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

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

22 October 2008

Interview with Fran Kelly

ABC Radio National Breakfast

22 October 2008

SUBJECTS: Economic Security Strategy; Deposit Guarantee; Small Business Forum

KELLY:

Treasurer, welcome to Breakfast.

TREASURER:

Good morning, Fran. It's good to be with you.

KELLY:

Treasurer, what do you say to Australians who have their savings frozen in mortgage funds right now?

TREASURER:

What I'd say to all Australians is that we put in place a comprehensive guarantee for bank deposits supervised by APRA. That was a very, very important decision and it has restored stability to our financial system. It has strengthened our banking system. It has made it possible for there to be cuts in interest rates by banks, and they are now flowing through to the system. They are flowing through to households. They are flowing through to business. Now, this has been very important. People need to understand the context in which we made the decision for a comprehensive guarantee, and we make no apologies whatsoever for that comprehensive guarantee. It was supported by our regulators, and the reason they supported it was the world changed fundamentally two or three weeks ago and the imperative was to give people faith in the very centre of our whole financial system - the banking system. And that's what we did and that is working and credit is now flowing in the Australian financial system.

KELLY:

Well, I go back to the original question. What do you say to those Australians who have their savings frozen in the mortgage funds?

TREASURER:

What I say to them is that their investments are safe but our decision to provide the guarantee will put further liquidity in the system and make sure that the very central part of our financial system is stable. That is absolutely imperative. We flagged in the Parliament last Wednesday that there would have to be some finetuning and adjustments to the guarantee, and it doesn't relate to a cap. The cap that is talked about by Malcolm Turnbull of $100,000 would cause a flood of funds out of the banking system. That's exactly what it would do. It would be destabilising. Because of what occurred on world financial markets two or three weeks ago, our guarantee had to be absolutely comprehensive. It was and we make no apologies for that.

KELLY:

Your guarantee, though, has led to, perhaps not a flood, but certainly a fair amount of money shifting from one place to another. What do you say to Australians who pulled their money from cash management trusts, felt they had to in a panic, and felt they've had to rush to the bank to make…

TREASURER:

Well, a cash management trust is more like an investment. It's not like a deposit in a bank. But let me make this point, and this is what I said last week on Wednesday in my Second Reading Speech. “The Government is consulting on the interaction between this guarantee on eligible wholesale borrowing and the guarantee on deposits. If desirable, the Government will proceed with measures to clarify the intersection of these guarantees and facilitate their operation. This intersection is particularly important in relation to the market for short-term bank securities.”

That is precisely what we are doing and it is not a cap. What we are looking at doing, and we've discussed this with the Reserve Bank, the Treasury are talking about, is putting in place a fee above a certain level. That's what we're doing, for the reasons that I outlined in my Second Reading Speech last Wednesday morning.

KELLY:

I want to talk more about that, but this very basic question: you must have seen this coming? You must have known that once you put these guarantees in place - and some institutions were not covered - that there would be a flood of funds? You must have seen that distortion?

TREASURER:

We always recognised that there would be consequences of that decision. A comprehensive guarantee was important but just because there are some particular investments that aren't bank deposits that are not covered doesn't mean to say you don't need a comprehensive guarantee for your banking system.

KELLY:

No, but there was no warning to people and to these organisations these institutions, that this might happen. Did you foresee there would be tens of millions of dollars shifted…

TREASURER:

Fran, think about this for a minute. You said there was no warning. What we did was to act swiftly. We acted swiftly on the advice of our regulators for the reasons that I outlined before. And the reasons we acted swiftly were what was occurring in world financial markets. There were guarantees being put in place around the world. We acted to protect the position of our banking system in a circumstance where other countries were moving very swiftly to put in place a whole range of guarantees which would have had knock-on effects for our banking system.

KELLY:

What was your advice from Treasury and from the Reserve Bank of Australia about the market distortion effect of an uneven deposit guarantee?

