8 June 2011

'Regulatory Challenges: A Stable and Competitive Banking Sector', Keynote Address to Australian Bankers' Association Banking Regulations Forum


Good morning and thank you Kylie for that warm introduction and thank you to the Australian Bankers' Association for the invitation to speak to you today about some of the regulatory challenges facing the banking sector.

I understand that you have heard from an impressive range of speakers on issues spanning across both the international and domestic regulatory reform agendas.

These views have been provided by your colleagues in the industry, by the regulatory agencies, and indeed, from some of my parliamentary colleagues.

A discussion on banking regulations is important for the industry, for Australian consumers, and for the Australian economy. And this makes it an important discussion for the Australian Government.

Regulatory challenges across the economy

Governments must ensure that the degree of regulation across the economy has a positive net benefit.

This involves making complex assessments, and often depends on the specific characteristics in particular markets. It also depends on the social goals that the regulation is intended to achieve.

The banking sector has some specific regulatory challenges.

We saw during the global financial crisis just how important financial markets are to economic growth. And we saw just how intertwined global financial systems have become, as problems that began in the United States took hold across world markets.

It is for these reasons that in the aftermath of the global financial crisis, international discussions on the appropriate regulation of the banking sector have focussed on the arguments of 'too big to fail', questions of capital requirements and proposals of structural separation between retail and wholesale banking.

The Basel III framework is central to this augmentation of the international regulation agenda.

The Government has worked hard to ensure that these global standards are appropriate for our unique domestic circumstances.

Due to the Government's efforts, the new framework will ensure that all Australian banks are able to comply with the global liquidity rules in a way that acknowledges Australia's low levels of government debt and does not overburden them with inappropriate regulatory standards.

Regulatory challenges reflect the times

As these debates demonstrate, regulatory challenges will generally reflect the social, economic and political realities of the times.

Australia's economic history shows us that there have been specific phases of regulatory intervention in the banking sector.

Indeed, Andrew Fisher's decision to establish the Commonwealth Bank in the early 20th century was motivated by the need to inject competition into the banking sector, which had been severely constrained by the recession at the end of the 19th century.

During the Second World War, the Government thought it necessary to exercise tight control over the banking sector, with centrally determined overdraft rates, statutory reserve deposit ratios and liquid asset ratios.

In the post-war era, Chifley sought to extend the wartime regulations in an effort to bring about his vision of a new "golden age" of peace and shared prosperity. Following a series of legal defeats, Chifley announced his plan to nationalise banking in Australia.

These controls would, according to Chifley, "open a long-locked doorway to the development of a monetary and banking system truly adequate to our national requirements and wholly devoted to the service of Australia".1 Inevitably, the plan encountered a High Court challenge and sustained attack from the Opposition, both of which were successful.

Notwithstanding his ruthless defeat of Chifley over, amongst other things, the bank nationalisation issue, the regulation of the banking sector arguably reached its zenith in Australia during the Menzies era. Throughout this period, the banking sector was certainly very stable, but was notable for it's lack of competition and dynamism.

By the 1970s a new set of policy challenges began to emerge in the banking sector. The unsupervised rise of the fringe banking system brought with it considerable vulnerability. Collapses of fringe banks gave rise to consumer panic and even runs on some building societies.

Following the Campbell Inquiry and the election of the Hawke Government, the 1980s heralded perhaps the most significant changes in the regulatory landscape of the Australian banking sector to date: a process widely referred to as deregulation.

The separation between savings and trading banks was extinguished, foreign banks were welcomed into the market, interest rate controls were removed and other general banking restrictions were loosened.

However, in turn, these regulatory developments presented their own challenges. Sustained consolidation throughout the 1980s saw the then Treasurer institute the "four pillars" policy to ensure a minimum number of participants in the competitive banking landscape.

This period of deregulation was best symbolised by the privatisation of the Commonwealth Bank from 1990 to 1995. The incremental sale not only provided the Commonwealth Bank with much needed capital, it also marked the end of government ownership in the banking sector.

This period was followed by a wave of competition in the housing loan market from the mid-1990s which was led by the rise of non-bank lenders. Their success was driven by growth in securitisation which accounted for around 20 per cent of new home loans by 2007.2 This was accompanied by the proliferation of mortgage brokers and the expansion in the range of mortgage products available to consumers, including low doc and high loan-to-valuation ratio loans.

