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Economics Legislation Committee
Australian Prudential Regulation Authority

Australian Prudential Regulation Authority

CHAIR: Welcome. Dr Laker, would you like to make an opening statement?

Dr Laker : I have a brief opening statement. When we appeared before this committee last October, the world was bracing for a major aftershock from the global financial crisis that had erupted four years earlier. To recall, global financial markets were rapidly losing confidence that policymakers in the United States and a number of European countries had the capacity to restore their public finances—and, in the European case, their banking systems—to a surer, a more sustainable footing within a reasonable time frame. There was increasing pessimism about global growth prospects accentuated by fears of a hard landing by the Chinese economy. The loss of market confidence was reflected in bouts of severe turbulence in global equity markets, falls in commodity prices and dislocation in wholesale bank funding markets particularly for unsecured longer term debt. These developments were the background against which the IMF in January downgraded its forecast for global growth, and the IMF managing director warned dramatically of the dangers of easily sliding into what she called a '1930s moment'—a moment where trust and cooperation break down and the global economy faces a downward spiral.

These developments were the background as well for my confirmation to the committee that APRA remained on heightened alert status. As I outlined, our particular focus was the potential funding pressures on Australian banks via any continued dislocation of global funding markets and the exposure of the insurance, and superannuation industries to the volatility in global and domestic equity markets. Fortunately, the extremes of pessimism have begun to lift since the new year. Global financial markets have had some positive news to absorb. In particular, the US economy is showing firmer signs of recovery, the Chinese economy appears headed for a soft landing from earlier overheating pressures while still recording strong growth and European governments individually and collectively have taken further steps in shoring up support mechanisms for the euro, improving fiscal discipline and tackling fiscal deficits. In addition, large-scale market operations by the European Central Bank have been instrumental in improving liquidity in the European banking system and bolstering market confidence.

The lift in market sentiment has had two immediate benefits for APRA regulated industries. Firstly, improved conditions in global bank funding markets have enabled the larger Australian banks to step up bond issuance and all four major banks have now commenced their covered bond programs. As the Reserve Bank of Australia has noted, however, spreads on bank debt are significantly higher than they were in the middle of last year. Secondly, global and domestic equity markets have firmed and volatility has returned to average levels or below. These are positive developments for the capital position of the insurance industry and for investment returns in the superannuation industry.

All that said, there have been earlier false dawns during this protracted global crisis. Market sentiment is fragile and will remain so, certainly until European governments can demonstrate tangible progress in dealing with their sovereign debt crisis. Looking through these market gyrations, as a prudential regulator must do, the current operating environment presents a more general challenge for the Australian banking industry. This was highlighted in our 2011 annual report which was tabled shortly after our last appearance before the committee. Our message bears repeating: the challenge is coming to terms with life in the slow lane. The Australian economy is expected to grow at around its trend pace over the next couple of years; however, if the current cautious approach of households and businesses towards taking on additional debt persists, authorised deposit taking institutions are very likely to be denied the strong balance sheet growth that supported a sustained period of profit increases before the crisis. In these circumstances, boards of management may be tempted to chase unrealistic expectations for returns on equity by assuming more risk—through lowering credit standards or seeking new and unfamiliar markets where they may have little comparative advantage—or by aggressive cost-cutting that may weaken risk management capacities. These temptations must be resisted in favour of more measured strategic ambitions.

A quick update finally on prudential policy matters. Since we last appeared before the committee APRA has released its proposals for implementing the Basel III liquidity reforms. These global reforms address a number of weaknesses in liquidity risk management that came to light during the global financial crisis. We are currently consulting on our Basel III capital and liquidity proposals and they were the subject of a major industry workshop in November. APRA has also begun a third, and we hope final, round of consultations on its review of capital standards for the general and life insurance industries. APRA has also been consulting on its proposals for prudential standards for the superannuation industry. We plan to release draft standards once legislation to enable APRA to make prudential standards for superannuation has been considered by the parliament. Thank you.

CHAIR: Thank you.

Senator WILLIAMS: I have given APRA my questions on notice. If they have printed out the answers I am happy to take the print form, and not ask questions.

Dr Laker : We have some of the answers. Some of the data we do not collect. Some of the data we collect only under confidentiality arrangements and we do not publish. Some of the other data we can provide for you. We have some of the answers here, but in the normal course there is a protocol for us to respond to questions on notice.

