Speech - Exit From The Government Guarantee Of Large Deposits And Wholesale Funding




"Exit From The Government Guarantee Of Large Deposits And Wholesale Funding"




Mr Speaker, on several occasions now since this Government took office, I've updated the House on Australia's path through the worst global recession in 75 years.

Through March and June 2008, I warned of the deteriorating global outlook, and advised that much of the impact on the real economy was yet to be felt.

In September 2008, I said I was confident that through the hard work and unity of all Australians, we would come through these challenges in a position of strength, and ready to tackle our future.

Well Mr Speaker, I'm sure all the honourable members of this House were pleased to see the IMF, just two weeks ago, endorse again Australia's standout economic performance among the developed world during the global recession.

We are virtually alone amongst advanced economies in avoiding recession.

Mr Speaker, that's why I believe that Australians have good reason to be confident, but of course not complacent, about our economic prospects.

And it's against this improving economic landscape, Mr Speaker, that I'd like to update honourable members, and through them the Australian people, on a very significant development in Australia's financial and economic recovery.

Yesterday, I announced that the Government, acting on the advice of the Council of Financial Regulators, will withdraw on 31 March 2010 its Guarantee of Large Deposits and Wholesale Funding for authorised deposit-taking institutions.

However, as I made clear yesterday Mr Speaker, the Government's Financial Claims Scheme will continue to provide certainty to depositors through a free guarantee for their deposits of up to $1 million until October 2011, at which time the $1 million cap will be reviewed.

This deposit guarantee provides automatic free coverage for an estimated 99.5 per cent of Australian depositors.

Mr Speaker, following these announcements yesterday, I'd like to use today, in this first Parliamentary session of the year, to describe the context for our decision to exit the Guarantee of Large Deposits and Wholesale Funding.

. . .

Mr Speaker, as honourable members know, the collapse of Lehman Brothers on 15 September 2008 sent shock waves through financial markets across every time zone.

In the months that followed, we saw global financial markets in disarray.

Lenders across the world became paralysed by fear and anxiety – as their previous complacency about risk was shattered into pieces.

What followed was the severe dislocation of global credit markets as investors ran for safety.

Governments and regulators across the world took unprecedented policy actions to stabilise the global financial system.

Some even had to go as far as injecting taxpayer's money to prop up major financial institutions, or worse still, outright nationalisation.

And even in Australia, as Governor Stevens of the Reserve Bank put it, people were "ringing money programs on TV" and asking "'is my money okay in the banks?".

Now honourable members will know, as Governor Stevens stated at the time, that the answer to this question was of course "yes".

Our banks are highly-rated, well-capitalised and did not engage in the risky lending seen in some other countries.

But as Governor Stevens told us, actions like those taken by the Australian Government maintained "public confidence in the security of the banking system".

And honourable members will know that despite the resilience of our banks, they still compete in global credit markets for funding against other borrowers all around the world.

There was a period in late 2008 where our banks experienced great difficulty in borrowing offshore, and this threatened the flow of credit to the entire Australian economy.

Where Australian banks were able to borrow at all, the cost had skyrocketed since the onset of the global financial crisis.

In mid-2007, before the crisis, our banks were able to issue 5-year wholesale funding for as cheap as 35 basis points over the benchmark rate.

By late 2008, at the peak of the crisis, this had blown out by a multiple of five times – to 175 basis points over the benchmark rate.

Our G20 colleagues started introducing bank guarantees to support international borrowing by their banks.

So the Australian Government acted quickly and decisively to ensure our banks stayed on a level playing field.

On 12 October 2008, the Government announced the guarantee of all deposits and wholesale funding.

This was just one in a suite of actions we took to protect Australia against the worst the world could throw at us.

The Rudd Government provided three critical waves of fiscal stimulus to boost demand, keep businesses ticking over and support employment.

As a result, Australia has been virtually alone among advanced economies in avoiding recession.

Australia now has lower debt and deficits than comparable countries, we've maintained our Triple-A rating, and we have the second lowest unemployment of the major advanced economies.

So it's unsurprising, with everything else we're doing to support jobs and growth, that the community has not focused as much on the importance of the guarantee in keeping our economy moving forward.

But Mr Speaker, the Government's guarantee of wholesale funding has indeed been central to Australia's crisis response.

It gave our banks continued access to global capital markets on competitive terms, allowing them to raise more than $160 billion.

This meant they could keep lending to Australian businesses and households, providing vital support for jobs and growth.

