Minister for Superannuation and Corporate Law
3 December 2007 - 8 June 2009
Address to the European Australian Business Council Boardroom
10 October 2008
I’d like to thank the European Australian Business Council for inviting me to speak as part of your boardroom program.
The Australian Government is committed to building upon the positive partnership Australia already has with Europe.
In his speech to the European Policy Centre in Brussels earlier this year, the Prime Minister of Australia, Kevin Rudd, spoke of the deep and enduring relationship between Europe and Australia and the importance of improving and expanding that relationship.
Today, I’d like to echo some of the Prime Minister’s sentiments, and start by talking about the longstanding historical, political, economic and cultural ties between Australia and Europe.
Europe has nurtured Western civilisation.
Our deeply-held beliefs in liberal democracy and the rights of the individual are based on European models.
These are the very foundations of Australia’s stable society, and the system of government that has served us so well since Federation.
As two global economies, Australia and Europe are closely connected through trade and investment.
In fact, the European Union is Australia’s largest trade and investment partner.
Although we can at times have differences over trade policy – Australia is committed to working closely with the EU to produce real outcomes in bilateral and multilateral trade.
In particular, we are both committed to ensuring that the Doha Round of WTO negotiations are brought to a successful conclusion.
Our cultural identity also draws heavily on our European heritage. Around 2 million Australians were born in Europe and nearly 90 per cent of Australians have some European ancestry.
For these reasons and many more, maintaining a positive and dynamic relationship with Europe is a high priority for this Government.
PM meeting with EC President
To this end, in April this year, Prime Minister Rudd met with the President of the European Commission, Jose Manuel Barroso, in Brussels.
During the meeting, Australia and the EU agreed to intensify and upgrade bilateral relations through a new Australia-European Union Key Partnership Framework.
The Partnership Framework will provide a more constructive context for both parties to pursue our shared interests by:
- strengthening bilateral and multilateral dialogue and cooperation in support of shared foreign policy and global security interests;
- promoting and supporting the multilateral rules-based trading system, and consolidating and expanding the bilateral trade and investment relationship;
- enhancing regional and bilateral cooperation and coordination in relation to the Asia and Pacific regions;
- seeking opportunities to cooperate on climate change, environment and energy security; and
- strengthening cooperation in science, technology and innovation, education and culture and to facilitate the movement of people.
The Partnership Framework has invigorated the relationship between Australia and the EU.
As just one example, the Australian Government welcomed the signing in Brussels on 30th June this year of the EU-Australia Passenger Name Record Agreement.
The Agreement will allow for information about travellers flying into Australia on some airlines to be disclosed to Australian Customs officials. This is an important step towards closer cooperation between the EU and Australia in the fight against terrorism and serious transnational crime.
This new era of broad-based cooperation between Australia and the EU will provide both parties with many important benefits.
Strong links between Australia and the EU mean we are in a good position to learn from each other’s experiences, particularly in managing our financial systems.
As the Minister for Superannuation and Corporate Law, this is a subject close to my heart.
On that point, I would like to spend some time today discussing an international financial issue which is affecting both our jurisdictions.
Global credit market crisis
The global credit crisis is a critical issue confronting Australia and Europe.
The past 12 months have seen the most difficult period in global financial markets for at least two decades.
The sub‑prime crisis has led to severe dislocations in global credit and funding markets. This has affected both the cost and availability of finance for a wide range of borrowers.
Over one year after the initial phase, recent developments have reminded us that the crisis is not yet over.
Impact on Australia
Compared with their US and European counterparts, Australian financial institutions have very little direct exposure to the US sub‑prime sector.
Australia’s banking system remains profitable, well capitalised, and prudentially sound. The terms-of-trade boom is expected to support Australia’s economic expansion going forward.
And yet Australia is not immune from the fallout of the global credit crisis.
Some Australian banks have announced increased provisioning against specific US sub-prime related assets as well as domestic corporate exposures. However, these are not considered prudentially significant.
Notwithstanding these developments, the “big four” Australian banks have still been able to maintain a solid pace of funding. But spreads on short-term funding remain elevated, and longer-term spreads seem to have risen again recently.
Responding to elevated funding costs since the financial market turmoil began last August, Australia’s major banks have raised household mortgage lending rates by around 55 basis points on top of increases in the RBA’s cash rate.
However, interest rates on loans to households have now started to fall, This is a result of the RBA cutting the official cash rate at its latest two Board meetings by a combined 125 basis points.
Also, the Australian dollar until very recently was around historical highs. Now the Australian dollar is trading at lows against the US dollar not seen for several years.
In line with markets worldwide, Australia’s equity market has fallen by approximately 35 per cent since reaching a peak in November last year. This is the largest drop in the past 20 years.
All stock market sectors have fallen. The hardest hit sector has been consumer discretionary with a 47 per cent drop… industrials with a 45 per cent drop... financials with a 40 per cent drop… and materials with a 39 per cent drop.
Impact on Europe
And I’m sure you will all be aware that EU countries have not escaped the turmoil unscathed and in many respects, Europe has become the current centre of world financial events.
As in the US, the cost and availability of capital in key European funding markets has been significantly affected.
