13 October 2008

Interview with Madonna King, ABC 612

SUBJECTS: Global economy, deposit guarantee, Australian subsidiaries of foreign banks, non-deposit taking institutions, property prices

BOWEN:

Good morning Madonna.

KING:

Other countries were doing this. What prompted Australia to act? Was it to keep our banks competitive?

BOWEN:

Partly. There are two issues: firstly, as you said, we have guaranteed all bank deposits in Australia; and secondly, guaranteed the overseas borrowing of all Australia banks, in return for a fee from the banks.

Now there are two reasons for doing that.

With the deposits: with this wave of bad news after bad news from overseas, it's natural that people would be concerned. Now, all of our financial institutions are very sound. They're all very well regulated by APRA (the Australian Prudential and Regulatory Authority), but we wanted to ensure that people had that extra insurance policy – that extra bit of comfort; and to ensure that there was no move to do anything rash, and try and take money out of banks. So this is just, an extra reassurance for people. We think it's highly unlikely that it would ever be necessary but it's there in case the worst ever happens.

KING:

But there must have been some level of concern that some institutions might not be able weather it, as has been the case overseas?

BOWEN:

Well, no, all our financial institutions continue to be very sound; but what we are concerned about is to ensure that the Australian community is comfortable with the level of soundness, and they know that, now they have that extra level of support, if necessary.

KING:

You say, 'all our banks' – do you mean financial institutions? Building societies, all of those?

BOWEN:

Yes, all of those that are regulated by APRA – by the government; their footing is very sound.

KING:

This is not a question I would've even asked last week, but now there is a guarantee, were there signs of some people moving their money?

BOWEN:

What we have seen is signs of the big four banks increasing their deposits quite dramatically. Where that's coming from – whether it's the smaller banks and financial institutions, or people selling shares and property – is another question.

What we are seeing is a big rise in deposits in the larger banks, and that's understandable; but we wanted to ensure people – whether there bank is large or small, whether it's a building society or credit union – that their money is safe: that's the Government will guarantee it.

KING:

Are building societies and credit unions regulated by APRA?

BOWEN:

If they're based in Australia, then yes they are.

KING:

In layman's terms, how will this work?

BOWEN:

Well, what this basically means is: if, at the end of the day, the worst happens and a financial institution can't meet its deposits, the government will fund those deposits. We'll then, of course, seek to get that money back from the wound up financial institution, so the entire loss wouldn't be taken by the taxpayer.

We wanted to ensure that people could have access to their money at all points in the cycle.

KING:

People are very interested in what you have to say. We're already getting callers. One person's said, 'Does that include banks like ING that are Dutch-owned but have Australian operations, for example?'

BOWEN:

If there's an Australian subsidiary it does. Obviously if you've got your money in an offshore bank or overseas bank and it's not based in Australia, then we don't cover it. But say with BankWest, who's owned by a British bank, then they're covered; because they're an Australian subsidiary.

KING:

Well what about that question on ING?

BOWEN:

Well, because ING is based in Australia the money that's held in Australia is covered.

KING:

And another caller: 'Does this guarantee cover cash management trust funds?'

BOWEN:

It covers all sorts of deposits: savings accounts, passbook accounts, cheques, term-deposits.

What it doesn't cover is debentures and shares and market-linked investments. It depends on the investment – if it's an investment where, for example, you give your money to the bank and the bank buys shares on your behalf or it's a funds arrangement, then it's not covered. But all deposits are covered.

KING:

This might sound like a silly question but if you have to fund this, where would you get the money from – there are quotes from $700 billion up to $1 trillion.

BOWEN:

Well it is a very large amount of money - $1 trillion is every financial institution in Australia. Now, if every financial institution in Australia needed this support, then we'd be in a situation where this would be just one of our many problems.

We don't expect that to happen, we don't expect any financial institution to go under.

