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Wednesday, 25 February 1959

Mr HAROLD HOLT (Higgins) (Treasurer) . - by leave - I wish to make two very short statements, one giving details of the recent Commonwealth loan, which has just closed, and the other giving some details to the honorable member for Melbourne Ports (Mr. Crean) and the honorable member for Yarra (Mr. Cairns) regarding the operations of the short-term money market.

I may say by way of preliminary observation that I do not propose to make a practice of taking up the time of the Par liament with the details of Commonwealth loan raisings, but there were some features about the latest loan raising which I think honorable members would wish to have at direct hand.

Honorable members will be interested to learn that the Commonwealth cash loan that closed last Friday received subscriptions of £60,000,000. The loan was thus over-subscribed by £35,000,000. In view of this notable result I think honorable members will appreciate some details firsthand rather than through the medium of the usual statement released to the press and radio stations.

When the Australian Loan Council decided on a target of £25,000,000 for the loan - and I emphasize that the amount and conditions of the loan were unanimously agreed upon by the various constituent members of the Loan Council, which, of course, includes the State governments - it took into account the relatively small amount of advance subscriptions received in the short period since the close of the October, 1958, loan and the very useful subscriptions which had been received to special bonds since then. However, in the event the result was spectacular. Total receipts were more than £20,000,000 higher than in any other loan raised since early 1955, whilst the extent of the oversubscription was easily the greatest for any cash loan since the first Commonwealth loan was raised in 1915. The successful result of the loan was due principally to a small number of unusually large subscriptions from trading banks and from brokers and dealers interested in the new short-term market. Nevertheless, there was continued strong support from other institutions and from the general public, particularly when investments in special bonds are taken into account.

The Government is grateful for the confidence that investors have displayed in Commonwealth securities. So far this year we have borrowed £96,700,000 in two cash loans in Australia, £17,600,000 in special bonds, and £29,300,000 in two loans raised in London and New York last October, a total of £143,600,000. This amount is being applied entirely towards financing the 1958-59 State governments' works and housing programme of £210,000,000, approved by the Loan Council.

As to the short-term money market, on 18th February last, the honorable member for Melbourne Ports asked me a question relating to the short-term money market in Australia, and on 19th February the honorable member for Yarra asked a further question relating to the same subject. The statement that I now make to the House incorporates answers to both questions.

For some time there has been evidence of the growth of a short-term money market in Australia. With the increased significance of the market both the central bank and the firms actively engaged in it have seen the need for the establishment of a close and formal association with the central bank to ensure that the further development of the market will be soundly based and that it will operate in the national interest. The basis of the association recently announced by the Governor of the Commonwealth Bank has been evolved by the central bank after considerable discussion with the firms either acting in the market or which have expressed interest in participating as dealers. In addition the bank has been in consultation with the trading banks, as the major group most likely to be using the market.

Although only four companies were included in the announcement by the Governor of the Commonwealth Bank, it is understood that others are interested and may be applying for appointment at a later stage. The central bank is willing to consider applications from those who can meet the basic conditions and requirements which have been decided.

The central bank's relationship of " lender of last resort " will take the form of a line of credit to be established in favour of each dealer, under which the dealer against lodgment of security will be enabled to obtain a temporary loan from the bank to ensure the liquidity of his position. The amount of the line of credit will correspond to the maximum investment portfolio approved by the central bank for each dealer which in turn is partly governed by the capital of the dealer. The investment portfolios of the dealers will for the time being be confined to " money market securities " which have been defined as Commonwealth Government securities with currencies not exceeding three years.

The dealers will finance the holding of their portfolios by seeking and accepting loans - overnight, at call or fixed for short periods - from banks, commercial and industrial companies or others with substantial short-term funds available. They will also be ready to buy or sell outright shortterm government securities.

The central bank will charge interest on its loans to dealers under the lines of credit. The primary object of this rate, which may be varied at any time, will be to discourage too frequent borrowing from the central bank.

The lines of credit for the approved dealers will be distinct from the arrangements whereby the trading banks may obtain temporary assistance from the central bank to restore their liquidity and will have no effect on the obligations of trading banks in relation to special account.

To qualify for the relationship with the central bank the dealer companies are required to -

(a)   establish that they have the standing, capital resources and technical capacity considered necessary to handle this type of business;

(b)   undertake -

(i)   that their investment opera tions will be confined to "money market securities ";

(ii)   that they will consult regu larly with the central bank on all matters relating to the market and furnish on a confidential basis such regular returns as the bank requires.

As I said when I answered in broad terms the first question put to me, the Commonwealth Government regards this as a very useful addition to the financial arrangements inside this country. If there are further points of detail on which either of the honorable gentlemen who have already addressed questions, or other honorable members would wish to have enlightenment, I should be glad if they would advise me.

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