Speech - Guarantee Scheme For Large Deposits And Wholesale Funding Appropriation Bill 2008




"Guarantee Scheme For Large Deposits And Wholesale Funding Appropriation Bill 2008"




Today I am introducing a Bill to provide a standing appropriation to pay any possible claims made under the Australian Government's Guarantee Scheme for Large Deposits and Wholesale Funding.

The Bill will provide international markets with the assurance that Australian institutions are, in their borrowings, supported by an Australian Government guarantee, and that payments made under that guarantee will be timely.

The global financial crisis continues to wreak havoc on economies around the world. Growth in many of the world's largest economies has slowed substantially. Some are already in recession.

Australia is not immune.

The Mid Year Economic and Fiscal Outlook showed the global financial crisis has reduced future surpluses by $40 billion. Domestic economic growth will slow significantly over the coming year.

Faced with the most difficult economic conditions since the Great Depression, the Rudd Government has kept a strong focus throughout on measures to protect our financial system from the fallout of the crisis.

On 12 October, the Government took action to stabilise and promote confidence in Australia's financial system by instituting a broadly-based deposit and wholesale funding guarantee.

In one stroke, the guarantee provided support to banks, credit unions and building societies in the provision of credit to Australian businesses and households, and security and peace of mind to Australian depositors.

This guarantee was part of coordinated global action, which is starting to produce real results. In recent weeks, spreads have begun to narrow, and there are tentative signs that markets have started to thaw.

Reserve Bank Governor Glenn Stevens noted last week that globally coordinated action – of which our guarantee was a part – has "averted…potential systemic collapses that would have had massive repercussions throughout the world."

Since the initial guarantee announcement, the Government has been engaged on a daily basis in putting in place the detailed arrangements.

In recent weeks, we have settled the parameters of the guarantees, including the applicable fees and coverage.

Last Friday, we released the deed of guarantee, with the specific detail on the scheme's operation.

This deed will take effect from 28 November.

We have consulted with regulators and industry to ensure that the guarantees are effective for our industry and to ensure that we take account of new developments as they have arisen.

Providing a standing appropriation is a part of this process.

Let me first go to the detail of the guarantees and how they are being implemented.

Deposit and wholesale funding guarantees

Deposit guarantee

To restate the Government's deposit guarantee commitment, from 28 November, the first one million dollars deposited with an Australian-incorporated bank, a credit union or a building society will be guaranteed free of charge.

Large deposits, that is, deposits in excess of one million dollars, deposited with an Australian-incorporated bank, a building society or a credit union will be eligible for the guarantee, for a fee.

In addition, any deposits by Australian residents with a foreign bank branch in Australia will also be eligible for the guarantee, for a fee.

These deposit guarantees will apply to accounts including, for example, savings accounts, passbook accounts, cheque accounts, pensioner deeming accounts, term deposits, mortgage offset-accounts, farm management deposit accounts, first home saver accounts and retirement savings accounts.

Wholesale funding guarantee

In addition, from 28 November, short-term and long-term wholesale funding for Australian-incorporated banks, building societies and credit unions, and short-term funding for foreign bank branches raised from Australian residents, will be eligible for the guarantee, for a fee.

The wholesale funding guarantee will apply to selected short-term liabilities with initial maturities of up to fifteen months, for example, bank bills, certificates of deposit, commercial paper and certain debentures.

The wholesale funding guarantee will also apply to selected long-term liabilities with terms of maturity of fifteen to sixty months, for example, bonds, notes and certain debentures.

The wholesale funding guarantee will apply to these instruments whether they are offered domestically or in international markets.

It will ensure that Australian institutions are not placed at a disadvantage when seeking funding in international markets, given that many of their international competitors have the benefit of similar government guarantees.

The wholesale funding guarantee will also promote financial system stability in Australia and assist banks, building societies and credit unions to continue to access funding at a time of considerable market turbulence.

Mr Speaker, implementation of these arrangements this coming Friday is a substantial step at a time of significant turbulence in financial markets.

The Australian people should be aware that the Government has very strong real-time monitoring arrangements in place through the Council of Financial Regulators, whom I met with as recently as last Friday.

