SUBJECTS: Global Financial Crisis, deposit guarantee, APRA funding, market-linked investments
TONY JONES, PRESENTER:
Well back now to our top story. Just two weeks ago Malcolm Turnbull was flying under the flag of bipartisanship, openly supporting the Government's emergency move to guarantee all bank deposits.
Within days he'd run up the Jolly Rodger and rolled out the canon. Today he said the guarantee was rushed and bungled, and for its part the Government is still struggling to repair the damage wrought by the guarantees unintended consequences.
It's still very much a live debate and here to prosecute it tonight we're joined by the Assistant Treasurer, Chris Bowen, he's here in Sydney, and in our Brisbane studio is the Shadow Minister for small business Steve Ciobo, thanks for both of you for being here.
And we'll start with Chris Bowen. It's clear now that your bank deposit guarantee does have serious market distorting consequences, so was it, in fact, rushed and bungled as Malcolm Turnbull says?
CHRIS BOWEN, ASSISTANT TREASURER:
Absolutely not. And there's a couple of important points to make here Tony. Firstly, this was an important measure to restore confidence in the Australian banking system.
There were signs, which APRA has publicly indicated, that despite the strength of the Australian banking system, that there were growing signs of public concern.
So this was an important step. Now we saw 10 of the funds that have frozen redemptions do so before the Government's bank guarantee came into place. 10 have frozen since, 10 froze before. So half of the freezing occurred before the guarantee was even announced. So I saw Peter Costello have...
TONY JONES:
But you are not disputing there were market distorting consequences? Even David Murray who runs your own Future Funds admits that.
CHRIS BOWEN:
Well look, what we're seeing around the world is a flight to certainty, a flight to stability. People seeking more stable investments, more guaranteed investments, around the world.
And of course, where you have a bank guarantee in place, that's attractive to people. But we are already seeing that before the bank guarantee was in place.
TONY JONES:
All right let's here from Steve Ciobo.
STEVEN CIOBO:
Well, Tony, I mean the fundamental problem here was that this was a rushed and bungled decision. We had one of the biggest decisions that the Government’s taken with respect to monetary policy, and the extraordinary aspect to this was that the Reserve Bank Governor was not even consulted by the Treasurer Wayne Swan in taking that decision.
Now, what I find hard to fathom in terms of Chris's response is that he basically is washing his hands and the hands of the Government from any responsibility for this rush of funds from market linked investments into the bank guaranteed deposits.
So, you know, Chris, I don't understand why it is that the Government cannot accept that they have taken a problem and made it worse rather than fixed it.
TONY JONES:
Chris Bowen?
CHRIS BOWEN:
Well what we're doing today, what the Prime Minister's announced today, is a series of measures to restore confidence in those funds.
So it's not about saying, "We're not responsible, we won't fix it", it's about saying, "Across the world we see a flight to certainty and stability and we'll continue to respond flexibly but decisively to this financial turmoil which is embracing the world".
TONY JONES:
Alright, I'll let you come to, we will obviously talk in detail about what the new measures are and what they potentially might do. But you did take these steps on the advice of the regulators, didn't you?
CHRIS BOWEN:
Yes, absolutely.
TONY JONES:
Did none of the regulators give you any advice whatsoever suggesting that these kinds of consequences might flow from the decision?
CHRIS BOWEN:
Well the Secretary of the Treasury has made it quite clear, as have the Prime Minister and Treasurer, that the regulators were of one mind and one voice in recommending this.
TONY JONES:
But I’m actually simply asking whether, as well as being of one mind and voice of the overall emergency move, whether they actually understood and gave advice that there would be market distorting consequences relating to these funds, people might have money frozen in bank accounts.
CHRIS BOWEN:
They gave advice that on balance this was the necessary and appropriate action for the Government to take, and that’s the action we took, decisively.
TONY JONES:
But they absolutely didn't give you any other advice. The consequences what they might be...
CHRIS BOWEN:
The advice was this was the appropriate thing to do. That this was the right response. Now Steve says, "This was rushed; they shouldn't have rushed into this decision." On the other hand they go around saying, "The Government does too much reviewing and too much thinking and not enough decisive action." I mean they can't have it both ways; they try to walk both sides of the street.
We've responded decisively…
TONY JONES:
Okay.
CHRIS BOWEN:
… and continue to respond decisively and flexibly, to what is the most turbulent situation we have seen in 70 years.