Senator WILLIAMS: Just send them to my office as best you can. Thank you.

Senator WATERS: Dr Laker, QT Mutual Bank provides an interest rate that tracks their mortgage interest rate to the Reserve Bank's cash rate. Are you aware of any other banks that provide such a product?

Dr Laker : We do not monitor individual products, prices or offerings by individual institutions.

Senator WATERS: Do you have any prudential concerns about such products?

Mr Littrell : The issue with most variable rate home loans in Australia is the lender sets the rate so they do not have a risk of some other benchmark rate moving against them. With a tracker loan that risk does exist because if the RBA rate moves, in this example, much lower than that particular lender's cost of funds, they cannot do anything about it. However, in our capital rules there is a calculation we perform that addresses that issue. So if that turned out to be a large risk for any given institution, they would have to hold more capital to cover that risk. I cannot comment on the specifics of that one institution. There is a known risk. It is not actually that big and there is a process by which we cover it.

Senator WATERS: Can you tell me a little more about how you would address those risks? He mentioned requiring banks to hold more capital. Are there any other sorts of examples?

Mr Littrell : The risk we are speaking about here is something that would be caught in something called interest rate risk in the banking book, and it is called basis risk. In our prudential standards there is a series of methods of calculating basis risk. Beyond that, it would probably take more time than we have tonight to explain how we would actually reach that number. It is a known risk; it is something we keep track of.

Senator WATERS: If you could possibly take that on notice and table a little more information about the concerns you have about such products, how you address those concerns and how you quantify them, that would be great. Has the introduction of covered bonds lowered the cost of funding for the major banks?

Dr Laker : We do not track individual cost of funds. The Reserve Bank has said that they will be issuing a discussion of trends in the bank funding costs in their March bulletin, and that will be where they will be able to draw that data together, but that is not—

Senator WATERS: Sure, but I think all four of the majors have now done so. Has that come to your attention?

Dr Laker : I am certainly aware of their funding programs. I direct you to the Reserve Bank. First of all their statement on monetary policy, which came out last Friday, has the interest rates for all of the covered bonds that were issued by the four banks and a comparison of how these spreads have moved. They are drawing all that data together in an article in their bulletin next month. I think you will find that will answer that.

Senator WATERS: So in that interim period, do you have a view on whether that will have lowered the costs to majors?

Dr Laker : We are not tracking daily data on those costs.

Senator WATERS: Are there any indications that that has flowed through to consumers?

Dr Laker : We are not monitoring that. That is not our bread and butter work.

Senator WATERS: Okay. I am interested in whether any of the smaller banks have issued covered bonds, to your knowledge?

Dr Laker : No, only the four major banks.

Senator WATERS: Okay. Thank you.

Senator SHERRY: At the conclusion of your opening statement, you referred to the new prudential standards, which obviously have yet to pass parliament. Can you outline, in summary form, how APRA see that as being to the advantage of superannuation fund members and the key areas where you have commenced work or are considering work given the foreshadowed new prudential standard making powers?

Dr Laker : I will ask Mr Jones to respond in full, but I will make a general point. We issued a discussion paper on the potential prudential standards that we had in mind for the industry that we believe would raise the standard of our supervision of the industry to the standard that we apply to the other regulated institutions and, in that way, provide a stronger and safer superannuation system. Mr Jones has been working on these issues very closely.

Mr Jones : We have the standards making powers in the other regulated industries and not in superannuation. The consequence of that has been that the superannuation industry has probably been a little underdone in terms of the regulatory powers. In anticipation of legislative change that would give APRA standards making powers and with the approval of government, we issued a consultation paper last year and we now have the responses to that consultation paper. The main area that we are doing work on is governance: operational risk requirements; investment governance risk management; conflicts of interest, and fitness and propriety; and there will also be some additional standards surrounding defined benefits funds and a little on insurance as well.

We have completed the first stage of the consultation process and the next stage is that we will issue a response to the submissions. We will also issue the draft prudential standards for industry consultation and I hope that we will manage to get that out by about Easter.

Senator SHERRY: When these changes come to finality, how do you see them improving things? There has been a general reference to safety prudential et cetera. How do you see them contributing to the improvement of the retirement savings of individual members?