Indeed it was the under-regulation of these sorts of banking practices in international markets that proved to be the true test of Australia's banking system.

The global financial crisis

The global financial crisis demanded that governments around the world look deeper into conventional wisdoms about intervention in financial markets and undertake the largest liquidity injection into credit markets in the history of banking.

In late 2008, we all watched as foreign central banks and governments purchased trillions of dollars of private sector assets and invested billions in newly issued preferred stocks of major institutions. As the contagion took hold, countries ranging from Iceland to Pakistan were forced to seek emergency aid from the International Monetary Fund.

Against this backdrop, the world suddenly looked on with envy at Australia's more cautious regulatory environment and applauded APRA's oversight of our financial system.

Nonetheless, our banking sector was far from immune from these global ills. The drying up of securitisation markets, the broader dislocation of global funding markets, consumer anxiety and a flight of capital to those perceived to be safer, placed many smaller banks and non-bank intermediaries under severe pressure.

Accordingly, the times demanded that the Government look to its regulatory arsenal to promote stability.

In September 2008, the Government mandated the Australian Office of Financial Management to purchase up to $8 billion in residential mortgage-backed securities, which was increased by a further $8 billion in November 2009.

The Government followed up this investment with the creation of the Financial Claims Scheme to protect deposits of under $1 million in authorised deposit-taking institutions. This was complemented by the Guarantee Scheme for Large Deposits and Wholesale Funding.

This crisis, along with the broader history of banking in Australia, illustrates the necessity of appropriate government regulation to meet the challenges of the day.

Australia deserves to be proud of the way in which we weathered the GFC, but we cannot afford to rest on our laurels.

The post-GFC regulatory environment

It is in the post-GFC environment that the Government announced its Competitive and Sustainable Banking System Package.

This is a comprehensive package of reforms designed to collectively make the banking system more competitive and sustainable.

Informing and empowering consumers

The first stream of the banking package focuses on empowering consumers to get a better deal.

The Government will introduce a mandatory key facts sheet for new home loan customers that will give people a side-by-side comparison of home loan products in simple, easy-to-understand language.

And we have increased fairness in the way fees and interest are charged on credit cards, giving consumers more say over how they use their credit cards, and helping consumers to better understand the features of the credit cards they sign up to.

The Government will complement these consumer initiatives by launching a community awareness and education campaign.

The MoneySmart website, which provides consumers with important financial tools such as budgeting, was launched on 15 March.

Consumer mobility

We also need to ensure that consumers have the mobility to act on this information.

To this end, regulations have been made that ban mortgage exit fees on all new home loans from 1 July 2011.

I welcome moves by some banks who have already responded to the Government's announcement by abolishing their exit fees.

As the Treasurer has noted, this is an important reform for consumers because it removes one of the biggest roadblocks to Australians getting a better deal for their families.

We also want to provide consumers with increased flexibility to transfer deposits and mortgages.

The Government has asked Treasury to explore ways to make Lenders Mortgage Insurance transferable from lender to lender. This measure will promote competition by abating the cost and inconvenience for consumers who choose to switch home loans.

The Government has also asked Bernie Fraser, the former Governor of the Reserve Bank of Australia, to conduct a comprehensive feasibility study to examine the technological options, potential timeline and processes for implementing bank account portability.

Price signalling

The Government also wants to see consumers get a better deal on their home loans by prohibiting anti-competitive price signalling.

While information disclosure plays a vital role in any economy, in some cases, it can impede competition.

The Government has a Bill currently before Parliament to amend the Competition and Consumer Act to provide new prohibitions to address anti-competitive price signalling and information disclosures.

The Bill is not directed towards ordinary commercial communications. Banks will be able to continue communicating with their customers, shareholders, market analysts, employees and other stakeholders in the ordinary course of business.

The Bill provides that banks will still be able to fully comply with any continuous disclosure obligations, such as discussing their funding costs, as well as any other legal or regulatory obligations.

The Government has worked closely with the Australian Competition and Consumer Commission (ACCC) to design these amendments, consulting extensively on the draft legislation with the banking industry, legal experts and other stakeholders.

