I very much appreciate the opportunity to talk with you about recent global financial market developments and how they are impacting on Australia.
You won't be surprised to hear this is what takes up most of my time these days – long days sometimes book-ended with conversations with my counterparts around the world. These conversations are one reason why the PM and I have been able to stay ahead of the global game, anticipating the challenges of these uncertain times and adapting our policy responses accordingly.
I'm sure the past 12 months have also been busy for those of you that are being relied on to provide sound long-term advice in a less than certain environment. Times like this are yet another demonstration of why we need good, sound independent advice.
I know that when you sit around the table from your clients you are imparting for them the best possible advice on planning for the future. I understand that yours is a difficult job in these times, but one that is critical for Australians seeking advice on their investments.
We all know that one of the things that gives Australia a real advantage is our superannuation system. While not perfect, our super system really is the envy of the world – I've lost count of the amount of times my international counterparts have raised it with me.
Inevitably global developments have hit the investments and superannuation savings of many Australians. We understand that this is creating considerable anxiety in our community, particularly for retirees reliant on super as their primary income. But we also understand that our superannuation system is strong and that as a long term investment it has delivered benefits to so many Australians that make it the envy of the world.
Today I want to discuss how global financial developments are impacting on the financial sector and what the Government is doing to make the system stronger and more competitive.
But I do want to relate this back to your work, because I am sure this group will appreciate more than almost any other the importance of competition to ensuring consumers get the best possible deal from the financial sector.
It goes without saying that these last few weeks have clearly been very difficult on global financial markets. This comes on the back of more than a year of difficult transformation, which is seeing substantial change in the very nature and makeup of financial markets, in particular in the United States.
Every economy in the world is facing tough economic conditions. The fallout from the global financial crisis continues to buffet confidence and share markets around the world and is slowing global growth. The global credit crunch has pushed up borrowing costs here and abroad. Spreads in US interbank markets widened by 159 basis points over September 2008. Global stock markets have fallen by around 30 per cent since the turmoil began. Consumer confidence across the OECD economies fell to its lowest point in almost 30 years in June and remains around historically low levels.
These global difficulties are slowing growth across advanced economies, with five of the world's seven largest developed economies recording zero or negative growth in the three months to June this year.
As you know, we are not immune from these global developments. But we are better placed than probably any other country to withstand the fallout – for a range of reasons.
One, the Government has built a strong surplus, to buffer against global turmoil and provide a foundation for responsible investment in the future.
Two, the prices of our key commodity exports still remain around generational highs and demand for our exports is strong. Our trade figures released yesterday show that the value of our exports increased by 33 per cent over the past year – excluding gold sales by the RBA this is the largest trade surplus on record.
Three, businesses are also investing in the future with confidence, planning for a record $100 billion of investment in 2008-09.
And four, Australia has a strong and stable financial sector, which the Government has moved quickly to further strengthen where we can.
We are implementing the Financial Stability Forum recommendations in full and encouraging their implementation internationally.
We have taken steps to support liquidity in the Government Bond market to ensure our broader financial markets operate more effectively.
We are strengthening protections for deposit holders, through the introduction of a Financial Claims Scheme.
We have moved to crack down on short selling.
What does all this mean? It means our underlying strengths and the Government's initiatives to build on these strengths put Australia in an enviable position.
As I have said, Australia does not face the same underlying problems as those weighing down on US financial markets.
Australia's banks are well‑capitalised and well‑regulated, and don't face the nature and depth of the problems of their US counterparts. Australia's largest four banks are among only 12 of the world's top 100 banks with a credit rating of AA or above.
In Australia, sub-prime mortgages account for only 1 per cent of the mortgage market compared with around 15 per cent in the US.
Our default rates are nowhere near those being experienced in the US. But, again, we are not immune from global developments.
In particular, our residential mortgage-backed securities (RMBS) market has seen only limited issuance in the past 12 months. As you know, Australian lenders sell RMBS to raise funds to finance their mortgage lending. Over the past 15 years, the RMBS market has been an important driver of competition in mortgage lending as it has enabled smaller lenders (both banks and non-bank lenders) to raise funds at competitive rates. Since the onset of the turbulence in international capital markets, the RMBS market has experienced limited activity and higher interest rates.
While RMBS funding is only a minor proportion of the major banks' funds, it is an important source of funding for certain smaller lenders, including the non-major banks, credit unions, building societies and lenders that are not authorised deposit-taking institutions (ADIs).