Mr Jones : Because the nature of most superannuation is defined contributions, no specific promise is made, unlike the other industries that APRA regulates where you are focusing on a specific promise. In banking, the promise is that your money is there at the end of the day if you want to withdraw it from the bank. With insurance, it is the promise that if you need to make a claim it is there. With defined contributions, because there is no specific promise you focus very much on the behaviour of the trustees because they have a huge impact on what the member ultimately receives. In the case of superannuation, we probably have not had the same powers we have had in the other industries. The types of powers we have in superannuation are very tough in the sense that the main power we have is to wind up a fund or remove trustees. I said to somebody recently that it is like not having conventional war instruments, only an atomic bomb, and what you need is a series of greater responses like we have in other industries. I think the industry will find it much better as well, because they will be able to deal with APRA in an more effective way because there are a series of greater responses that you can get via standards.

Senator Sherry: Do you believe that from this work—and I broadly agree with the work you are doing—one consequence will be greater pressure on some funds to merge because they do not have the ability, capacity, size et cetera to deal with the set of issues you are considering and other reforms that are moving through?

Mr Jones : It is difficult to say, because there has long been a trend towards greater consolidation. One of the most interesting things was, in 2004-06, we did a complete licensing, the first licensing of superannuation funds. That led to a substantial number of mergers when many smaller funds decided that their systems of governance probably were not appropriate for the current environment. My guess is that with every industry each time you introduce these types of arrangements—particularly in the case of corporates—you may find that corporate trustees say that is not their core business and they will leave it to professionals. We have seen the number of trustee licences fall from around 320 to 330 when we completed the licensing to around 270 now. I would imagine that we will continue to see consolidation. The other element is that the government has requested that APRA start looking at issues of scale over time. Consequently, the focus of that will be that if it appears that you are very small and your returns have been inadequate, as we find in other industries, you will be pressured to look for merger partners.

Senator SHERRY: Will APRA consider the issue of the tax liabilities which may result from the fund mergers? I understand that has been a contentious issue.

Mr Jones : I understand that, but it is really not an APRA issue.

Senator SHERRY: I know it is not. But if APRA comes to the conclusion that a fund merger is necessary for whatever reason, and you have effectively said it needs to be done but it cannot be done, is there any anticipated role for APRA to give advice to government about the tax implications where something has occurred beyond its control as a result of other regulatory change?

Mr Jones : I think that would be part of the normal process in the sense that we have regular liaison with the ATO under those circumstances and also talk to Treasury about why there may be tax implications and what the implications of not merging might be.

Senator SHERRY: Finally, I was refreshing my memory of the Wallis inquiry. Some of the issues you are now dealing with, as well as the licensing issue, were dealt with in Wallis. I assume you have not been able to respond to at least some of the Wallis inquiry recommendations because you did not have the power or the authority.

Mr Jones : It is a very, very long time since I read Wallis.

Senator CORMANN: Does APRA keep risk registers of financial institutions as suggested in the Sydney Morning Herald in an article on 27 December?

Dr Laker : We have been monitoring risks since our establishment. We do have risk registers, but we have been monitoring risks and directing resources within APRA to address those risks from our inception. At the moment they are documented in a form called a risk register.

Senator CORMANN: This article says that the first of these registers was set up in November 2008. Is that right? It seems odd that you would not have kept these sorts of risk registers on an ongoing basis.

Dr Laker : We have formalised the process over recent years.

Senator CORMANN: In November 2008?

Dr Laker : I did not see that article and I do not know where that date came from. As I say, we have had evaluations of risk from the inception of APRA. That is what we do for a living. The way in which it is formalised and organised in APRA has changed over recent years and we have certainly put a different structure around that, but we have not changed the way we go about our operations, fundamentally, over the last few years.

Senator CORMANN: It sounds like the Sydney Morning Herald sought access to those risk registers under FOI. The FOI request was rejected and that decision, incidentally, was confirmed by the Freedom of Information Commissioner. The basis for that was that releasing those risk registers may affect the stability of Australia's economy. Is there something about the risks that you are monitoring that we should know about, in terms of the risk profile of our financial system?