This extensive consultation has produced laws which will effectively address the issue of anti-competitive price signalling and information disclosures, while allowing banks to get on with business.

More choice: supporting small lenders

The Government is also strengthening community perceptions of confidence in credit unions and building societies.

We have seen from our experiences in the GFC that there was a lack of understanding about the way that the sector is regulated.

Some customers pulled their savings out of credit unions and mutuals and put them into the major banks under the belief that the sector was not held to the same prudential standards as the major banks.

The Government wants to make sure that Australians understand that mutuals are regulated to the same standards, and overseen by the same regulatory authority, as the major banks.

In addition, we are supporting the smaller lenders, which rely heavily on the Residential Mortgage Backed Securities market as a source of funding, by investing an additional $4 billion in high-quality, AAA-rated RMBS. And we are facilitating the bullet RMBS market.

The Government's measures will not just support smaller lenders but will be of benefit to the banking sector as a whole.

For instance, the Government has confirmed the Financial Claims Scheme as a permanent feature of our financial system. We are currently consulting on settings for the Scheme in a post-crisis environment.

Securing long-term safety and sustainability

The banking package is also focused on securing the long-term safety and sustainability of our financial system.

The Government will amend the Banking Act to allow banks, credit unions and building societies to issue covered bonds.

This will broaden lenders' access to cheaper, more stable and longer-term funding so they can continue to provide reasonably priced credit to Australian households and businesses.

Treasury released an exposure draft of the covered bond legislation for industry consultation on 24 April this year, and Treasury is continuing to work with industry on the details of this important Bill.

The Government is also working to develop a deep and liquid corporate bond market.

We are launching the trading of Commonwealth Government Securities on a retail securities exchange, and we are further simplifying disclosure obligations for new corporate bond issuers.

Regulatory risk: community expectations and values

In addition to depending on the economic developments of the times, regulation also depends on social and political realities.

At the heart of these realities will be the effectiveness of the existing regulatory environment, the community's expectations and values, and the extent to which the conduct and behaviour of banking sector participants aligns with these considerations.

There will always be a need for regulation in the banking sector. It is necessary to ensure that we have a stable and competitive sector in both the good and bad times. And it is important that our banks act in accordance with the community's expectations and values.

While it will always be the case that some regulation is welcomed, such as that put in place during the GFC, and some is resisted, it is the job of Government to build a strong system in good times and bad.

And it is the job of Government to listen when the community's expectations and values are not being met.

But consideration of questions of community values and expectations does not have to involve negative reflections upon the conduct of our banks. Banks also have an enormous capacity to build reputational goodwill where their actions align with the community's expectations. The Queensland floods are a good example of how important your actions are to the community – both in real and reputational terms.

I would like to take the opportunity to thank the ABA and the banking sector for their work with the Government in the aftermath of the Queensland flood disaster. There was no better display of the relationship between consumers and the banking sector than during these terrible events, with measures such as the moratorium on ATM fees for non-customers and the deferral of home loan repayments.

In my own experience, I have been impressed by the willingness of some of our banks to engage with questions of financial literacy and financial inclusion. In recent months, I have also been encouraged by the responsiveness of our banks to addressing some of the concerns I have been raising in relation to the fee structures impacting upon remittances to some of our neighbours in the Pacific.


The Competitive and Sustainable Banking System Package is a comprehensive suite of interrelated reforms that have been developed after extensive consultation with stakeholders.

While much has been achieved and gained through competition in the Australian banking sector over the past few decades, we cannot afford to be complacent. The recent period of international financial instability should serve to affirm rather than quell our commitment to competition and stability in our banking sector.

The Government is implementing its banking system package in this spirit. These reforms will allow our banking system to work more fairly and efficiently, to create wealth for Australia and for Australians.

The Government looks forward to continuing to work with the sector to implement our reforms and deliver economic opportunities to all Australians in the future.

1 House of Representatives Hansard, Reserve Bank Bill 1959- Second Reading Speech, 11 March 1959.

2 See: Reserve Bank of Australia, Submission to the Senate Economics References Committee Inquiry into Competition Within The Australian Banking Sector, 30 November 2010, http://www.rba.gov.au/publications/submissions/inquiry-comp-aus-bank-sect-1110.pdf at page 2.