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Thursday, 26 February 1959

Mr HAROLD HOLT (HigginsTreasurer) . - I move -

That the bill be now read a second time.

This bill is the second of the four main measures that go to make up the proposed banking legislation. Its essential purpose is to provide for the reconstitution of the noncentralbanking components of the present Commonwealth Bank group under a new corporation, to be called the Commonwealth Banking Corporation, which will function as an entirely separate organization from the Reserve Bank.

The Commonwealth Banking Corporation, under its own separate board, will be the controlling body for three banks - the Commonwealth Trading Bank, the Commonwealth Savings Bank and the Commonwealth Development Bank. The lastmentioned of these banks will be constituted as an amalgamation, with some increase of resources and some change of responsibilities, of the present Mortgage Bank and Industrial Finance Departments of the Commonwealth Bank. As we shall see, provisions are included in the bill to ensure that each of the three banks will have its own statutory functions and responsibilities and that the separate identity of each within the general framework of the corporation will be preserved.

The board of the corporation will be empowered to determine the policies of each of the three banks and to control their affairs, and the corporation is to provide the staff for conducting the business of the three banks. The board will have a statutory responsibility to ensure, within the limits of its powers, that the policy of the corporation and the banking policies of all three banks are, to quote the wording of the relevant provision in the bill, " directed to the greatest advantage of the people of Australia and have due regard to the stability and balanced development of the Australian economy ". In line with the provisions of the present Commonwealth Bank Act and the Reserve Bank Bill, the board of the corporation will be required to keep the Government informed of the policies of the institutions under its control, and there are provisions whereby, in the event of a difference of opinion between the Government and the board as to whether any such policy is directed to the objectives laid down, the Government will, subject to the tabling of explanatory documents in both Houses of the Parliament and the observance of certain other procedures, have an ultimate power of direction over the board in regard to the policies of the corporation and its three affiliated banks. I would stress, however, that as the bill is worded it will not be possible for the policies of the corporation and the three banks to be inconsistent under any circumstances with the provisions of the proposed Banking Act, which will provide for regulation of the banking system at large.

Before describing the provisions relating to the administration of the corporation and its affiliated banks, I should like first to say a word or two about the principle on which they are based. The principle in question, to which I have already alluded in my reference to the preservation of the separate identity of each of the banks, concerns the great importance that the Government attaches to ensuring that each of the three banks, which will be important institutions in their own right, will rank equally with each other in the Commonwealth Banking Corporation framework and that the interests of one will not be given preference over, or be overshadowed by, the interests of the others. Suggestions have been made that the administration provisions are unduly and unnecessarily complex. The Government does not share that view; the provisions are the result of the Government's most careful consideration of the best and most effective means of achieving the fundamentally important purpose 1 have described.

The board of the corporation is to comprise eleven members. The managing director and deputy managing director of the corporation and the Secretary to the Treasury will be ex officio members, and the other eight members, of whom one will be chairman and another deputy chairman of the board, will be persons who are not officers of the Commonwealth Public Service or directors, officers or employees of a bank, including the Reserve Bank and the corporation and its three constituent banks. The composition of the board will thus be designed to comprehend the widest possible field of available knowledge and experience that is appropriate to its important responsibilities. There will also be an executive committee of the board for each of the three separate banks. These executive committees will be appointed by the Treasurer after consultation with the board, and will be charged with taking such action as is necessary to ensure that effect is given by the respective banks to the policies laid down for those banks and to any directions given by the board in relation to their affairs. These committees are being established for two main reasons. First, as a considerable amount of detailed business will have to be done in connexion with each bank and this business will vary a great deal as between banks, there is an obvious advantage in having for each a separate executive group of the board that will be capable of giving its affairs the necessary time and attention. Secondly, the executive committee device will further contribute to the achievement of the fundamental objective I have already stressed. I might mention specially in this connexion the provision that the chairman of the board will not be a member of any of the executive committees, although he will have the right to attend any meetings of the committees.

Under the board, the corporation will be managed by a managing director and a deputy managing director, both of whom will be appointed by the Governor-General and will be ex officio members of the board. The managing director will also be a member of each executive committee and the deputy managing director will be eligible for membership of the committees. Each of the three banks will have its own general manager, who will be appointed by the Governor-General on the recommendation of the corporation board. Under the managing director of the corporation, the general managers will manage their respective banks in accordance with the policy laid down for those banks and with any directions of the board or of the executive committees.

I now come to the provisions of the bill that relate to the three individual banks. The Commonwealth Trading Bank will be maintained in its present form. It will carry on general banking business and will continue to have the duty of developing and expanding its business. As in the present act, there is a provision that the Commonwealth Trading Bank shall not refuse to conduct banking business by reason only of the fact that to conduct that business would have the effect of taking business away from another bank.