Dr Laker : If, in principle, we have concerns about emerging risks in an industry we articulate that in the annual report, in our speeches and in our publications. We are not coy in drawing attention to emerging risks in industry but the documentation we have in APRA contains very sensitive information on individual institutions, for example, which under our legislative requirements we cannot disclose and would not wish to disclose. Fundamentally, APRA deals with a very precious commodity, which is called confidence. The legislation protects that precious commodity. If we have an issue that we want to raise with industry, we raise it with industry. They know where we are coming from.

Senator CORMANN: Sure. It was a very strange article, I guess. There was another quote from general counsel Warren Scott of the dangers to the economy if registers were to be released:

In my view confidence in the economy might be undermined if the potential emerging risks and APRA's discussions and approach were disclosed.

You say you are not shy in talking about them in your speeches and in your other comments.

Dr Laker : We choose the timing of our discussion of these risks and we choose carefully the language in which we can express them. But in our internal documentation we are quite frank with each other about what we are doing. That is the way APRA does its work—behind the scenes.

Senator CORMANN: Let me ask the question a different way. In APRA's perception of the risk profile in our financial services sectors—the banks, insurers, superannuation funds and so on—is there anything that would concern you beyond your normal routine? Is there anything significant, that would go beyond your normal level of audit and addressing risks as they come along? Is there anything out of the ordinary that you are concerned about?

Dr Laker : In what?

Senator CORMANN: In relation to the stability of our financial system.

Dr Laker : I am not sure I understand the question, but—

Senator CORMANN: If you are maintaining all of these risks on risk registers, and there is information on those risk registers that if it became public would have a systemic effect on the industry which may affect the stability of Australia's economy—that is what the general counsel of APRA says--is there information there—

Dr Laker : A lot of that information draws from our interaction with the individual institutions. There are dealings with institutions which we do not discuss in public. There are risk assessments we make of individual institutions that we do not make public or allow our institutions to make public. The fundamental reason is the danger of market overreaction. We can generate a problem in the attempt to deal with a problem. We are a behind-the-scenes regulator. That is our strength and that is a very important part of what we are there for.

Senator CORMANN: One thing is the problem becoming public; the other thing is the problem being there, even if it is not public. What I am looking for is whether, fundamentally, you are confident that everything is under control based on the job that you are doing behind the scenes.

Dr Laker : Senator, you will have to judge us on our record. To date, I am proud of the record. I think we have worked very effectively behind the scenes to address specific problems and more general problems. We really want to anticipate problems, not turn up after they have become manifest. That is the distinguishing characteristic of a prudential regulator: it attempts to be forward looking, anticipatory. I would be delighted if the public never knew there was an issue, because we had been able to sort it out. Where we see industry-wide risks emerging, we will alert the institutions to those risks and we will make them public. Unfortunately, the annual report came out after I was last before the committee. For example, in there I made it very clear that we had written to the boards of the larger authorised deposit-taking institutions on the subject of credit quality because we had seen market developments which we really wanted to head off at the pass. We put our concerns to the boards. We had responses from the boards that essentially allayed those concerns and in the annual report we explained what we were doing. That is the way we operate. I think we have been effective in that approach.

Senator CORMANN: It is great. I think you have been. In relation to the life and general insurance capital review, you undertook a second quantitative impact study—I think we have discussed this issue before—to assess the likely consequences of changes to the regulatory capital regime. I understand that APRA found that the initial proposals would increase overall capital requirements across both life and general insurance industries, with quite a significant variation impact across individual insurers. Is that a fair—

Mr McLaughlin : Yes, that is fair.

Senator CORMANN: How significant was the overall increase in capital requirements?

Mr McLaughlin : That is after the initial one?

Senator CORMANN: No. Where did you start? Where are you now? What are we looking at?

Mr McLaughlin : The initial round was quite high. For the second round, if you think in terms of about 10 per cent increase in capital—

Senator CORMANN: How will insurers meet that increase in capital? Is it going to be a matter of increasing the total capital or are insurers only going to reduce their conservative buffer?

Mr McLaughlin : It could be either. The general insurance industry, as an example, runs at about 1.75 times the minimum. It is quite a big buffer at the moment.

Senator CORMANN: If they have the buffer anyway, what is driving the need to increase?