And the Financial Claims Scheme will keep giving over 16 million Australians certainty over their deposits.

In fact, we had Governor Stevens coming out in early 2009 and telling us that actions like those of the Australian Government "helped to stabilise what could have been a catastrophic loss of confidence in the global financial system".

In the Governor's words, he thought "what was done stabilised a potentially quite dangerous situation".

Governor Stevens said that these measures saw "term spreads in money markets decline" from their peak, and "long-term markets reopen to banks".

And the IMF told us the guarantee has been critical in supporting the flow of credit through the Australian economy.

It allowed our banks last year to issue bonds in larger amounts, with longer maturities and at lower cost, than had been possible since mid-2007.

But of course, Mr Speaker, the guarantee was put in place to support the Australian people – not the banks.

Australian banks and other lenders have so far paid around $1.1 billion for the use of the guarantee and will pay around $5.5 billion over its full life.

And without the guarantee, our banks would have lent less and interest rates for borrowers would have been higher.

This would have led directly to lower growth and more households losing a breadwinner right across Australia.

. . .

Mr Speaker, the Government has always said the guarantee would be withdrawn "once market conditions have normalised".

We put in place "very strong real-time monitoring arrangements" through the Council of Financial Regulators.

Our regulators have constantly monitored international developments, evolving market conditions, and the financial position of all Australian ADIs.

The Council advised the Government late last year it was coming to the view that conditions may warrant removal of the guarantee.

After further assessments, the Council recommended we close the guarantee to new issuance as at 31 March 2010.

The Council considered that bank funding conditions had improved such that the guarantee is no longer needed.

This reflects the prudential strength of our individual ADIs and the strength of our financial system as a whole.

The Council has advised that none of these institutions would need the guarantee to fund themselves.

In fact, the proportion of non-guaranteed issuance by Australian banks has increased from less than 2 per cent at the start of 2009 to 98 per cent in January 2010.

As I said yesterday, I've been discussing the future of the guarantee with the Council for some time.

And I've been talking to the Council about market conditions through the whole period of the guarantee, since October 2008.

The Council's recommendation has not changed in light of the recent anxiety in some global markets.

And critically, our regulators have explicitly advised that removing the guarantee will not materially affect banking sector funding costs.

So I make this point very clearly – there will be absolutely no justification for any bank to raise interest rates beyond future Reserve Bank movements, for any reason at all, including the removal of the guarantee.

As I've said before, with some banks' interest margins having recovered to pre-crisis levels, the Australian people won't tolerate any bank trying to take them for a ride.

Finally, the Council advised that the Australian guarantee should not be available much longer than other countries, given the greater strength of our financial system compared to many of them.

Key G20 countries, including the United States, Canada, France and Korea have withdrawn their wholesale funding guarantees. The UK and Germany will do so shortly.

So just as our stimulus is being progressively withdrawn, it's appropriate we now move to start unwinding our guarantees.

. . .

Mr Speaker, honourable members will know that the Government has also announced the withdrawal of the Guarantee of State and Territory Borrowing on 31 December 2010.

In July last year, I announced the formal commencement of the state guarantee.

I said then that the global recession has "severely constricted liquidity in state government bond markets", and that "supporting liquidity in these markets is critical to maintaining the capacity of state and territory governments to deliver on nation building investments".

The Government's announcement led to a sharp improvement in the pricing of state bonds relative to Commonwealth bonds and restored demand for state government bonds.

These benefits were experienced by all States, regardless of whether they opted to make explicit use of the guarantee.

The State Guarantee Scheme was also established as an interim measure to be withdrawn when market conditions normalised.

However, a longer transition period relative to the Guarantee of Large Deposits and Wholesale Funding is required for States to establish liquidity in new unguaranteed bond lines.

Unlike bank funding, issuing bonds under such existing lines is a critical source of funding for the states.

All States and Territories will therefore continue to have access to the guarantee until 31 December 2010.

. . .

Mr Speaker, withdrawing the Guarantee of Large Deposits and Wholesale Funding represents a significant milestone for Australia's banking system in pushing past the worst of the financial crisis.

But it's appropriate to not only take stock of the resilience of our financial system, but also to reflect on some of the challenges forced on us by the global economic carnage we've withstood.

The stability of Australia's banking system has been recognised consistently by both the IMF and the OECD.

But as I said earlier, we were not immune from the impacts of the financial crisis – it created significant challenges for competition in our domestic banking market.

The guarantee has been critical in helping to support competition. It's offered wholesale funding certainty to more than 150 Australian ADIs, including regional banks, building societies and credit unions.