In order to provide for certain transitional costs, particularly those arising from the fact that the head office of the present Commonwealth Bank group is owned by the central bank, the Commonwealth Trading Bank is to be supplied from central bank reserves with additional capital of £2,000,000. On the basis of its reserve fund, as at 30th June, 1958, the Trading Bank will then have total capital and reserves of almost £10,500,000 apart from the amounts that have been set aside over the years as provisions for contingencies.

The Trading Bank should, therefore, commence its career under the Commonwealth Banking Corporation with adequate capital funds. I wish to stress in this connexion that the Government considers that the Trading Bank should not be at a capital disadvantage as compared with other trading banks. The position of the Trading Bank in this respect will be closely watched, and action will be taken to make a further increase in its capital in the future if experience shows this to be necessary.

Consistent with our purpose of placing the Commonwealth Trading Bank on an equal footing with its competitors, the Trading Bank will, under a bill I shall later be introducing for :an amendment to the Income Tax Assessment Act, be made liable to Commonwealth income tax. In addition, the bill now before the House leaves scope for the Trading Bank to be made liable, equally with the private trading banks, to any income tax that might be imposed by the Territory of Papua and New Guinea. I am not suggesting that it necessarily follows that taxation laws will be introduced in that Territory, but clearly it would be undesirable to have to bring in special amending legislation should that transpire. There is a good deal of discussion proceeding on that matter. I should also mention at this stage that the Commonwealth Trading Bank will be on precisely the same basis as the other trading banks so far, as the provisions of the Banking Act are concerned.

The -Commonwealth Savings Bank is also to continue in its present form, and in addition is being given the explicit statutory duty of encouraging savings and promoting the interests of its depositors. As at present, the .profits of the .Commonwealth Savings Bank will be exempt from income tax and, after the making of payments to certain States under amalgamation agreements with those States, will be divided each year equally between the bank's reserve fund and the Commonwealth.

Provision is made in the bill, as in the present Commonwealth Bank Act, for the investment of the funds of the Commonwealth Savings Bank in ways which are traditional for savings banks. This provision is to be supplemented by regulations to be made under the Banking Act, of which I shall speak further when discussing the Banking Bill, that will apply equally to the Commonwealth Savings Bank and to the private savings banks. In other respects also, the Commonwealth Savings Bank will be subject to the same central banking controls under the Banking Act as are the private savings banks.

With regard to housing loans, the bill contains provisions for the making of loans to individuals on credit foncier terms and to building societies by the Commonwealth Savings Bank as well as by the Commonwealth Trading Bank. In the present Commonwealth Bank Act, the provisions in -question apply only to the Commonwealth Trading Bank and not to the Commonwealth Savings Bank.

As I have said, the Commonwealth Development Bank will be formed basically as an amalgamation of the present Mortgage Bank and Industrial Finance Departments of the Commonwealth Bank, and it will operate in the same field as those two departments - namely, the provision of assistance to primary producers and to industrial undertakings, particularly small undertakings.

The functions and responsibilities of the Development Bank , as laid .down in the bill are, however, defined with .greater precision and will be different in some important respects from those of the two existing departments. First and foremost, the function of the Development Bank will be to provide finance to primary producers and to industrial undertakings in cases where, in its opinion, provision of the finance is desirable and the finance would not otherwise be available on reasonable and suitable terms and conditions. In other words, the Development Bank's role will be to supplement, but not to take the place of, the sources of finance available to primary producers and industrial undertakings through ordinary commercial lending institutions. Secondly, and as an important corollary of the function I .have just described, the Development Bank will be required, when determining whether or not to make a loan, to have regard primarily to the prospects of the borrower's operations being successful rather than to the amount of security the borrower can provide in support of the loan. Thirdly, the Development Bank will be prohibited from providing finance for the purchase of goods otherwise than for use in the course of the borrower's business, and all of its resources will thereby be devoted to productive purposes.

The Development Bank will have powers and resources necessary for the performance of its important functions. I wish to stress, however, that none of its powers or resources will be capable of use except for the purpose of the functions I have described, and that purpose is set out clearly in the measure.

The capital funds of the Development Bank on its establishment will consist of the capital and reserves of the Mortgage Bank and Industrial Finance Departments - amounting to almost £15,000,000 on the basis of 30th June, 1958, figures - plus an additional £5,000,000 capital to be provided from the reserves of the central bank. These funds, together with the borrowing powers that the bank will have and the provision, to which I shall refer later, for retention of its profits, should ensure that the Development Bank will have adequate resources for the discharge of its important responsibilities. The Government will, however, watch the position closely from the viewpoint of the possible need for a further increase in the bank's capital later in the light of the bank's operating experience.

