Press Conference
Parliament House
7 February 2010
SUBJECTS: Bank Guarantee; economic management
TREASURER:
Today, before I come to my announcement which is market sensitive which is why we're here on a Sunday, I just want to say a few words about the Black Saturday bush fires. I think today is a day to think about the hardship and the loss of so many fellow Australians, about the sacrifice that so many made, the impact on their lives. So today our hearts do go out to all of those who've been affected, and we should dedicate ourselves today to do as much as we possibly can to assist them as they go through what is still for many people a difficult period.
But today I want to talk about the wholesale funding guarantee and the large deposit guarantee, because this is a very significant issue and of course, as you know, it's market sensitive.
I'm pleased to mark a very significant milestone in Australia's recovery from the worst global recession in over 75 years. I think everybody knows that Australia was almost alone amongst all advanced economies in avoiding recession. We've got lower debt, lower deficit, and the second lowest unemployment of any major advanced economy.
The announcement today brings further evidence of the resilience and the recovery of the Australian economy from this global financial crisis. So today I am announcing the closure of the Government's Guarantee Scheme for Large Deposits and Wholesale Funding on 31 March 2010 – a decision taken on the unanimous advice of the Council of Financial Regulators.
I want to be very clear to all Australians that today's announcement does not impact on the Financial Claims Scheme. This scheme will continue giving over 16 million Australians certainty over their deposits of up to $1 million, with that cap to be reviewed in October 2011. This deposit guarantee provides automatic free coverage for an estimated 99.5 per cent of all deposits. It's very important to distinguish that from the removal of the wholesale funding guarantee and the large deposit guarantee.
Over the past 18 months, our financial system has proved itself one of the strongest in the world, thanks in large part to sound regulation and first-class supervision. But we have been by no means immune from the effects of the global financial crisis. Our banks are highly-rated, well-capitalised, and did not engage in the risky lending that we saw in so many other countries. But they still have to compete in global credit markets for funding against other borrowers around the world.
Now, there was a period in 2008 where our banks experienced great difficulty in borrowing offshore, and this did threaten the flow of credit to the Australian economy. In response to this severe dislocation of international capital markets, most of our G20 colleagues introduced some form of bank guarantee. So in October 2008, the Australian Government acted quickly, the Australian Government acted decisively, to ensure that our banks stayed on a level playing field with other banks around the world.
The Government's bank guarantee has been absolutely vital to the stability of the Australian economy when others of course were collapsing around the globe. It's been critical in supporting the flow of credit through our economy. It gave our banks [continuing access ] to global capital markets on competitive terms, allowing them to raise something like $160 billion.
Now this 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 to the Australian people for the use of the guarantee and they will pay around $5.5 billion to the Australian people for its use over the full life of the scheme. Without the guarantee, our banks would have lent less and interest rates for borrowers would have been far higher. This would have led directly to lower growth and more households losing a breadwinner right across this country.
So the guarantee has been critical in helping to support competition in the banking sector throughout the global financial crisis which hit smaller lenders particularly hard. It's offered funding certainty to more than 150 deposit-taking institutions, including 11 building societies and 110 credit unions. The guarantee has allowed non-major Australian banks to raise over $32 billion in funding from international credit markets. And together with the Government's direct investment of up to $16 billion in high-quality, AAA rated RMBS, it has helped smaller lenders keep lending at competitive interest rates and putting competitive pressure on the big banks.
Our regulators have constantly monitored international developments, evolving market conditions, and the financial position of all Australian banks, credit unions and building societies. The Council has advised that bank funding conditions have improved such that the guarantee is no longer needed. This reflects the strength of our individual institutions, and the Council advises that no institution will need the guarantee to fund themselves.
And critically, our regulators explicitly advised that removing the guarantee would not materially affect banking sector funding costs. So I make this point very clearly: there will be absolutely no justification, because of the withdrawal of the guarantee, for any bank to raise interest rates beyond any Reserve Bank movements. No justification whatsoever.
And finally, the Council has advised that key G20 countries have either removed their bank guarantees or will do so shortly. In light of the greater comparative strength of Australia's financial system, the Council has advised it is appropriate that our guarantee be removed.
