Thank you and good morning.
I'm delighted to have been invited to address you this morning to help launch FINSIA's report Navigating Reform: Australia and the Global Financial Crisis.
Introduction
I think it is fair to say – and certainly the FINSIA report recognises – that Australia has weathered the financial crisis with remarkable resilience, both in terms of our financial markets and the real economy.
Indeed, late last week, the World Economic Forum released its annual financial development report and gave a significant endorsement of the maturity of Australia's financial markets.
The report ranked Australia second in the world – ahead of the United States, Hong Kong and Singapore, and behind only the United Kingdom – for the strength of our financial systems and capital markets.
In a tumultuous year for financial markets, Australia was the only country in the top 10 to actually improve our overall financial development score.
It was such a extraordinary result that even the official Chinese news agency, Xinhua, picked up the story. And it reported not on the UK's top position or Hong Kong's fifth position but, rather, on Australia's strong performance.
To have ranked ahead of Hong Kong in the financial development list, and to have had the official Chinese news agency note that it is a boost for Australia's push to become a financial services hub, something I want to speak about today in more detail, is recognition that we have a lot going for us.
Financial Services Sector
But let me start by saying a little about the state of Australia's financial services sector, which is an area of particular strength in our economy – and, on market capitalisation of listed financial sector companies, is larger than that of France and of equivalent size to that of Hong Kong.
Australia's equity market is the eighth largest in the world, while, on the debt side, Australia ranks first in the Asia-Pacific for international debt securities currently on issue.
What that means is that, within the Asia-Pacific region, we have become a preferred location for bond issuance by high credit quality, non-resident issuers – generally referred to as "kangaroo bonds" when they are denominated in Australian dollars.
In addition to those issued in Australia by non-residents, "international debt securities" encompasses bonds issued here in currencies other than Australian dollars, all of which demonstrates the growing international flavour of our financial services sector.
Last Wednesday, I was pleased to launch Austrade's Financial Services Benchmark Report, a report which confirms the continuing improvement in the international standing of the Australian financial sector.
But, perhaps most importantly for our goal to become a financial service hub, Australia's real economy has been one of the world's best performers throughout the financial crisis.
Despite the significant and largely unanticipated jolts, our economy has so far managed to avoid technical recession. While all about us plunged into at least two consecutive quarters of negative growth, the Government's temporary and targeted economic stimulus measures have worked to keep our economy ticking over and to keep unemployment relatively low while confidence returns to both businesses and consumers.
Admirable workplace flexibility, shown by both employers and employees during a time of economic uncertainty, has also been partly responsible for unemployment remaining below forecast levels.
And we have, of course, also benefitted from our trade links with China, the world's fastest growing economy, which has ensured continuing demand for our exports.
So our economic strength is a clear advantage, as a strong economy provides confidence to underpin dynamic financial markets.
Deposit Guarantee
The strength and liquidity of Australia's financial sector was reinforced by the Government's move to provide enhanced depositor protection arrangements and a temporary guarantee of banks' debt funding, a measure which helped ensure the Australian financial sector's stability and liquidity at the height of the market turbulence.
The FINSIA report touches on the need for – and timing of – the unwinding of the government's guarantee of deposits in Australian authorised deposit-taking institutions, ADIs.
Yesterday was the 12 month anniversary of the government's announcement of the guarantee of deposits and borrowing by ADIs.
Our guarantees have supported stability in the financial system and maintained lending in the face of the global financial crisis.
Banks have been able to raise over $140 billion. This has allowed them to continue lending to households and small business, and therefore provided critical support to the economy and jobs.
The guarantee was carefully designed to encourage reduced reliance as conditions improve through the pricing signal. And we are already seeing increased issuance of unguaranteed debt – meaning banks are increasingly choosing not to rely on the government guarantee when securing funds – and this is a welcome thing.
The Council of Financial Regulators continues to monitor the arrangements governing the guarantee to ensure that they remain appropriate.
We are also working with our international colleagues through the G20 on the appropriate frameworks for the withdrawal, when the time is right, of the extraordinary policies put in place to support financial systems right around the world.