It has allowed non-major Australian banks to raise over $32 billion in funding from international credit markets.

We know that we can't undo all the impacts of the global financial crisis, but we are working hard to support banking competition.

Mr Speaker, honourable members may be aware that the securitisation market was one of the strongest drivers of competition in the mortgage market in the decade before the crisis.

So on 30 November last year, I directed the Australian Office of Financial Management to invest another $8 billion in high-quality, Triple-A rated Australian residential mortgage-backed securities to further support competition in Australia's mortgage market.

This was in addition to the Rudd Government's initial $8 billion investment, which we launched in 2008.

The Government's direct investment of up to $16 billion in the RMBS market has enabled smaller lenders to lend at competitive interest rates and maintain a higher level of lending than would otherwise have been possible.

It has also been critical to preserving market infrastructure and fostering a recovery in private investor confidence.

And just over a week ago, I announced a fresh boost to competition with three non-bank lenders and two smaller banks allocated up to $3.4 billion in funding, from our second $8 billion RMBS investment.

It is expected that private investors will also participate significantly in these offerings, following recent encouraging signs of improvement in securitisation markets.

As I said a week ago, private capital has now made up some 37 per cent – or $4.6 billion worth – of the $12.4 billion in Australian RMBS issuance in which the AOFM has taken a stake since the Government's initial announcement in September 2008.

This will place more competition on the big banks, helping to put downward pressure on mortgage rates over time.

The Rudd Government has acted decisively to support banking competition, but we know we can't simply overcome all of the effects of the global financial crisis overnight.

We understand that mortgage repayments are a big part of the monthly budget for most Australian families.

We'll keep looking for ways to make it easier for families, at kitchen tables around Australia, to balance the household budget.

For starters, we've introduced tough new consumer credit protection laws due to come into force this year.

These new laws will be the toughest laws governing consumer credit Australia has ever had, with wide-ranging powers to overrule unfair terms in credit contracts, including mortgages.

And we will always make sure the independent competition regulator, the ACCC, is armed with the powers it needs to prevent anti-competitive behaviour by the banks.

Finally, we'll continue to promote Australia's future as a leading financial services hub – we want to get the settings right to encourage new competitors into our local banking sector.

Now more than ever, Australia is the investment destination of choice – offering among the most robust financial, physical and regulatory infrastructure globally.

And the clear objective of the Rudd Government is to position Australia to leverage the global economic recovery by preserving this reputation.

. . .

Mr Speaker, I'd like to also take this opportunity to briefly discuss the global regulatory landscape for the banking sector.

As honourable members know, there were some fundamental problems with key aspects of financial market regulation – particularly in some other countries.

These led to excessive risk taking across global financial markets.

And that's why Australia has committed to working through the G20 and the Financial Stability Board to address the underlying weaknesses in the global regulatory system.

We have to ensure that global financial markets contribute to sustainable global growth and not to the types of destabilising behaviour we have seen in recent years.

Of course, this will mean a substantial adjustment for some financial systems and institutions, particularly in the developed world.

And we recognise the need to work with our G20 colleagues to create a consistent international set of principles for regulation of our increasingly interconnected global financial system.

It's important that financial institutions not be able to simply "go shopping" for the easiest set of financial regulations.

But, of course, Australia's financial system did not suffer the same excesses as seen elsewhere. So our financial system is not expected to need to go through the same degree of adjustment.

To this end, APRA, the Reserve Bank and the Treasury are working through the G20 to ensure any financial reform arrangements are appropriate for Australia, and reflect the resilience of our system.

The key here is better regulation rather than more regulation.

But I'll say this to the banks – the Australian people won't tolerate any bank abusing their place in the Australian economy because of their strength.

The Rudd Government is working to ensure Australia continues to have a stable, efficient and competitive financial sector – which will continue to serve our broader economy and the Australian people.

. . .

Mr Speaker, Australia's financial system stands today as the envy of the world. This reflects both the hard work and experience of our regulators, and the decisive action of the Rudd Government.

The Government took swift action to ensure our banks' access to global capital markets, to support RMBS funding for smaller lenders, and to provide certainty for depositors across Australia.

This ensured the continued flow of credit and, together with the Government's timely and targeted stimulus, helped infuse a sense of confidence in the Australian people.

And Australians worked together like they have always done – businesses and employees, governments and households – driving our economy to outperform all other major advanced economies around the world.

Mr Speaker, I thank the House.