in the community or rumours get spread around which leads to a panic that these two people were not wishing to withdraw the funds. That is why we have a range of different types of deposits and funding durations in order to make sure that our funding profile is diversified not just by type but by duration in order to protect against that situation of having the potential for withdrawals to happen instantly across all of your business. Every bank endeavours to make sure that its funding profile is a diversified one.

Senator McGAURAN —I have a couple of quick questions. I cannot help but decipher that the only time you hear from our Treasurer is down the barrel of a camera. You speak to his officials but not to the Treasurer himself. Given that you have led the charge on five occasions, we hear, on lifting the rates higher than the cash rate movement, has the Treasurer met you or picked up the phone to you on any of those five occasions?

Mr Norris —I would not like anybody to have the view that I do not have any discussions with the Treasurer at all. I talk to the Treasurer from time to time and certainly I have made sure that he is aware of our interest rate positioning. The fact of the matter is, as has been stated, he generally does not agree with that.

Senator McGAURAN —Are these times when you bump into him at a cocktail party or are you sitting at a desk discussing the matter?

Mr Norris —I have had meetings with him in his office. I have had discussions with him on the telephone.

Senator McGAURAN —In your introduction—I feel I have to jump in here and defend competition.

Mr Norris —I am a great believer in competition.

Senator McGAURAN —I am not sure you are because between you, the Reserve Bank and the other majors—or not enough; I should not say you are not—there is a catchcry that there is a trade-off between competition and stability, and too much of that trade-off and you get the GFC. But the GFC had nothing to do with competition. Competition at its base is many players in the market. The GFC had everything to do with—and you went on to say—poor lending criteria led to subprime lending, mispricing of credit. Isn’t there a trade-off between less regulation and stability? Competition has nothing to do with it. If you had double the players in Australia during the GFC, you would have got the same result.

Mr Norris —There is an interesting series of analysis on this—I think it is Bain that has done this analysis in the UK—which points to the problems in the UK banking system were largely due to unbridled competition that led to the failure of Northern Rock.

Senator McGAURAN —That is lack of regulation.

Mr McEwan —No, competition. Maybe we can forward a copy of that particular review to you.

Senator McGAURAN —Please do so. So competition is fewer players in your eyes.

Mr McEwan —No. Competition is a situation where you get competitors that tend to misprice, and when they misprice you end up in situation where the stability of the system is put at risk. If you look at what has happened through the GFC, a significant part of the reason for that has been due to mispricing and—

Senator McGAURAN —Bad management.

Mr McEwan —A combination of factors, but mispricing is generally due to bad management.

Senator McGAURAN —Not competition.

Mr Norris —But competition, to take a short-term competitive view—

Senator McGAURAN —Competition is not mismanagement.

Mr McEwan —over competition.

Senator McGAURAN —We beg to differ. I say competition is not mismanagement. I read in the Financial Review—creditable, I suppose. It says that companies such as—we move from the small end to the big end of town now—Woolworths, Tabcorp, Westfield, BHP are now accessing funding offshore. I do not know whether that is a developing market, a returning market or it has always been there. If the big end of town has this access, that is competition and real competition against you.

Mr Norris —Sure. What has happened is that obviously during the crisis we saw a situation where Australia had a heavy reliance on offshore funding. So we have a small number of borrowers who, roughly speaking, borrowed a fairly significant amount of money and therefore there are funders out there, providers of funds, who look to diversifying their funding profile.

Senator McGAURAN —Is that a developing market or has it always been there?

Mr Craig —It is a returning market.

Senator McGAURAN —The Treasurer tells us that the two key points of his reform—covered bonds and exit fees—will bring down interest rates. I heard you say before that you have factored in an increase in interest rates. Will you be looking at your predictions or estimates or expectations in the light of these reforms and, therefore, in bringing down your expectations, interest rates will rise?

Mr Norris —I think it is fair to say, as I said initially Senator McGauran, that my view is interest rates will continue to increase and they will increase primarily because the Reserve Bank will move the rates up.

Senator McGAURAN —Regardless of these reforms?

Mr Norris —Because of the fact that the Reserve Bank is responsible for monetary policy. If the Reserve Bank has concerns about inflation and the speed of growth within the Australian economy, they will make movements. I think it is fair to say that all economic commentators and major economists in Australia are predicting an increase in interest rates over the next 12 months.

Senator McGAURAN —So the Treasurer is wrong. You were speaking about Aussie Home Loans and in the backdrop of my belief that competition is many players, what is your control over BankWest interest-rate policies et cetera? Is it an independent entity?

Mr Norris —BankWest is a 100 per cent owned subsidiary of the bank. As a result, we have oversight of its risk policies, its general financial reporting and the like. We do allow BankWest to price their products as they see fit, given that there are certain return hurdles we are looking for as a shareholder. How they achieve that and pricing is up to them. You will see that BankWest pricing is not consistent with Commonwealth Bank pricing. What we have done is provide equality across the group and the fact that our transfer pricing between our retail bank at Commonwealth Bank and what is done at BankWest is consistent. So the provision of funds that come from the core of our organisation and are provided to BankWest are done on exactly the same basis but they do have a different pricing strategy from that of the Commonwealth.

Senator McGAURAN —And you indicated today that basically it was a merciful takeover not a good investment at the time.

Mr Norris —It was always going to be a good investment at the right price.

Senator McGAURAN —Of course it was. From mythology it was a merciful takeover.

Mr Norris —To be fair, we have to provide $17 billion in funding which no other organisation could have provided at that time in taking that organisation over.

Senator McGAURAN —Or it would have collapsed.

Mr Norris —Yes. Potentially it would have collapsed.

CHAIR —Thank you for the Commonwealth Bank in assisting us today. Thank you also for your forbearance in terms of time.

Proceedings suspended from 12.24 pm to 1.07 pm