TONY JONES:
I'm just going to pursue that point for one more question.
CHRIS BOWEN:
Yes.
TONY JONES:
It came as a complete surprise to the regulators did it, what happened to these funds?
CHRIS BOWEN:
Well as I say, we had seen 10 of these funds freeze redemptions before the Government...
TONY JONES:
So it doesn't come as a surprise?
CHRIS BOWEN:
We were already seeing a flight to stability, and we were already seeing people moving to more stable investments.
APRA have indicated publicly that we were seeing that within the banking system, within the APRA-regulated system, and also seeing it from the non-APRA regulated system, towards the APRA-regulated system.
TONY JONES:
OK Steve Ciobo, now the Opposition failed to prove its case, the Treasury, that the Treasury Secretary Ken Henry had actually lied about advice given by the Reserve Bank on this issue.
You've just heard what the Assistant Treasurer has said here.
Are you now saying that essentially the Reserve Bank, the Treasury Secretary, in fact, the regulators got this terribly wrong in the advice that they gave to the Government.
STEVEN CIOBO:
Tony, let's be clear about what's happened here. I mean we have policy pinball from this Government. It's complete policy pinball.
We've got a very inexperienced Treasurer in the form of Wayne Swan who’s at the paddles desperately trying to keep the ball in play as it bounces off one token decision to another. The problem that we have here Tony, and this is really the point, now Chris wasn't in Cabinet when that decision was taken.
What we know though, was that on the single biggest monetary policy decision that this country has faced since the great depression, the Government in its inexperience did not even talk to the Reserve Bank Governor.
So there can be no doubt, and we need to take at their word, the comment made by...
TONY JONES:
But Ken Henry did correct? You agree with that?
STEVEN CIOBO:
And that's what I’m saying we take them…
TONY JONES:
Ken Henry advises, he's the main economic advisor of the Government, so he spoke to the Reserve Bank, he relayed the Reserve Bank's opinion to the Government.
What I'm saying to you is, are you essentially blaming the regulators for making a big mistake here? Because they're the ones that advised the Government?
STEVEN CIOBO:
Well what's, no I'm certainly not blaming the regulators. We are absolutely saying this is the result of a rushed decision because what we have seen now, and it's masters being finetuning, but in reality, as I said, it's policy pinball as this Government moved in, attempted to say, "Look, we're going to provide an unlimited guarantee on all bank deposits."
Chris has acknowledged himself that they already were seeing a flight from managed market linked funds into the bank deposits and they ignored that and they actually made the problem worse by providing that unlimited bank guarantee. So if there's anybody trying to walk both sides of the fence on this, make it very clear Tony that that is the Government. Because they are saying on the one hand they were already seeing a flight to certainty, and on the other hand they say, "We didn't see any possible problem arising from the fact that we were providing an uncapped unlimited guarantee."
I mean of course it is going to make the problem worse.
TONY JONES:
Chris Bowen briefly on that.
CHRIS BOWEN:
Well, policy pinball, I mean the Liberal Party's had seven positions on the bank guarantee. Firstly, they didn't implement it when recommended by a Royal Commission as a result of the HIH collapse, then when we moved to implement it they suggested a higher cap, when we said...
TONY JONES:
Are you going through the whole seven?
CHRIS BOWEN:
Well, it will take too long.
TONY JONES:
Too long.
CHRIS BOWEN:
But there's been a lot of positions. And now we see Malcolm Turnbull coming...
STEVEN CIOBO:
It can probably save you Tony...
CHRIS BOWEN:
Now we see Malcolm Turnbull coming out today and saying well nobody was really questioning the soundness of the Australian financial system, in effect saying, "This was all unnecessary", when at the time he welcomed it, contradicting APRA.
What we're seeing, just to take your point about the Secretary of the Treasury, what we're seeing is a very unfortunate trend from the opposition when a senior public servant, whether it be Ken Henry or Glenn Stevens or Graham Samuels, says something publicly which doesn't support their narrative, they question their integrity and trash their reputation. And that is simply unacceptable...
STEVEN CIOBO:
That is ridiculous.
CHRIS BOWEN:
That in 12 years of opposition the Labor Party didn't do that. We're seeing within the first year of opposition the Liberal Party trashing the reputation of some of Australia's finest public servants.