TREASURER:

What the Treasury advised and what the Reserve Bank advised was that the step that we should take on the Sunday that we took it was for a comprehensive guarantee for all of the reasons that the Prime Minister outlined when he took that decision. But we began finetuning the system in the middle of last week when the Reserve Bank and the Treasury started talking about the impact on the short-term money market. Now, there was some commentary on the program before about the length of time that it has taken to put in place this fee level.

KELLY:

(inaudible) that advice.

TREASURER:

Fran, we make no apologies for that either because we've been out there consulting with industry. One of the reasons that there are stories floating around at the moment is that there are plenty of people out there that have got a view on what we should do or should not do. And it's very important for us to take all those into account and announce our decision after that consideration.

KELLY:

Well, you've mentioned one of the things you're looking at. You're looking at some sort of level where an insurance premium would have to be paid…

TREASURER:

That's right. Not a cap. Let me make this very clear. The cap that Malcolm Turnbull was talking about would exclude 40 per cent of bank deposits - 40 per cent of bank deposits.

KELLY:

So, if you're looking at putting in this level for insurance to be paid, you say somewhere north of $1 million. When are we going to get the final figure, or can you tell us now?

TREASURER:

When it's concluded. I certainly won't be announcing it on your program, Fran, I can tell you that. It will be done in a thorough, measured and considered way.

KELLY:

Could it be less than $1 million?

TREASURER:

I'm not going to speculate about it, Fran. I've said all I'm going to say on it. But what the Government is doing, what our regulators are doing, is settling all of those details and consulting with industry. And if we did something different we would be criticised for that?

KELLY:

How big will the premium be? How will this work?

TREASURER:

As I said, I'm not talking about the detail on the program. This is being sorted out between the regulators who are talking to the market. That is how it should be and you don't speculate on the outcomes that are market sensitive on radio programs in the morning.

KELLY:

Have you had that meeting yet or have you had direct correspondence and communication with some of the financial institutions who have been hit hard by this and have they agreed with you? Are they talking to you about what sort of level they think will even the playing field?

TREASURER:

Fran, of course they are and that's why some of these stories floating, some in a distorted way. The industry has a view and there are winners, always, and there are those who don't get what they want. So, there will be all sorts of stories floating around in the media. But we'll get the detail absolutely right.

KELLY:

I mean, basically what you're saying is you acted in a hurry because the need was urgent. Yes?

TREASURER:

Fran, we acted. We started acting on this issue at the beginning of this year when we took up a recommendation that goes back to the HIH Royal Commission about a deposit guarantee and we put legislation together to deliver a guarantee which had a cap. But then circumstances completely changed, as I just indicated before, and we moved to a comprehensive guarantee. So, we've been ahead of the game on this all year. And when circumstances change in the international economy, when I was at the G7, G20 and IMF meetings over the weekend before last, it was absolutely clear to me that we had to move swiftly. So, we moved to a comprehensive guarantee away from the original proposal on which we had consulted industry extensively and we moved on that weekend because it was absolutely imperative to move then, and I think most people out there think it was a very good thing for this economy, for this country, for our financial stability, that we moved on that weekend.

KELLY:

And maybe some of those who don't include the mortgage funds. Can we go to the Small Business Summit on Friday. What's your message for small business and banks? Because we heard from small business yesterday who suggested that some of them are having their credit frozen by the banks. Given the guarantees you've put and the support you've put in place for the banks, do you think that's fair?

TREASURER:

Well Fran, as I've just indicated to you, that credit is starting to flow again but the reason we needed the comprehensive guarantee was to ensure that could happen, and that is starting to happen. But yes, it is the case that some businesses have indicated to me, small and medium sized businesses particularly, that they are having difficulty still in accessing credit. That's what a credit crunch is, and that's what the world has been through in recent times. Fortunately, we've been spared the worst of much of that to the extent that it's happening elsewhere. But nevertheless, this issue has been raised and we're talking with business, as we normally do right around the country, including small business in Brisbane on Friday.

KELLY:

And you'll be talking to the banks too?

TREASURER:

Absolutely.

KELLY:

Alright Treasurer, thank you very much for joining us on Breakfast.

TREASURER:

Thank you.