With the increase in interest rates and severe reduction in demand in the RMBS market, some lenders have been unable to raise funds at an affordable price to finance their new lending. This has impaired their ability to exert the competitive pressure in the mortgage lending market that we all want to see.
The Government and the regulators had been monitoring developments in the RMBS market, to assess whether investment by the AOFM would be necessary to support competition in the mortgage market.
In June we introduced into Parliament legislation to expand the investment powers of the AOFM.
This was an important step in ensuring the Government had the means to take the action should it prove necessary.
While the RMBS market has seen little new issuance in the past 12 months, recently there had been tentative signs of recovery. Issuance had quadrupled from $1 billion in the first quarter of this year to around $4 billion in the third quarter. However, the events of the past few weeks are likely to affect this recovery and slow return to greater liquidity in the RMBS market.
The resultant impact on competition in Australia's mortgage market led to my announcement last Friday that the Government will be investing an initial $4 billion in Australian AAA rated residential mortgage-backed securities. And I am very pleased to announce that today I am giving a Direction to the AOFM under section 62A of the Financial Management and Accountability Act 1997 to implement this decision.
The Direction sets out the Government's objectives in making this investment – that is, to support competition from a diverse range of lenders during the present market dislocation. It also ensures the quality of the investment by requiring the securities purchased to be rated AAA or equivalent by one of the major credit rating agencies, and providing for other eligibility criteria – including limitations on the loan-to-valuation ratios and the proportion of low documentation loans – to be specified by the Secretary to the Treasury. The Direction will be tabled in Parliament during the next week of sittings.
The Government's decision to invest in RMBS will enable smaller lenders with limited alternative funding sources to obtain new funds at affordable rates and continue to exert strong competitive pressures in the mortgage lending market. This initiative is helping to tip the scales back in the favour of smaller mortgage providers that are so critical for competition and lower interest rates.
The initial investment will almost double the average RMBS issuance for the first three quarters of this year. In doing so it will provide funding for the smaller mortgage providers and help kick start the RMBS markets. This will help to promote the recovery of the RMBS market and will allow these lenders to re-assert competitive pressure on the mortgage market and the major banks.
This is part of our commitment to the maintenance of strong and effective competition in Australia's mortgage markets. It comes in addition to the bank switching package I announced in February, which is making it easier for people to vote with their feet if they think their bank is being unreasonable. The initiative I announced last Friday will ensure they have plenty of alternatives to go to.
But this is not the sum of our efforts to ensure a competitive banking sector.
The Government and the States also reached an historic agreement just yesterday in Perth, to create a single, standard national regulation of consumer credit. This will significantly boost consumer protections, which will help to ensure that the kind of problems being faced in the US with poor lending practices do not occur here. Credit providers and brokers will be subject to requirements to lend responsibly to consumers and meet stringent conduct obligations.
A national market for credit will also help to boost competition in the mortgage market.
Competitors in the credit market have long been frustrated by the range of different regulatory regimes, which create a barrier to entry and competition.
COAG also agreed to introduce a national provision to prohibit unfair contract terms. This is part of COAG's commitment to a national consumer protection regime, also made yesterday.
Many consumers are concerned that unfair exit fees prevent them from exercising choice in the market place. Yesterday's decision will provide a path of redress for consumers incurring unfair exit fees, helping consumers to switch mortgage accounts.
Through COAG, the Government has provided the leadership needed to establish a National Electronic Conveyancing system, which will reduce costs to business, and ultimately to consumers in transferring ownership of land.
These costs form part of the administrative costs in establishing or exiting a mortgage – just one of the things we're doing at COAG level to boost competition in your field of work.
All of these initiatives – at the global level, and closer to home – show the Government's doing what it can, in those areas we can directly influence.
These are serious issues and serious times. Not the time for politics – a time for decisive action and responsible economic leadership.
Our opponents, and Mr Turnbull in particular, can't have it both ways. They can't call for bipartisanship then take cheap pot shots from the sidelines. Mr Turnbull needs to understand that it's not business as usual, nor is it politics as usual.
Serious times call for the serious initiatives I've touched on today.
This current period of financial turbulence also highlights the need for your services — sound financial advice, with a view to the long-term.
You can be certain that the Government will be ensuring we have both a strong and a competitive financial system. Because all of us here know that competition is so vital to ensuring consumers get the best deal possible. And looking after the future wealth and prosperity of Australians is an objective we all share.