And, of course, in the last couple of days, the Treasurer announced the Government's intention to buy up to an additional $8 billion of AAA-rated residential mortgage-backed securities in order to support continued competition in the mortgage market. This move will help smaller mortgage lenders and improve their ability to compete with larger lenders.
Regulation
Another reason for Australia's resilience throughout this financial crisis is our world's best prudential regulation.
Indeed, the FINSIA report notes that most of the recommended improvements to financial regulation now being suggested in overseas jurisdictions were already in place in Australia.
I have no hesitation in declaring our regulators some of the best in the world. The Australian Prudential Regulation Authority has ensured the strength and of our banks and financial services sector. As FINSIA's report says, the battle testing of APRA by the HIH insurance collapse gave APRA the experience and caution to be prepared for the global financial crisis – as prepared as any regulator could be.
And the Australian Securities and Investments Commission, with the assistance of increased government funding, has been busier than ever over the past 12 to 18 months.
This past weekend, the International Organisation of Securities Commissions, IOSCO, nominated ASIC Chairman Tony D'Aloisio to chair the Joint Forum, a major international regulatory body.
Tony's nomination is evidence of the respect the international financial community has for Australia's prudential and markets regulation. Our regulators have emerged from the global financial crisis with their reputations not only intact but enhanced, and Tony's nomination is further formal acknowledgement of the work ASIC and our other regulators have done in helping to navigate Australian businesses through the recent turbulence.
The FINSIA report also touches on our separation of prudential and financial markets regulation.
I have said before that the Australian "twin peaks" regulation model has worked and continues to work. In other jurisdictions, where the regulators are combined, there is inevitably a dominance of prudential over financial markets or vice versa within the organisation. The two complement each other but each needs to have its own independent focus to ensure both are able to give 100 per cent of their attention to their respective areas of regulation.
In other words, that an organisation exists with prudential regulation as its core business and an organisation exists with corporate regulation as its core business.
Now let me just say something about regulation generally. The FINSIA report points out that Australia leads the field in financial regulation and that our successful and appropriately-balanced regulatory framework is one of the keys to us becoming a regional financial centre.
And yet I note that some people continue to argue for the government to keep out of the financial markets almost entirely, despite the vital importance of appropriate regulation being comprehensively demonstrated by the way Australia weathered the global financial crisis better than certain other economies.
Some people say that the way to become a financial services hub is to have the lightest regulation in the world. I disagree. It is to have the best balanced regulation.
One of the reasons our financial system is so robust is the quality of our regulation. It means that investors in Australia can have a very high degree of confidence.
Sensible prudential regulation is firmly in line with the principles of economic liberalism, to which I subscribe.
In The Wealth of Nations, Adam Smith called for governments to prohibit excessive risk-taking that could jeopardise financial markets as a whole, something which people who quote him at will in other contexts forget.
On the need for prudential regulation of credit, Smith said:
"Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed."1
I've always had the view that our prudential regulation was a great asset. This has been proven, I think, even more so over the last two years.
Strong Financial Institutions
Another great national asset that has helped us through this crisis is our set of strong and solid financial institutions – solid because of good management and also solid because of that prudential regulation and because of the four pillars policy.
Of the largest 100 banking groups in the world, only nine are rated AA or above, four of which are Australian. One quarter of the banks rated AA or above in September last year have since lost that status – but the major Australian banks have retained theirs and so now make up nearly half the world's banks with a rating of AA or higher.
On average, 8.5 per cent of the capital held by our major banks is Tier 1, high-quality capital – well above the minimum requirement of four per cent.
In so many other nations, the financial services sector has been a drag on economies throughout this crisis but it's certainly not something we would say of ours. We see our financial services sector as a great asset, not a drain.
In terms of making Australia into a financial services hub, we see this financial crisis as an opportunity. As I said earlier, for years to come, the world's investors will be looking to see who got through this crisis the best: which system of prudential regulation worked? Which financial institutions got through this crisis the best? Which nation survived the global financial crisis?
And, in Australia, we are in a very strong position place to argue that it's us – that our real economy, our financial sector have withstood the shocks of the last two years better than any other.
Financial Services Hub – Advantages
With that in mind, let me talk a little about some of the other advantages we already have going for us in our quest to become a regional financial services hub, as well as the work the Government is doing to ensure our ambition in this regard becomes a reality.