The Council will also have contingency plans in place to deal with any problems that may arise in implementation.

The Government stands ready to refine these arrangements in response to their advice.

It is in all our interests that this happen as quickly and as smoothly as possible.

Implementing the guarantees

It is estimated that 99.5 per cent of individual deposits held by Australians are worth one million dollars or less. As a result, as of 28 November, virtually all depositors will continue to be protected, free of charge, by the Financial Claims Scheme established in the Banking Act.

The Financial Claims Scheme was established by the Parliament, when the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Act 2008 was passed just six weeks ago.

Since 12 October 2008, the Government has been working to implement the guarantee for large deposits, that is, those in excess of one million dollars, and the guarantee for wholesale funding.

The Government's Guarantee Scheme for Large Deposits and Wholesale Funding is established by a Deed of Guarantee and associated Scheme Rules, which I executed on behalf of the Commonwealth on 20 November and made public the next day.

The Government decided that the quickest and most effective way to implement these guarantees was to use the Commonwealth's executive power to establish a contractually-based scheme that is valid and enforceable.

This follows international practice, for example the UK and New Zealand have guaranteed their wholesale funding by contract.

The Government's legal advice confirms that legislation is not required to implement these guarantees.

This Bill deals with a separate but related issue of an appropriation to cover the very unlikely event of a claim on Government under the guarantee.

Essentially, there are two options: one option is for the Government not to legislate for an appropriation now, given the extremely low probability of a claim under the guarantee.

Under this option the Government would legislate at the time of the call on the guarantee.

The alternative option is that the Government legislate for an appropriation now.

During the government's consultations, banks raised concerns about doubts in international funding markets that Government will be able to pass legislation with sufficient speed in the event of a claim on the guarantee.

Put simply, potential investors need to be confident they can get their money quickly if a bank were to default on a loan.

If they doubt quick and seamless bipartisan support for an appropriation bill, they will place too great a risk premium on lending to Australian banks.

Given the Opposition's recent commentary on the bank guarantee, it is now clear that quick and seamless bipartisan support could not be counted on.

For our part, the Government has decided it is better for us to settle the appropriation argument with the Opposition now, rather than have it be an impediment to Australian banks being able to access vital funding on international markets.

To reiterate, the Government considers it unlikely that claims will need to be paid under the Guarantee Scheme because Australia's banks, building societies and credit unions remain sound, well capitalised and well regulated.

No depositor of an institution supervised by APRA, or before that the RBA, has ever lost any money.

Nonetheless, to give certainty to the investors providing funding to Australian banks, building societies and credit unions, and to provide certainty to those with large deposits, the Government is seeking the Parliament's support to pass this appropriation Bill now.

Quick passage of this Bill will ensure that, from 28 November, any claim under the Guarantee Scheme, however unlikely, will be able to be paid in a timely way.

Guarantee Scheme for Large Deposits and Wholesale Funding

The Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding will be administered by the RBA, acting as agent for the Commonwealth. For their part, the Treasury, the RBA and APRA will cooperate closely to ensure the Guarantee Scheme is administered effectively.

Eligible institutions, that is, eligible banks, building societies and credit unions, will need to apply for access to the Guarantee Scheme.

The scheme is voluntary and each eligible institution can determine whether or not it takes part.

Each eligible institution can also determine which of their deposits and which of their wholesale funding liabilities are covered by the Guarantee Scheme.

Once eligible institutions have applied for coverage of their large deposits and/or wholesale funding liabilities, and the application has been accepted, these liabilities will be supported by the guarantee.

Each eligible institution will be obliged to pay a fee based on the value of large deposits, or wholesale funding, it has covered by the guarantees.

The Guarantee Scheme application process provides a number of important safeguards for the Government and for taxpayers.

Transparency and accountability mechanisms

To ensure transparency and accountability, the Government will publish regular reports on the Guarantee Scheme's website—www.guaranteescheme.gov.au— including a statement of publicly issued guaranteed liabilities.

The Government can also publish on the website the details of participating institutions and the liabilities that are covered.

