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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

12 December 2010

NO.041

Treasurer's Economic Note

Today, after months of hard work and preparation, I was really proud to announce the Gillard Government's new Competitive and Sustainable Banking plan. Given this is such an important announcement for both our economy and for all Australians, I'd like to take the bulk of today's note as an opportunity to talk in more detail about this new package. For a bit more background and context, I encourage you to take a look at the address to the Financial Services Council I delivered on Wednesday in Brisbane, which touched upon some of the lessons we had learnt from the financial crisis and what these lessons meant for our national savings, our banking system, and the broader economic reform push that is at the core of the Gillard Government's agenda. I should also note that the UN climate change negotiations wrapped up in Cancun this week and I welcome the outcomes we've seen overnight, particularly on climate financing, led by our Minister for Climate Change and Energy Efficiency, Greg Combet. It's another step towards meeting the very big challenges ahead on climate change, including the introduction of a carbon price in Australia.

Labour Force Figures

Before we turn to banking, it is worth reflecting on the terrific jobs figures we saw on Thursday. This month's labour force figures showed more than 54,600 jobs were created in November and the unemployment rate dropped 0.2 percentage points to 5.2 per cent.  A key highlight for me was that, as of November, 300,000 full-time jobs have been created in 2010. This is the largest increase in full-time employment ever recorded in a calendar year and it's something we can all be proud of.  

This sustained jobs growth is particularly impressive given that we've been up against continued volatility in the global economy, the unwinding of stimulus, and a high Aussie dollar. We also saw an all-time record number of Australians in the workforce, with the participation rate rising from last month's high of 65.9 per cent to a new record high of 66.1 per cent. The fact that our country has been able to keep Australians in work, and create so many additional jobs, really does set us apart from much of the rest of the developed world. Just this week we saw Ben Bernanke, Chairman of the US Federal Reserve, highlight in an interview that the unemployment situation in the US, now at 9.8 per cent for November, is a major concern, and it could be four or five years until the US sees a more normal unemployment number.

Competitive and Sustainable Banking Package

The effects of the GFC weren't just felt in the labour market, it also had a devastating impact on the international financial system, particularly on banking competition, and Australia was not immune from this. Our banking system was more stable than others during the crisis, but all Australians know it can be more competitive.  That's why today I have joined with Bill Shorten and David Bradbury to announce that the Gillard Government is taking further action to support a competitive and sustainable banking system to help ensure families and small businesses a fair go in the system.

Our plan is built around three streams of reform: to empower consumers to get a better deal; to help smaller lenders put more competitive pressure on the big banks; and to secure our financial system so it can continue to provide a sustainable flow of credit to home buyers and businesses.

Australia did not suffer the same excesses as the US and Europe, and our banks did not need taxpayer-funded bailouts, or to be nationalised, as happened elsewhere. In fact, the banks will pay over $5 billion to access the Government's guarantees which ensured the continued flow of credit to our economy, avoiding severe credit rationing that would have pushed up interest rates for borrowers right across the country.

But our financial system was not immune from global developments, which impacted particularly hard on smaller lenders in our banking sector, hurting competition. In the years before the global financial crisis, the rise of the residential mortgage-backed securities – RMBS - market allowed the likes of Aussie, Wizard and our regional banks to tap reliable, well-priced funds and put competitive pressure on the Big Four.  This helped to bring down net interest margins over time and helped Australians get a better deal. But the global financial crisis had a devastating impact on RMBS markets, all around the world.

In Australia, RMBS issuance shrunk from over $60 billion in 2007, to around $15 billion in 2008 and 2009. Because of this, since late 2008, the Government has invested around $12 billion of the $16 billion already announced, in AAA-rated RMBS.  This has supported more than $27 billion of RMBS issuance, representing more than three-quarters of all RMBS in the past two years, with not a single cent going to the Big Four banks. This has allowed many of our smaller lenders to keep putting pressure on the big banks.

The additional series of measures we announced will support funding, particularly for our smaller lenders, to ensure that we continue to foster a competitive banking system.  This is central to our plans to encourage a new pillar in the banking system. Among these, we will invest a further $4 billion in AAA-rated RMBS, and continue developing a market for ‘bullet' RMBS for smaller lenders, to help them put more competitive pressure on the big banks. 

Our efforts have already seen credit unions hit their highest market share in twelve years, approving more than 3,500 new mortgages in October, or 7.4 per cent of all approvals for the month, compared with 6.7 per cent in September.  Building societies' share of all newly approved mortgages jumped from 2.4 per cent to 2.8 per cent between September and October, bringing their share back to pre‑2008 levels.

This is a great achievement, but our Government knows that, in addition to supporting the funding needs of smaller lenders, we have to make it easier for consumers to walk down the street to get a better deal. And last Friday, I did exactly that. Regular readers of my economic note may remember that back in March this year, I commended Credit Union Australia, when it announced it would cut its variable home loan rate by 25 basis points for all customers. I've always been a big believer in the potential for our smaller lenders to put competitive pressure on the banks, and so on Friday I set up an account at my local Credit Union Australia branch down at Toombul, in Brisbane.

I hope more Australians will be encouraged to walk down the street and get a better deal after today's announcement that the Government will now ban all exit fees on all standard variable rate mortgages. This will mean that borrowers will not be trapped in a bad deal. We are also providing consumers with more information so that they can compare deals and work out what works best for them. We know that the impacts of the global financial crisis will be with us for many years, but we will continue to do all we can to make the banking system more competitive and work for Australians not against them.

Coming up...

This week, I will be travelling to Melbourne to meet with some members of the financial sector and discuss our new banking package, before heading over to Perth, then Sydney, to meet with key business groups. I'm really looking forward to getting out in communities right across the country and talking with families, business owners and the financial sector about our new Competitive and Sustainable Banking Package, and what it will mean for the future of banking in Australia.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 12 December 2010
www.treasurer.gov.au