The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

1 October 2008

Interview with Chris Uhlmann

ABC Radio AM Program

1 October 2008

SUBJECTS: US Financial Crisis; Interest Rates; Residential Mortgage-Backed Securities

UHLMANN:

Wayne Swan, good morning.

TREASURER:

Good morning, Chris. Good to be with you.

UHLMANN:

Now, you've just been on the phone to the US Under-Secretary of Treasury. What did he have to say to you?

TREASURER:

He assured me that the US Administration was doing everything within its power to ensure that this package passes the Congress, and passes the Congress as quickly as possible. Because as we've heard overnight there have been further developments in Europe as well. It's very important that we get stability into the system where the system has its problem, which is the epicentre - being in the United States and the sub-prime problem. So, the US Administration is doing everything within its power. And as we've heard, both major political leaders in the US are also getting behind the package, and I think that's encouraging.

UHLMANN:

Things in Europe, though, look to be getting worse.

TREASURER:

Yes, certainly it's not encouraging news from Europe but whatever is happening in Europe and whatever is happening in the United States. Our regulators advise us here that our system is fundamentally sound. We are not experiencing the same problems that they are experiencing in the United States or in Europe.

UHLMANN:

Are you sure that you can price all the risk of Australian banks? Are you sure that you know things that the banks know?

TREASURER:

We're not immune from these events, Chris. We're certainly not immune. But our regulators advise me that irrespective of these events elsewhere, our system is fundamentally sound.

UHLMANN:

Can they price derivatives, though? Do they know exactly what the risk our banks are exposed to? We're just hearing there that was $18 billion worth...

TREASURER:

Our regulators do understand the exposures of our banks and in fact our regulators have been working with our banks to declare those exposures. Indeed, that has been part and parcel of our response to this crisis which began, after all, last August. APRA has been working with our deposit-taking institutions, and part and parcel of the reforms they have been implementing is to encourage our institutions to declare and make transparent any exposures. That is part of the solution.

UHLMANN:

Well, given you have such a good idea of what's happening in the banks, should banks immediately pass on the next official interest rate cut?

TREASURER:

Well, I've certainly argued very strongly over the past year that when official rates go down, then the banks should follow, because when they were going up they certainly went up very quickly. So, I would encourage all of our banks to act as responsibly and as competitively as they possibly can. Some reports this morning that the banks may not pass on any proposed cut from the RBA are simply incredible. I can't believe that the banks would behave in that way. There is certainly a problem at the moment in terms of short-term costs for banks. They have spiked and they are very high. It complicates the matter. But it is certainly not the case that the banks would be in the position where they would say they would not pass on any official rate cut at all that was declared by the Reserve Bank.

UHLMANN:

Just to be perfectly clear, are you saying that they should pass on all of the next official rate cut or that you think that they should have some discretion because their other costs are going up?

TREASURER:

Well, certainly I would encourage them to act as responsibly and as competitively as they possibly can. And that's the reason, for example...

UHLMANN:

That's not all, though, is it, Treasurer? You're not saying they should pass on all of the next cut?

TREASURER:

Well, we are in a more complicated environment and I can assure you that I will be putting maximum pressure on the banks to ensure they pass on the maximum amount that is economically responsible given events in global markets. And I certainly won't relent on that.

UHLMANN:

Now, the big move we've seen from you is the Government's going to pump $4 billion worth of taxpayers' money into residential mortgage-backed securities - that's securities raised by non-bank lenders. Why?

TREASURER:

First of all, it's an investment. It's an investment in AAA rated prime residential mortgage-backed securities. It's a very important investment because what's occurred in recent times, Chris, is that the smaller banks and the non-bank lenders have not been able to access finance because of these events on global financial markets. And we think for competitive reasons, it's very important that there is a source of finance for these lenders. And that's why we decided to take this action, and this was an action that we contemplated earlier this year and we've done it, if you like, to make the market more competitive and to make the market more liquid.

UHLMANN:

So, it is just a matter about competition and not about keeping Australia safe - $4 billion worth of money to a broken business model? They can't raise money...

TREASURER:

That is completely incorrect. This is not a broken business model. What we're dealing with here is mid-tier banks, deposit-taking institutions, and we are dealing also with non-bank lenders that have kept the major banks honest in recent years and made competition in the market fierce. Through no fault of their own, and through no problem with their business model, they've not been able to access finance because of the crisis in global credit markets.

UHLMANN:

If they can't raise cash overseas why should the Government lend them a hand?

TREASURER:

It's a competition measure that puts downward pressure on rates. Because as you are well aware, and families out there are under tremendous financial pressure. Ten interest rate rise in a row under the previous government. Further unofficial rate rises caused by the global credit crisis. All of those things have put a lot of pressure on Australian families and all year I have made it very clear that the Government will do everything it possibly can to put competition in the banking market, and this is a very important part of that.

UHLMANN:

Now, you announced this move at 4.00 pm last Friday. You were quite specific in saying you were doing it because you wanted to make sure that trading was closed. Was all trading in Australia completely settled when you made your announcement last Friday?

TREASURER:

We announced it after the market closed and that was the advice we received from our regulators as to when we should make that announcement. We took that advice.

UHLMANN:

But doesn't settlement take place for another 10 minutes and didn't we see a 25 point rise in the Stock exchange between 4.00 and 4.10 pm while you were making your announcement?

TREASURER:

I'd have to go away and look at that, Chris. But I took the advice of our regulators about the timing of our announcement and I'm entirely confident that was the right thing to do.

UHLMANN:

Wayne Swan, thank you.

TREASURER:

Good to be with you.