Mr McLaughlin : They do not have to hold that buffer. We set the minimum; they set the actual figure. They choose where they pitch the actual figure.

Senator CORMANN: What would be the response in financial markets if insurers either reduce their buffer or need to seek additional cover?

Mr McLaughlin : They are reasonably conservatively capitalised at the moment. If that capital coverage reduced a little bit, I do not think that would cause a great deal of concern. Likewise, if they raised capital over a period of time, I do not think that would cause a great deal of concern either.

Senator CORMANN: Obviously it is a discussion that we had in the context of the banking inquiry—the balance between stability and keeping things affordable. You would be aware through media reports and through what you know in the industry yourself that there has already been a significant increase in insurance premiums in recent years. Do you expect that this increase in capital requirements will flow through to increased insurance premiums in the years ahead?

Mr McLaughlin : It could, but there are various forces at work driving the premium rates, including reinsurance costs. I am sure that you understand that reinsurance costs have gone up quite significantly over the last 12 months or so.

Senator CORMANN: Reinsurance costs, as I am told, are not actually that large a proportion of the insurer's cost base.

Mr McLaughlin : I cannot quote you a figure off the top of my head—

Senator CORMANN: One per cent?

Mr McLaughlin : No, it is more than that.

Senator CORMANN: Much more than that?

Mr McLaughlin : Yes. The increase in reinsurance costs is not insignificant over the last 12 months—enough to, in fact, impact prices, for example.

Senator CORMANN: Yes, we are part of the New Zealand-Japan region, so we get caught up in the reinsurance risk profile.

Mr McLaughlin : That is true, but reinsurance costs, for example, in New Zealand have gone up more than they have here.

Senator CORMANN: Industry stakeholders tell me that reinsurance costs as a proportion of their overall cost base is actually not that significant as a driver of increased costs, but clearly there is a level of concern about what the implications are going to be of the increased capital requirements. The proof is in the pudding. You went for second a second bite of the cherry, for want of a better way of putting it.

Mr McLaughlin : Not really. The normal process would involve a series of consultations anyway and until we get the response from industry as to the impact of our proposals, we really do not know what the answer is going to be. So what has actually happened is not unreasonable. In fact, I would go a little bit further and I would say that we are really comfortable with the process that we have followed and where we have actually ended up.

Senator CORMANN: My objective is to have some questions and answers from everyone at the table. Mr Jones, I think this is yours! Can you just update us on where you are at in terms of the changes to rules for superannuation funds around disclosures and improved transparency.

Mr Jones : We put out our draft discussion paper and we now have comments from a variety of sources in terms of the issues that we raised with regard to governance, greater disclosure, transparency and so on. What we will do next is to start providing responses to the industry and, at the same time, we will actually start developing the standards. Those standards will go out for consultation. In the latter part of this year, we will also publish draft prudential practice guides, which will provide additional guidance, So the standards will really be looking more at objectives and then the guidance, which will come in the second half of the year—assuming the legislation is passed—will flesh out in more detail these sorts of areas. I would imagine at the next estimates I will be able to give you a lot more detail in terms of exactly where we are at .

Senator CORMANN: Can you give us a list of the issues you are looking to lift standards?

Mr Jones : Yes. There will be quite a bit of work on general governance with regard to things such as the notion of independence of directors, board renewal, proposals on remuneration and disclosure of this type of information. There will be further standards on operational risk reserve for the holding of financial resources against any type of operation or risk. There will be further work on investment governance. There will be additional work on risk management. We will have an expectation that far more information will be provided by trustees on their risk appetite for the fund, and in future we will be looking at the whole process of their risk management objectives, how they made those decisions, how they test to see whether they are meeting those and so on. There will be additional work on conflicts of interest. There will be further work on fitness and propriety. There will be work on outsourcing. These will all be different standards and then there will be some very specific ones on insurance and superannuation, and there will probably have to be an additional one on defined benefits as well.

Given that the industry would like to see this as a package, we hope to have the entire set of standards out in a number of months to give industry the chance to comment. We put out the discussion paper, which gave the general thoughts on the issues and we now have the submissions back in on those. We will respond to those. We will issue the actual standards in draft form. We will seek comment on those and then, assuming the legislation is passed, those standards will come into place. But given that those standards tend to be fairly high level and principles based, some of the information that is coming from the industry is, 'Can you give us more information' and that will probably come via prudential practice guides, which I would like think will be in the second half of this year. There is a lot of regulatory change.