It has been necessary to give the Development Bank the power to accept deposits from the public. It is not anticipated, however, that the bank will either attract deposits from the public on any significant scale or seek to rely on such deposits as a major source of funds. In respect of such deposits as are placed with it, the Development Bank will not, under the Banking Bill, be required to lodge statutory reserve deposits with the Reserve Bank - this for the reasons that the Development Bank will be a special institution quite unlike the trading banks, and that, since the level of its deposits will not be affected to anything like the same extent by the influences which cause the trading banks' deposits to rise and fall, the Development Bank's business could be inconvenienced without warrant if, for instance, it were required to participate in a call to reserve deposits brought about through an increase in trading bank deposits in which it did not participate.

I might say that in other respects the Development Bank will be subject to the same basic central banking controls as the trading banks. I shall indicate the controls in question when introducing the Banking Bill.

Like any other bank, the Development Bank will have fairly wide borrowing powers. It will, however, require the Treasurer's consent to any borrowings in excess of £2,000,000 from the Reserve Bank and to any borrowings from overseas. With regard to the making of loans by the Reserve Bank to the Development Bank, it is to be remembered that under the Reserve Bank Bill the Reserve Bank will be able to make loans to the Development Bank, or to any other bank, only for central banking purposes. In other words, the Reserve Bank will only be able to make such loans if they are needed for the purpose of supporting a bank's liquidity position. This, of course, is the traditional central banking function of acting as lender of last resort to the banking system. It has always been the intention that the Development Bank would, like other banks, be able to call on the Reserve Bank only if the need arose for its liquidity to be supported, and the Government is satisfied that the provisions in the legislation relating to such borrowings go no further than to give effect to this intention.

In relation to borrowings by the Development Bank from the Treasurer, the Treasurer's power to make loans to or deposits with the Development Bank will be subject to the appropriation of moneys by the Parliament for the purpose. The Treasurer will not otherwise have power to make moneys available to the bank.

Mr Calwell - That is another surrender.

Mr HAROLD HOLT - The Deputy Leader of the Opposition calls control by Parliament over these matters a surrender. I submit that such control is of the essence of democracy, and the Government has accepted the restrictions it imposes as being in the interests of democracy and the people generally.

As is at present the case with the Mortgage Bank and Industrial Finance Departments, all of the Development Bank's profits will be paid to the bank's reserve fund and will thus go to augmenting the bank's resources.

There has been included in clause 83 of the bill a provision to the effect that, if they so desire, the trading banks will be appointed as agents of the Development Bank for the receipt and transmission of applications for assistance.

Mr Calwell - Another surrender!

Mr HAROLD HOLT - Honorable members opposite are oblivious of the fact that this has been the practice applied in relation both to the Industrial Finance Department and the Mortgage Bank Department. In other words, what we are doing is to put specifically into the legislation what has been the unchallenged practice in the banking system up to this point of time. I do not know whether that exposes the ignorance or malevolence of honorable members opposite on this particular matter.

This provision should ensure the continuance of present arrangements under which the trading banks commonly refer to the Mortgage Bank and Industrial Finance Departments applications which are not suitable for trading bank loans but which the trading banks feel would be considered by those two departments. In addition, the provision will serve to ensure that the Development Bank will not discriminate between the trading banks in the choice of its agents.

I have heard honorable gentlemen opposite interject " bad risks " and say that we would give the Commonwealth instrumentality all the bad undertakings and so forth. Do these honorable gentlemen not recognize the need in the Australian banking system for a bank which will not be compelled to rely upon normal, orthodox and conservative banking practices? If we are to develop the land and the small businesses which have a risk element and which may be in need of capital but can demonstrate good prospects, and if we have men and women of character and capacity who cannot put up the necessary security in order to go ahead with a project that they can demonstrate has a high probability of success, do we not welcome an institution of this kind which will, I believe, fill an important gap in the present financial and banking structure of this country?

The remaining important part of the bill now before the House is that dealing with the Commonwealth Banking Corporation Service. These provisions are in practically identical terms to those in the present Commonwealth Bank Act relating to the Commonwealth Bank Service, and so do not call for special comment. The allocation of officers to the new service is dealt with in the Banking (Transitional Provisions) Bill which I shall be explaining shortly.

I have now dealt briefly with all the more important aspects of the Commonwealth Banks Bill, which the Government considers marks a great and significant advance in the development of the Commonwealth's banking institutions an servants of the Aus tralian community. It is therefore with great pleasure that I now commend the bill to the House.

Debate (on motion by Mr. Calwell) adjourned.

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