Today, I'm also announcing the closure of the Guarantee of State and Territory Borrowing, which has been critical to maintaining the capacity of state and territory governments to deliver on nation building investments. The global recession severely constrained liquidity in state government bond markets. 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 have been experienced by all states, regardless of whether they opted to make explicit use of the guarantee or not. The Government will withdraw the State Guarantee from 31st December 2010. So this is a very important day for our economy, as we go about building the recovery. We're confident about the future but not complacent. Over to you.
JOURNALIST:
Mr Swan I just wondered whether the Reserve Bank has advised you whether its decision was – well the timing of it – in any way, when they made their decision on interest rates last Tuesday.
And secondly. Just generally, what advice are you getting from the Council of Financial Regulators about the sorts of distortions that we saw in particularly the secondary markets - the state government paper and non major bank paper - since the time the guarantee was put in place. Have all those markets basically restored to (inaudible)?
TREASURER:
Well, I've been discussing the future of the guarantee with the Council of Financial Regulators for some time, because you will recall Laura, we said when we announced the guarantee for term funding and for large deposits that it was dependent upon market conditions. So I've been talking to the Council of Financial Regulators about market conditions through the whole period, from the beginning of the guarantee in October 2008. Those discussions accelerated towards the end of last year and early this year, and the Council advised me in the last few weeks that they thought it was now appropriate to withdraw the Large Deposit Guarantee and the Term Funding Guarantee, as I have announced today. I don't go into the nature of all of the discussions that I have with the Council of Financial Regulators, but their advice to me has been what I have conveyed in my remarks just before.
JOURNALIST:
What would you do to the institutions, or indeed, what could you do if they used this decision to increase their interest rates beyond any future move by the Reserve Bank.
TREASURER:
Well, I think we've seen from the data that's been published that their interest rate margins are back to pre-crisis levels. That means that they are as profitable in terms of their rate margins now as they were prior to the onset of the global financial crisis. So therefore there is no justification to use this decision for them to say that it would have an impact on their borrowing costs. I want to make that point.
Secondly, I think the Australian people were bitterly disappointed with the behaviour of some of our major banks at the end of last year. And if any major bank were, in the conditions that I've just described, to attribute some move above the Reserve Bank rate to a decision such as this, they would be wrong to do so, and I think they would incur the wrath, not just of the Australian people, but of the Australian Government.
Now can I make a couple of points about competition, because I think there ought to be a strong discussion about competition. What the global financial crisis has done is it has had an impact upon the competitive arrangements in our lending sector. Certainly the removal of securitisation or the loss of securitisation caused by the global financial crisis removed an important source of funding for many second tier banks, small banks and non-bank lenders. That's why we have moved to invest in AAA high quality RMBS up to $16 billion, to make sure we can keep the infrastructure in place which will be, in the future as securitisation begins to return – it will never come back to where it was – but has kept the infrastructure in place for those banks to get a pipeline of funding. And that $16 billion is going out at the moment and will certainly make that part of the sector much more competitive against our majors.
Secondly the Government also has brought in new consumer credit laws, and in particular unfair contract terms are part of those, and I'm sure when they begin - I think from the middle of this year - there will be an examination of some of the fees and charges that particular institutions are charging as well. So the Government is very much focused on the fact that the global financial crisis - whilst it impacted dramatically on competition - that as we move out of this we've got to do everything that we can to foster further competition in the banking sector.
JOURNALIST:
Just in terms of the deposit guarantee. There's been some discussion of moving to a more permanent form of deposit insurance. Do you have any message to voters of what your plans are down the track?
TREASURER:
We gave a guarantee when we announced the bank guarantee that the arrangements for deposits under $1 million would be in place for a three year period, and they will be in place until towards the end of next year. As we get towards the end of next year the Government will make subsequent announcements about what it may or may not do in that area.
JOURNALIST:
Have some banks been misusing this guarantee, that is, taking advantage of it to raise money in favourable terms and then lending the money offshore?