Senator CORMANN: It sounds like a very comprehensive program.

Mr Jones : I think it will be, yes.

Senator CORMANN: I commend you on it. That certainly, I think, is very much going in the right direction. Is it fair to say that there is a pretty acute need to significantly raise standards across what is a pretty significant industry now, a $1.34 trillion industry? When it comes to the sorts of standards in the areas that you have listed, there is a serious need to take them up to another level, isn't there?

Mr Jones : Yes, I think that is true. This really just brings this industry up to the same level as the other regulated industries. These are the types of things that we have already in banking and insurance. I was very pleased that the comments that we received back from industry have actually been very positive.

Senator CORMANN: Just for the record and on behalf of the coalition, we think that that is very important work that you are doing and we support it wholeheartedly.

Mr Jones : Thank you.

Senator BUSHBY: Thank you, APRA, for assisting us tonight. How many staff does APRA have in its statistics unit?

Mr Littrell : It varies from time to time—approximately 43 at the moment.

Senator BUSHBY: How many of those staff will perform APRA superannuation data functions?

Mr Littrell : There are approximately five staff who work exclusively on superannuation. There is another, say, third of that unit who support all four industries, and their time allocation varies depending on what is happening at the moment.

Senator BUSHBY: I presume that, as part of the superannuation data function, you would collect data from retail funds like AMP, CFS, BT, MLC, ANZ, OnePath and ING?

Mr Littrell : We collect data from all regulated funds now and will continue to do so in the future.

Senator BUSHBY: Do you have any idea—you might have to take this on notice—what percentage of new flows into those products does not attract commission payments?

Mr Littrell : We don't—

Senator BUSHBY: Is that something that you actually record statistics on?

Mr Littrell : If you are asking me whether we have a data field for that in our current collection, the answer is no.

Senator BUSHBY: Do you have any knowledge of that through other means? Do you have a feel for the percentage of funds that come in, particularly the retail funds, that attract commissions?

Mr Littrell : I personally do not. We would probably have to take that on notice for—

Mr Jones : We could take it on notice. Because it is not really a prudential purpose, it is not the type of statistic that we would pay much attention to at this stage. I would point out that, in talking about all of the additional things that we are doing in terms of this, also in the second half of this year we start the consultation process on the new statistical package for superannuation. So, coming out of the Cooper inquiry and therefore the Stronger Super, there will be a whole new set of superannuation statistics that requires a consultation that will begin in the second half of this year. We will develop a whole new set of superannuation statistics—not just for us, as well, this time; statistics not just for prudential purposes but for other users as well.

Senator BUSHBY: I think, Mr Littrell—I think it was you—that in the past we have discussed your new data collection. You put out the tables showing performance of various super funds, and you were developing that better so that you could have a more sophisticated approach to that and ensure that you were comparing like products. Is this overtaking that?

Mr Jones : This is all part of the same thing.

Senator BUSHBY: That was started some years ago, well before Cooper, as I understand.

Mr Jones : Yes, but what happened was that we started the consultation process and then the terms of reference for the Cooper inquiry included statistics, so we put that on hold until we got the government response. So that is correct: we actually started the consultation process on the new collection in 2009, and then the government announced the inquiry. We put it on hold and then—

Senator BUSHBY: Yes, I recall that now.

Mr Jones : because of the Stronger Super recommendations on the things I have just mentioned, in discussion with the industry we thought they might be a bit overloaded if we asked them to consult on the statistics at the same time as all of the new standards, so we delayed it by six months.

Senator BUSHBY: That has effectively delayed it by a couple of years, as a result.

Mr Jones : It is, yes.

Senator BUSHBY: If I recall correctly, we had a discussion at estimates at one point about how it is actually going to take a number of years before the results of that data collection become meaningful.

Mr Jones : That is absolutely correct, in the sense that, given that now we are having consultation in the second half of 2012, we would still hope that we could begin the collection on 1 July 2013, but that is starting to look tight, depending upon the way the consultation process goes. But, assuming that that is correct, given that APRA focuses on the long term not quarterly, I would prefer it if we had a couple of years worth of performance statistics—

Senator BUSHBY: It is probably going to be 2015 before we see anything.