A major advantage we have in this country is our skills. Australia has built up a great skills base from the experience of managing the enormous pool of funds accumulated primarily through superannuation.
Australia now has the fourth largest pool of funds under management in the world – that's not per capita, but overall. It is the largest pool of funds under management anywhere in the Asia-Pacific region. And, since 1994, the sector has experienced a compound annual growth rate of 10 per cent.
This is perhaps Paul Keating's greatest political legacy, the skills that we have built up over the last 20 years as we manage our national savings.
Yet, for a nation that has built up such experience and expertise in managing capital, it is extraordinary that around only three per cent of all those funds under management come from overseas.
This is one area where we have so much scope for improvement. We need to be leveraging off our experience and spruiking our financial management skills to the world. Australia should have funds flowing in from all over the world for investment both locally and throughout the region.
We have, after all, several other natural advantages conducive to becoming a centre for financial transactions.
We have English as a native tongue – and our foreign language skills are good, though we would like them to be very much better. Improving such skills underlies so much of the Government's focus on education – at all levels.
Our time zone is also beneficial, strategically located, as we are, between the close of markets in the United States and Europe and the opening of markets in Asia.
In terms of attracting talent we, of course, shouldn't forget our great quality of life. Sydney and Melbourne, for starters, are unquestionably two of the world's greatest places to live and work, their liveability and cosmopolitanism complemented by their natural beauty.
We have, as I say, enormous advantages – but there is still an enormous amount of work for us as a nation to do. While the WEF and others may rate us highly, we haven't done enough to capitalise on our advantages in the past and we need to make sure that we do so as the world economy recovers and investors start looking for the markets that best withstood the stress test of the global financial crisis.
Financial Services Hub – Government Action
So, while clearly Australia is an attractive destination for financial services businesses, I am not going to tell you that nothing more needs to be done. On the contrary, the Rudd Government came to power on commitments that included action to improve Australia's international competitiveness and we are continuing to work towards seeing the realisation of that goal.
In releasing the Austrade report I noted some of the Rudd Government's achievements to date towards the goal of establishing Australia as a financial services hub in our region. These include:
- cutting the withholding tax on certain foreign distributions from managed investment trusts from 30 per cent to a final rate of 7.5 per cent, from the highest rate in the world to close to the lowest;
- changing the attribution rules and the deemed capital account treatment of the sale of shares, units and property from Managed Investment Trusts;
- repealing and replacing the Foreign Investment Fund provisions with a narrowly-defined anti-avoidance rule and modernising and re-writing the Controlled Foreign Company rules; and
- transferring supervision of financial markets from the ASX to ASIC, the corporate regulator, a long overdue reform that will allow us to consider opening our financial markets to genuine and meaningful competition.
Most importantly, last year I announced the establishment of the Australian Financial Centre Forum to progress the Government's initiative to position Australia as a leading financial services centre in the Asia-Pacific region.
I look forward to receiving the final report from Mark Johnson and the Australian Financial Centre Forum in the near future.
The Government expects that further work being done by the Australia's Henry Review and the Board of Taxation will also help us to get the policy settings right to achieve our goals in this area.
Conclusion
Last week's World Economic Forum's report, which ranked Australia second in the world for the strength of our financial systems and capital markets, was a welcome encouragement of what the Government is trying to achieve.
We are committed to doing whatever we can to promote Australia as a financial services hub in Asia.
We have many advantages and we are working hard to build on those strengths. Our regulatory framework has come through the crisis stronger than it went into it, which is testament to the balance we have in this country between appropriate regulation and allowing financial markets to do what they do best.
But, in terms of our goal of growing the sector and transforming Australia into a true regional financial services centre, we also have a lot of work to do, a lot of reforms to undertake, many of which you will see unfolding over the coming months.
We are conscious of the challenges and work that remains to be done before we can say with confidence that we deserve our position as Asia's regional financial services hub. But I can assure you that the Government is striving to ensure we make the most of our skills and existing strengths to grow the sector and, in this process, bring jobs and capital into the country.
Thank you.
1 Book Two, Chapter II: http://art-bin.com/art/oweal2a.html