TREASURER:
Well, the Reserve Bank administers the scheme and it has the discretion - if it thought that a particular institution was misusing the scheme - not to allow them access to the scheme. So I think …
JOURNALIST:
Have they done so?
TREASURER:
Not to my knowledge. I have no knowledge of any particular instance where they may have refused an application, but they administer the scheme and they have the power to refuse an application if they desire. Secondly, the activities in the banks - in terms of their lending - are supervised by APRA, and if APRA thought that a bank was acting in a risky way it could also intervene. And I'm not aware…
JOURNALIST:
Have you been upset with the behaviour of guarantees that have been approved? With the use that organisations such as the Macquarie Bank in particular - the one that people are talking about - made of that money.
TREASURER:
Well, there's a lot of scuttlebutt that you hear around the place, but what I know is we have a first class regulator - two first class regulators in this space - namely the Reserve Bank that has to approve the application, and APRA that supervises the behaviour of the banking institution. And both those bodies have been deeply involved in administering the scheme, and they have not advised me at any stage of such misuse that you have talked about.
JOURNALIST:
And you're not unhappy with the use that organisations such as Macquarie…
TREASURER:
Well, I have confidence in the advice that I receive from our regulators. They have shown during this crisis to be very competent. They are highly regarded not only domestically but around the world, and they have administered the scheme. I'm sure you wouldn't want me to be out there personally vetting the applications.
JOURNALIST:
Mr Swan, in addition to the two policy areas you mentioned previously to support competition in the banking sector, is the Government currently considering any other policy (inaudible) encouraging further competition in the sector, beyond the two you mentioned earlier?
TREASURER:
The Government always has this area under review. The initiatives with the AAA rated high-quality RMBS are very significant and are receiving very substantial responses in terms of the institutions that are going out there and using them. There are the measures that we're taking in terms of consumer credit and so on, and there may be other matters that we wish to address as we go forward. It is the case that the global financial crisis demonstrated that we had strong banks, our four majors are amongst the strongest in the world and that's been a strength as we've gone through, but unfortunately the global financial crisis did weaken many of their competitors. So we're putting a lot of effort into ensuring that as securitisation begins to return, and other conditions in the market normalise that we do everything we can to further more competition in the market.
JOURNALIST:
Treasurer, will you be talking to central bank Governors in the next few days about financial regulation generally? And what do you think about the idea of changing the capital adequacy rules in the banks – another set of regulation – to cut down on risky lending and perhaps…
TREASURER:
There's an international discussion going on in great detail at the moment through the Basel Committee, as well as the Financial Stability Board. They have processes in place to evaluate the impact of various proposals which have come through the G20 Finance Ministers and the G20 Leaders. They are doing that now. Consultations are going on with individual countries via both those processes, and that will continue as we go through the rest of this year. So I'm not going to pre-empt the outcome of those processes but they are important. They are important to making sure that we get a set of international arrangements which doesn't see a repeat of events of the past 18 months or two years.
JOURNALIST:
You've got a final date here of 24th March for access to the scheme. Why not end it now?
TREASURER:
Because people need certainty…
JOURNALIST:
Given that it's market sensitive, you chose to announce it on a Sunday. Usually when something is market sensitive it has an immediate effect.
TREASURER:
Because we have said to people we are moving out of this scheme, everyone's been aware that the Government was going to move out at some stage because we said we would remove it when market conditions normalise. We thought - I think the legislation says we have to have 20 working days notice.
JOURNALIST:
(Inaudible)
TREASURER:
Right. But secondly, I think we've done a bit more than that. But there's no rush to get out, we're just moving out because we think the time is right because the Council has given us that recommendation.
JOURNALIST:
You don't think there'll be a last minute rush to take advantage of the guarantees in the next week?
TREASURER:
Well, I don't know what will happen in the next two weeks, but I'll tell you a couple of facts. In January 98 per cent of issuances from the major banks were unguaranteed. Two of the banks to my knowledge have not accessed the scheme for some months. They took a decision not to access the scheme. I think the general view is that the sooner we move out of this scheme the better, and the Government is doing it at this pace, consistent with the advice that we received from our regulators.