Mr Jones : That is probably true, yes.

Senator BUSHBY: Okay. And in the meantime you will be using the same approach to analysing the relative performance of different funds and so forth?

Mr Jones : We will continue even post the new collection. We will continue to publish returns at the fund level because the fund level statistic is the measure of the trustee performance, and that is what APRA's focus is, because we are looking at the behaviour of the trustees. In terms of the investment option information, that information certainly would be far more relevant to individual members.

Senator BUSHBY: Absolutely, in looking at options or where they might put their money—

Mr Jones : Yes.

Senator BUSHBY: because, as we discussed before, fund level performance is certainly relevant to trustee performance but can be misleading in terms of people's personal preferences in what type of product they might want to invest in, looking at the headline figure for the fund. I see you nodding—for the benefit of Hansard.

Mr Jones : As you say, we have had this discussion before. The publication of the fund performance is very useful as a measure of trustee performance.

Senator BUSHBY: Yes, but that is about the extent of its usefulness.

Mr Jones : Well, that is what it is published for.

Senator BUSHBY: I know, but, as we discussed, it is read more broadly than that, and other people look at it and draw other conclusions from it than just the performance of the trustee.

Mr Jones : I think people look at all of our statistics and use them for various purposes—

Senator BUSHBY: Absolutely, and not always the purposes that they were prepared for. I will move on from there. We have dealt with some governance stuff.

Senator Waters raised covered bonds. Over the last couple of estimates I have raised covered bonds as well. I think we have had the discussion about how you were not sure how the cost of funds would play out relative to other funds and what prudential issues there might be with that because there had not been any covered bond issues in Australia. I said that there were some in New Zealand and you said, 'We want to see them in Australia before we can really comment on how they are going.' Have developments since, given that—as Senator Waters noted—all four major banks have now issued covered bonds, enabled you to more accurately assess how this aspect of covered bonds will play out, particularly since it appears that the market has not priced them as low as they would have liked?

Dr Laker : I can only give you the same answer I gave the previous senator: this question is not our turf. Our prudential supervisors are not sitting there calculating the impact of a particular issue on the average costs—

Senator BUSHBY: No, I am not so much interested in what impact that might have on the price that they put on the money that they then subsequently lend.

Dr Laker : No, but even on their costs of funds. I think I would encourage you to wait till the Reserve Bank brings out its article, because it is looking at a number of factors that are affecting the cost of funds, including the cost of swapping funds raised in other currencies back into Australia, which is part of the covered bond exercise.

Senator BUSHBY: But covered bonds raise other issues that I would have thought were of prudential interest. We have had this discussion pre covered bonds being put in place, in respect of the way they treat the primacy of depositors' funds and things like that, how that all plays out when you are doing prudential assessments of institutions that have issued covered bonds and how it adjusts the prudential risks in the institutions themselves.

Dr Laker : You are correct. It raised issues of principle under the Banking Act because covered bonds changed the order of seniority of lenders to a bank or an authorised deposit-taking institution. But that issue was addressed in the legislation that introduced covered bonds into the banking system in Australia, particularly in the form of a limit on the total number of covered bonds or volumes of covered bonds that an issuer can issue in relation to its total balance sheet. That has been handled by legislation. We will be finalising a prudential standard on covered bonds, but it will not be going to the heart of those Banking Act issues. Those issues were dealt with in the legislation. The concern about the pecking order has been addressed and the limit put in place. On how, over time, the pricing structures change as the covered bond programs become bigger and unsecured creditors look at where they may be in the queue: there is a global phenomenon taking place here because a lot of the money that has been issued since the beginning of this year in global markets by a number of issuers, not just Australian issuers, are secured issues, so the weight of secured versus unsecured is changing.

Senator BUSHBY: That has to be something of interest to you.

Dr Laker : There are indications that the unsecured creditors at the wholesale level are looking for a premium to recognise their changing position in the queue. But, as I say, we are not involved in the monitoring of markets closely in that form, so I think it best that those who are experts in that area respond.

Senator BUSHBY: Okay.

CHAIR: Thank you, Dr Laker. Thank you very much for your attendance and the assistance of you and your officers this evening.