TONY JONES:
OK I'm going to stop that part of the discussion there because you've both made your kind of, relative points.
I want to know Chris Bowen, how many people do you believe are now unable to touch their savings frozen in funds as a result of the bank guarantee decision?
CHRIS BOWEN:
Well, there's some distinctions here, and it's important distinctions.
Some of the funds, the majority of the funds, have frozen redemptions, but the income flow remains. So for some people obviously that's a problem. For people who were planning to withdraw the money in the very near future for whatever purpose that is a serious issue.
TONY JONES:
So how many people are we talking about, is it hundreds, thousands, tens of thousands, hundreds of thousands.
CHRIS BOWEN:
Well there's a very significant number of people affected.
TONY JONES:
Roughly, just roughly how many?
CHRIS BOWEN:
Well, I mean, there are various, you know the funds will put out how many people are affected.
TONY JONES:
So we don't actually know how many people are affected?
CHRIS BOWEN:
The funds have made those numbers publicly known.
But there's an important distinction, some have said redemptions are frozen, others have affected their income, the income streams, the majority it's just the redemptions.
Now for some people, while that's very concerning and understandably frustrating, it is not a major concern in the short term because they weren't planning to withdraw the money, it was a long term investment. And as long as the income flow remains then they're not personally...
TONY JONES:
But there are these emergency cases and David Murray, the banker you appointed to run Future Fund as I said earlier, says the Government and banks together should move now to put some liquidity into these frozen funds in order for these emergency people to take their money out. Will you do that?
CHRIS BOWEN:
Well, what we've done today is a decisive action; we'll continue to respond flexibly as we need to. But we have today, after discussions with these funds over the last two days moved to improve their liquidity via bringing them under the APRA regulation if they choose to.
A number of those funds have indicated to us that they are actively pursuing that. We wouldn't have done this unless they had indicated to us that they thought it would be helpful and this is the way forward that we have decided on in consultation with the regulators and in consultation with the affected sector.
TONY JONES:
We'll explore that in more detail. I want to hear Steve Ciobo on that subject. Do you think this is the right move to allow some of these funds to actually enter the regulatory system under the guidance of APRA?
STEVEN CIOBO:
Well, Tony, this is the policy pinball I'm talking about. Had the correct decision been taken by the Government in the first instance we wouldn't then need this subsequent decision to be taken.
This is all a consequence of the Government exacerbating the problem. This has many ramifications Tony across the economy. It's not just those self funded or partial pensioners that are so badly affected by what the Government has done here by bungling this decision, it's also across the economy.
Tony, I have shadow responsibility for small business, for example. Now, many of these market linked funds were a source of finance for Australia's 2.4 million small businesses, so at the very time when the Government is saying that it wants to improve the economy and provide increase liquidity, not only to these people in these funds but other sectors of the economy as well, they made the problem worse.
TONY JONES:
Let's just go back to the original question I asked: do you support the concept which is now being put forward of APRA examining these funds, and these funds clearly some of them want to do this, come under the auspices of APRA and be regulated properly as if they were banks and get the guarantee. Do you support that or not?
STEVEN CIOBO:
Well Tony we need to see the detail, because the problem that we have with this Government and with the decisions that this Government is taking is that they are taking decisions without providing the Opposition with the information and the transparency we need.
And then what happens is that when we take the Government on their word and we say "Yes, that seems reasonable," and we then subsequently discover that not all is as it was presented by this Government, they then start accusing us of trashing reputations. So we need to be very careful Tony.
TONY JONES:
But do you support the concept? Do you support it philosophically, the idea?
STEVEN CIOBO:
Absolutely. The concept that those people that are trapped and not able to have their redemption followed through, certainly it would be very good for them to be able have access to their cash.
But I repeat again, this would not have happened if it were not for the fact that the Government exacerbated this problem and made it worse.
TONY JONES:
Alright, Chris Bowen. Let's talk about how this will actually happen, I mean there are different types of funds obviously. There are some of those that deal entirely in the share market or mostly in the share market.
There are some that deal with property and mortgages. Will those be treated differently as they attempt to enter the regulatory system?
CHRIS BOWEN:
Let us make this very clear. We are not changing our prudential requirements. APRA will continue to regulate financial institutions as they have, which is to ensure adequate capitalisation, adequate quarantining of capital to ensure liquidity. Now that will continue, and they will have to, these funds will have to comply with that. Now these funds...