JOURNALIST:
Mr Swan what about the state guarantee? The states are – two states in particular – are relying heavily on it for infrastructure funding over the long-term. Have you talked to them about timeframe for scaling it back and stopping it? Are you comfortable that they will be able to…
TREASURER:
They were informed over the weekend of our intention to exit. There's a different timetable here, it's 31 December this year. Why have we done that? We've done that because they need to get liquidity in to their unguaranteed bond lines, and that takes a bit of time. So that's why we've set a 31st of December timetable there. And some of the states, all states in fact, have been doing unguaranteed issuances anyway and were aiming to move away from the guarantee. A reasonable time, our advisors said, would be by 31 December, at the end of this year.
JOURNALIST:
Mr Swan, are these announcements today the single most important sign to date that the crisis has passed?
TREASURER:
I think they're very important. I mean if you cast your mind back to what circumstances were like in October 2008; at the end of that year our major banks and our financial institutions had been unable for some months to raise funds offshore either because it wasn't available or it was just too expensive. There was a threat to the flow of credit to the Australian economy so we decided to move quickly, and as we say decisively, to put an end to that problem by putting the guarantee in place. It was one of the most fundamental decisions that we took to cushion this economy from the impact of what became a global recession. The weekend that we announced the guarantee I was actually in Washington at an emergency meeting of G20 Finance Ministers with George Bush. And we took the decision to put this guarantee in place on the Sunday morning, which I plugged into from Washington. The Prime Minister announced it, I think on the Sunday afternoon. If you talk to people in the business community they will all tell you that that decision that weekend, in particular its timing, was absolutely critical in stabilising our financial system, and that without it we could have been looking at a very, very different outcome for Australia
JOURNALIST:
Given your move on the guarantee is a positive sign of the economy, do you rule out further re-jigging the stimulus spending by bringing the number down…
TREASURER:
The stimulus is being gradually withdrawn.
JOURNALIST:
Yes, but bringing it down in overall size now that the economy is improving.
TREASURER:
Just a couple of facts; the stimulus peaked in the middle of last year. Every quarter this year it detracts from growth, but if you were to go out and say I'm going to rip the rest of the stimulus out for 2010/2011 you'd be disrupting a whole pipeline of activity.
JOURNALIST:
That wasn't my question. You said that you could actually just bring it back down even more…
TREASURER:
Well, I'm saying to do that would be damaging to the recovery.
JOURNALIST:
Are you ruling it out?
TREASURER:
It would pull the rug out from the recovery. Most of the stimulus money has been committed, and it has been committed in a pipeline of activity so that when employers take decisions to hire staff or keep them on they know there's a pipeline of work.
JOURNALIST:
That money that isn't committed, could you reconfigure that?
TREASURER:
I addressed all of these issues when I presented MYEFO here at the end of last year.
JOURNALIST:
Each and every single one of the $42 billion will be spent?
TREASURER:
A large part of that money is already committed and in the process of being spent in one way or another, because there is a pipeline of activity which is critical. And, of course the risk to the Australian economy is the Liberal Party who, are saying they would rip it out when it is already being wound down, and cause enormous uncertainty out there amongst employers and employees, putting at risk the employment of tens of thousands of tradies and businesses that have made investments and hiring decisions, and families that have made decisions on expenditure and so on, putting all of that at risk. It just shows the fundamental misjudgement of the Liberal Party, and their economic inexperience.
JOURNALIST:
It sounds like you're not ruling out tinkering with it further.
TREASURER:
I'm not ruling anything in or out. What I can say to you is that the stimulus is a pipeline of activity which is committed and going ahead, so the question is irrelevant.
JOURNALIST:
Well, with respect I don't think it is.
TREASURER:
Yes it is.
JOURNALIST:
If you have $42 billion - your question from Alison was whether the $42 billion - every single one of those dollars - was going to be rolled out.
TREASURER:
The vast amount of money committed in the $42 billion dollar infrastructure package and stimulus package is committed and is committed to a pipeline of activity and businesses and employment, and the Liberal Party is risking all of that, and creating an enormous amount of uncertainty in a critical sector for our recovery. Thanks.