KING:

Where would you get the funding, if the worst comes to worst? Let's not say every, but even if it was of $100 billion – that's a large amount of money; that's more than your surplus?

BOWEN:

Well what we would do is seek to recover the money over the medium-term, from the wound up financial institution; and we'd be hopeful of getting a large proportion of it back.

KING:

But where would you get the money in the first place? Would you have to print it?

BOWEN:

Well, no, it would come off the government surplus.

KING:

How big is your surplus?

BOWEN:

Well, we'll have to see how much of it goes through the Senate; but it's in the order of $20 billion, at the moment.

KING:

$20 billion compared to $1 trillion – that's a huge difference there, isn't there?

BOWEN:

Right, but a $1 trillion is, as I say, every financial institution in the country. If one institution went under we'd expect to recover that money it is not as if the taxpayer would cover the whole loss. But as I say, the chances of this happening are miniscule. We wanted to reassure people that there is an extra insurance policy – a 'belt and braces' measure - in case the worst does happen.

KING:

You're listening to the Assistant Treasurer of Australia, Chris Bowen, explaining the guarantee scheme this morning. Mr Bowen you said you'd also guarantee all term wholesale funding by Australian banks operating in international markets. Just explain that to me.

BOWEN:

Well, what we have is of course, Australian banks and financial institutions get most of their money overseas. We have other governments around the world saying, 'lend our banks money, we'll guarantee it they can't pay it back'. So you've got a high degree of nervousness around the world, amongst financial institutions – they're not keen to lend to each other at the moment, because they're not confident that whoever they lend to will survive.

We've seen 25 banks around the world go broke, so what we need to do is ensure that Australian financial institutions are able to access that money.

If you've got banks guaranteed by their government competing against Australian banks who haven't been guaranteed by their government, then Australian banks would miss out. Now it's very important that our banks have access to that finance.

KING:

You're also putting another $4 billion into residential based securities to help sure up the Australian mortgage market. It seems you have concerns about the property market, going on what the Prime Minister, Kevin Rudd, said last night. What's your advice, the advice that you're receiving there, on the property market?

BOWEN:

Well the reason for that extra injection is to, of course, ensure that the non-bank lenders – we all know who they are, Aussie etc – have access to funds as well; because they're not deposit-taking institutions, so they're not covered by the other actions.

We want to ensure that they have access to money, so that we continue to have that competition – both amongst the banks and against the banks; because if you don't have competition, that's where you find the Australian people missing out.

KING:

But I gather there is some concern about property prices, which usually follow the stock market. There is some concern of the prices of properties going down.

BOWEN:

Look, what we are going to see is an affect on the real economy. How that plays out is quite fluid, but you're going to see it. You can't have all this turmoil in international markets without it affecting the real economy. The real economy is where we all live: it's the property prices, the economic activity, the amount of purchasing going on; we are going to see some flow-through effects on that.

KING:

There just appears to be some confusion: on the day a bank went broke – and you're saying that's unlikely, that's your advice, and that's your advice from APRA – your deposit on that day would be protected?

BOWEN:

That's correct. The amount of money you have in the bank at that particular time. If you walk in to the bank tomorrow and withdraw $30,000 because you've $30,000 there, then that's the amount guaranteed. If you take $10,000 out the day before the bank goes broke, well then you've got that $10,000, and the $20,000 that was left is guaranteed.

KING:

One product of this guarantee will certainly be, as you're saying, to preserve smaller institutions. Do the big banks support the move announced yesterday?

BOWEN:

Certainly. The Australian Banking Association has supported it. They represent all the banks, including the big banks. I think the big banks accept that this was necessary.

KING:

And how will the banks repay the taxpayer for this, do you think, down the track?

BOWEN:

Well, in the very unlikely event that we're going to have put this in to place, then we will, through the liquidation process, recover the money from the bank in question.

KING:

I appreciate your time, Chris Bowen. Thank you.

BOWEN:

Always a pleasure, cheers. Goodbye Madonna.