The recent intensification of the financial market turmoil has seen the collapse of several European financial institutions and loss of confidence in financial markets.
In response to these pressures, both the European Central Bank and the Bank of England have injected significant amounts of additional liquidity into their respective banking systems.
In addition, recently, several European governments have stepped in and extended their respective deposit guarantee schemes, provided loans to struggling financial institutions and in some cases nationalised financial institutions.
Just a couple of days ago, the UK government announced a £50 billion rescue package aimed at injecting capital into the UK banking system and extended its liquidity schemes for financial institutions.
This move has also coincided with several European central banks taking part in a coordinated international action to reduce interest rates by 50 basis point.
The ongoing turmoil has also coincided with weakened housing markets in several EU economies.
In the UK and Ireland, where house prices had appreciated strongly over the preceding years, housing prices have declined by almost ten per cent over the past year.
And gross mortgage lending in the UK has declined to the lowest levels since April 2005.
Australia’s response to the global credit crisis
So how is Australia responding to this crisis?
Our strong, well-regulated banking sector and sound prudential framework is helping us to overcome these challenges.
Our financial regulators acted swiftly to minimise the impact of the global crisis on the Australian economy.
In the years leading up to this crisis, APRA had conducted a rigorous program of risk evaluation and inspection. A program which discouraged institutions from imprudent lending.
APRA also stepped up its monitoring activities as the aftershocks of the financial turmoil were felt on our shores.
For its part, the Reserve Bank quickly recognised that, in this particular financial crisis, it needed to accept a broader range of financial instruments as collateral in its lending operations.
The prompt action by the RBA, relating to both overnight and term lending, helped to stabilise the Australian financial system, and maintain investor confidence.
The RBA’s swift response also allowed Australian banks to expand both their assets and liabilities to meet the new demands of business and household borrowers.
Australian banks themselves also responded swiftly to the US sub‑prime crisis.
Compared with their global counterparts, the balance sheets of our banks are still very healthy.
When news of the crisis broke, the Australian Government encouraged banks to disclose their positions and promptly address any problems.
But despite the fact that we ensured our financial system continued to operate along proper and transparent lines — and despite the fact that the US sub-prime crisis originated beyond our shores — Australia was not immune to its effects.
We are part of the global financial system.
And we must actively contribute to the strength of that broader system. That is why Treasurer Swan is in Washington today meeting with the G20 Finance Ministers to discuss further global, co-ordinated action.
The robustness of Australia’s regulatory framework has not gone unnoticed internationally. It is heartening to see elements of our framework reflected in the reform proposals of other major economies.
And of course, we will continue to discuss our regulatory framework with other jurisdictions.
Shared concerns or common interests
If the world can learn one lesson from the US sub-prime crisis, it is this — international cooperation is critical to maintaining global financial stability.
The world needs a global regulatory framework that ensures financial institutions maintain improved standards of transparency and disclosure…
That keeps pace with financial market innovation…
That encourages convergence of national regulatory standards…
And that delivers effective cross-border supervision of international financial businesses.
This is why Australia has welcomed the recommendations of the Financial Stability Forum. We are implementing these recommendations domestically, and are also supporting their wide adoption internationally.
In his speech to the UN General Assembly on 25 September, Prime Minister Rudd called for a number of additional measures, including:
- licensing of all systemically important financial institutions;
- addressing the pro-cyclicality of current regulatory capital requirements by requiring banks and others to build up capital in good times as a buffer for bad times; and
- requiring higher capital requirements for firms that reward short-term returns or excessive risk taking in their remuneration packages.
We are actively considering how these further measures could be incorporated into our own regulatory framework.
Prime Minister Rudd also outlined proposals for the G‑20, with its unique membership of systemically important countries, to play a key role in driving adoption of the FSF recommendations and strengthening the global financial architecture for crisis prevention.
The G‑20 would strengthen its input into shaping the work of the IMF and FSF and the implementation of agreed outcomes.
This would include the IMF and FSF working together to develop early warning systems of impending institutional vulnerabilities and providing advice on remedial policies.
The joint statement by Prime Ministers Rudd and Brown in April foreshadowed such an early warning system for global financial risks and the UK has advanced some proposals of its own in this area.
The G‑20 would itself engage on the risks facing the global financial system based on regular scenario analysis provided by the IMF and FSF.
The relevant international bodies must be able to effectively fulfill the mandates we have given them.
And as part of this, key emerging market economies must have a voice in renewing the architecture and devising crisis prevention measures.
A strengthened G‑20, with financial stability placed at the centre of its work program, would provide political authority for the necessary reforms.
Australia has weathered the financial turmoil of the past year well.
But I would like to emphasise that this was not because our financial system is insulated against the influences of the global financial system.
And it was certainly not because we have limited our engagement in the international economy.
Rather, it is because we have sound financial institutions with good risk management practices, supported by a strong prudential regulatory framework, and a globally respected central bank.
Australia is — and under this Government will remain — an exemplar of openness… of engagement with the global economy… and of willingness to invest in our own future.
We will continue to work with other economies such as the EU.
And we will continue to be actively involved in global efforts to maintain stability in the global financial system.