The Government will provide six-monthly reports to the Parliament on the Guarantee Scheme's operations, including:

  • the extent of the liabilities covered by the guarantees;
  • whether any calls have been made under the guarantees for payment; and
  • the payments, if any, made by the Commonwealth under the guarantees.

Protecting the interests of taxpayers

The Guarantee Scheme protects the interests of taxpayers in three key ways.

First, all of the eligible institutions under the Guarantee Scheme are regulated by APRA and must already comply with stringent prudential requirements, accounting and audit rules, and reporting requirements.

To have liabilities protected by the Guarantee Scheme, eligible institutions will need to provide a statement of prudential compliance as a part of the application process or, alternatively, obtain special consent from APRA.

Any applications with incorrect prudential compliance statements, or without special consent from APRA, will be rejected.

Second, eligible institutions will need to execute a counter-indemnity that will require them to reimburse the Commonwealth for any payments made and costs incurred under the Guarantee Scheme.

Eligible institutions will also be required to agree to abide by the Scheme Rules, which include a requirement that institutions have reports relating to the guarantee audited.

The Government also has the power to independently audit these institutions' records.

The RBA and APRA will work together in the administration of the Guarantee Scheme.

The agencies already have a Memorandum of Understanding that sets out a framework for co-operation between them, which covers such matters as information sharing and consultation arrangements for the handling of threats to system stability.

Third, the Council of Financial Regulators—comprising Treasury, the RBA, APRA and ASIC—will actively monitor the administration arrangements and will develop any further protocols considered necessary for effective scheme administration.

Features of the Bill

The Bill has two substantive measures.

A standing appropriation is established by the Bill to enable claims to be paid in a timely way, in the unlikely event that claims are made under the Guarantee Scheme.

A borrowing power is also provided, should there be insufficient funds in the Consolidated Revenue Fund when claims are to be paid under the Guarantee Scheme.

Mr Speaker, the appropriation before the House is not a legal necessity for the commencement of the guarantee. Our legal advice makes that absolutely clear.

Nor would it be a commercial necessity, if international markets could be confident that there would be ready bipartisan support in this Parliament for an appropriation bill in the very unlikely event that one is required.

Australian banks could have been pretty comfortable this support would be forthcoming, based on the Leader of the Opposition's words on the day the guarantee was announced, and I quote:

"The Opposition welcomes the decisions taken by the Prime Minister today to provide a guarantee for all deposits for Australian deposit taking institutions, banks, credit unions, building societies and so forth. That's a very important step and we will undertake to give the Government every assistance in ensuring that the necessary legislation is passed through the parliament promptly."

As we all now know, that support has been withdrawn.

That wouldn't matter if it were just a case of the usual political rough-and-tumble.

But in the midst of a global financial crisis, words are bullets, and the Leader of the Opposition's growing attacks on the guarantee scheme have sowed the seeds of doubt in the minds of global investors.

We cannot allow those doubts to fester.

It is certainly the case that the Leader of the Opposition has been issuing dark warnings about uncertainty for banks on international funding markets if legislation was not passed.

I'd just make the point in passing that this is a bit like a cat burglar warning of an impending crime spree.

In essence, we have decided to bring this legislation forward now, to allow the Leader of the Opposition to take his potshots at a time when they can cause least damage.

Mr Speaker, this standing appropriation is an important step in our ongoing efforts to protect Australia from a global financial crisis that has already driven some of the world's largest economies into recession.

It is part of an ongoing process of the Rudd Government working quietly and methodically through the complex issues the nation confronts.

This process will continue as global circumstances change.

Our promise is that at all times, we will consult broadly, work collaboratively with regulators and with industry, and act in the national interest.

I'll make one final point.

Obviously the consultative approach we have taken to these matters means information can leak out from time to time, including to the Opposition.

This is inconvenient, but we won't ever stop consulting on such important matters, whatever the political cost we incur.

Of course Mr Speaker, the national interest is more important than the political interests of anyone in this House.

It's something those opposite would do well to remind themselves.

I urge the Parliament to support the Guarantee Scheme and this Bill in the interests of promoting financial system stability, confidence in Australia's banks, building societies and credit unions and in the interests of ensuring the flow of credit to Australian businesses and households.

I commend the Bill to the House.