TONY JONES:
This is the very problem these funds actually have, which is they don't have enough liquidity right now to even pay people who want to redeem their money, so how are they going to prove that they've got large sums of money put aside to cover all the investments.
CHRIS BOWEN:
Well some of them have short term cash flow problems but they have indicated that they are very confident that they can meet APRA's regulatory requirements for capital.
So therefore, the sensible thing to do is to facilitate their application to APRA. Now APRA receives very few of these applications in normal circumstances, as you would expect, so what we can do is facilitate, through increased funding, the rigorous but expeditious consideration of these applications.
TONY JONES:
I want to just get to the bottom of this, because realistically, given what you have said in the past about risk taking, share based funds, none of those are going to meet the regulation requirements, are they, to become effectively banks?
I mean if they've mostly invested in shares, the share market is tanking, so you're not going to guarantee those funds, are you?
CHRIS BOWEN:
We're not talking about extending the guarantee to market linked investments, we're talking about those funds who feel that they can comply with APRA's regulation, being able to do so? To facilitate that.
TONY JONES:
But to get to the point though, they wouldn't be funds that primarily invest in the share market?
CHRIS BOWEN:
Well what they'll have to do is convince APRA that their capital requirements have been met. And they'll need to convince APRA that the investments are safe.
And if they can do that, then the guarantee will be extended to them as it has been to other APRA regulated authorities.
TONY JONES:
Alright, Steve Ciobo, you've been listening to this, we're all sort of learning as we go along here. It does sound like it'd be very difficult for a share-based fund to actually get a guarantee of any kind or to be regulated by APRA.
What do you think? Should the Government, should APRA, take risks?STEVEN CIOBO:
Well Tony, I'm hearing two things from Chris Bowen and from the Rudd Labor Government tonight.
The first is that if you're a self-funded retiree or a partial pensioner, do not hold your breath expecting that this is going to improve liquidity or provide you with the ability to redeem funds out of that investment.
Because it's very clear that that is not going to be happening. From what Chris has just said I would doubt there would be many funds, if any funds, that would fall into that category.
The second thing that I'm hearing from the Rudd Labor Government as a result of Chris's statements is that basically they've said, "Look, we've made this mistake, but do you know what we're doing to do? We're going to leave it up to everyone else to sort out."
By simply saying, "Here's some more money that we're going to throw at APRA, if you're in the market linked investment scheme in terms of its administration, then you go along to APRA and the two of you sort it out together and work out whether we can give you the guarantee."
I mean this is a classic example of a Government, as I said, that is lurching from one crisis to the next trying to play catch up and solve these problems.
TONY JONES:
Okay we're nearly out of time; let me go back to Chris Bowen. Let's say it doesn't work, in the case of many funds, or if Steve Ciobo is right, in the case of most funds, what do you do then?
Do you go back to David Murray's suggestion of injecting some liquidity along with the banks into these funds so that people can actually redeem the money they need for emergency purposes?
CHRIS BOWEN:
What we're seeing here Tony is hourly developments across the world, not daily developments, hourly developments. And we'll continue to respond flexibly as we have done.
You know, I've just came back from Europe where I met with the Finance Ministers of France, Germany, Belgium, OECD and the EU, and there's a lot of interest in the Australian Government's policy responses. And what they have said is that the Australian...
TONY JONES:
They are trying not to make the same mistakes?
CHRIS BOWEN:
Well no, what they have said is that the Australian Government is ahead of the game. What they have said is that there is a lot of interest in why the Australian economy and the Australian financial system has withstood this turmoil so well. And partly that's the Government's response, and we'll continue...
TONY JONES:
Can we just go back to my question...
CHRIS BOWEN:
Well we'll continue to respond flexibly as necessary.
TONY JONES:
Right, so you would consider injecting liquidity?
CHRIS BOWEN:
We'll continue to respond as we need to, to these hourly and daily developments.
TONY JONES:
So if people can't get their money out you might consider putting liquidity into the funds?
CHRIS BOWEN:
We'll take the advice of the regulators, of the Reserve Bank and APRA in particular, and respond as we need to.
TONY JONES:
Alright, we'll have to leave both of you. Steve Ciobo in Brisbane, Chris Bowen here in Sydney, thanks to both of you for joining us.
CHRIS BOWEN:
Great pleasure, cheers.
STEVEN CIOBO:
Good evening.