Good afternoon.
First, please allow me to thank the Australian Securitisation Forum for inviting me to address your conference today. I always value the opportunity to speak with members of the financial services industry.
I appreciate the commitment of the Australian Securitisation Forum to develop and recognise professional standards. And I expect that your new Securitisation Professionals Program will contribute to the standing of your sector.
The ASF has taken a leading role in developing solutions to revive the securitisation market in Australia. The Government welcomes your suggestions and advocacy.
Securitisation is important for Australia's mortgage market and the financial system. Together, we can drive the necessary changes to get a better result for those Australians who want a competitive mortgage while providing more opportunities for your members.
Today, I would like to update you on the current state of Australia's financial markets, and how the Federal Government is honing our regulatory response. I would also like to outline the state of play on mutual recognition and the rating agency inquiry, as well as other current issues.
But first, I would like to take a moment to reflect on the first anniversary of the Rudd Labor Government.
As the Prime Minister has indicated, when the Government was elected just one year ago, it committed to building a modern Australia. An Australia equipped to face the challenges of the 21st century.
And over the last year, the Government has been delivering on that commitment.
Our achievements include:
- tax cuts for working and low income families;
- ratifying the Kyoto Protocol;
- the apology to the Stolen Generation; and
- abolishing the previous Government's extreme workplace laws.
These initiatives have met the challenges of cost of living pressures... the need to act on climate change... and heal the hurt of many indigenous Australians.
In my portfolio, the last year has seen decisive action to tackle one of the greatest economic challenges to confront Australia since the Great Depression.
It has been a challenging year as a Minister. But the Government and myself are determined to continue acting decisively to meet the tests we confront in these uncertain economic times.
Financial market volatility and Government's response
We are all well aware that the world is facing the most significant upheaval in global financial markets in nearly eight decades.
Despite the fact that Australian banks are amongst the strongest in the world, and had only a minimal exposure to the US sub-prime loans market, it is inevitable that we will be affected.
We are being affected through three primary mechanisms.
The first is financial markets. Funding costs for banks have risen and obtaining funding from overseas — where much of the funding comes from — has become far more difficult. And as I am sure you know only too well, the securitisation sector has been one of the hardest hit by the global financial crisis. As well, along with those of the US and other countries, our share markets have also been affected.
Second, we can expect the forecast global downturn to directly affect our economy by reducing the demand for Australia's resources and other exports.
And third, the downturn has inevitably affected Australian consumer and business confidence.
G20 Leaders' Summit
On 15 November, the Prime Minister and Treasurer attended the G20 Leaders' Summit on Financial Markets and the World Economy in Washington.
At the Summit, Australia continued to promote coordinated international action on two fronts.
We pushed to ensure that the governments of the world's major economies undertake the financial system reforms we need to prevent this type of crisis from ever occurring again.
We also pushed to secure a commitment to economic growth through international cooperative action to support growth and jobs.
At the Summit, leaders committed to implementing policies consistent with a set of five commonly agreed principles for reform. The five principles are... strengthening financial market transparency and accountability... enhancing sound regulation... promoting integrity in financial markets... reinforcing international cooperation... and reforming international financial institutions.
Leaders agreed to quickly implement these principles. They also agreed to a set of high-priority actions to be completed by 31 March 2009.
Of course, Australia has already set its own national course of economic action to deal with the global financial crisis at home.
Economic Security Strategy
One of the Rudd Government's first initiatives was to safeguard the Australian economy and bolster business and consumer confidence. I'm referring, of course, to the $10.4 billion Economic Security Strategy, announced on 14 October.
This economic stimulus package — roughly equivalent to one per cent of GDP — is strengthening the Australian economy by boosting household spending capacity.
Ladies and gentlemen, we have already seen the positive effects of the economic stimulus package.
As the recently-released Mid Year Economic and Fiscal outlook states:
"In the absence of the Government's Economic Security Strategy, economic growth would have been significantly weaker than currently forecast. The Strategy is expected to result in a boost to the level of real GDP growth of between half and one percentage point over the next several quarters, providing a significant boost to household consumption and supporting a recovery in dwelling investment over the forecast horizon."
It's important to point out that, after allowing for the measures set out in the economic stimulus package, we still expect to maintain a Budget surplus in 2008-09. This surplus will allow us to provide any additional assistance if we need to.
In fact, the reason the Rudd Government could respond to the crisis in such a strong manner was due to the sound surplus we built in the 2008-09 Budget.
Deposit and wholesale funding guarantee
Another way that we have bolstered business and consumer confidence is by guaranteeing bank deposits and bank funding.
On 12 October, we announced that, alongside similar international action, we would introduce a guarantee on deposits in Australian-owned banks, building societies and credit unions, as well as Australian subsidiaries of foreign-owned banks.
In other words, we are guaranteeing the fundamentals of this country's financial system.
On 24 October, the Treasurer announced the details of these guarantees.
On the advice of the Council of Financial Regulators, we decided to implement a $1 million threshold on the deposit guarantee. Depositors with investments over $1 million will be charged a fee to receive the benefits of the deposit guarantee.
This fee will ensure that the deposit guarantee does not provide disincentives for market participants to operate in short-term money markets.
The fee applies from today. Until then, all deposits and wholesale funding eligible for the guarantee arrangements will be guaranteed without charge.
After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.
The wholesale guarantee fee arrangements will be reviewed on an ongoing basis and revised if necessary.
Short selling
In another initiative to ensure the continued integrity, fairness and transparency of our markets, the independent regulator, ASIC, introduced a temporary ban on short selling, with limited exceptions.
ASIC recently announced that it has lifted the ban on short selling of non-financial securities, subject to disclosure requirements. The ban on short selling of financial securities will remain in place until at least 27 January 2009.
In addition, the ASX amended its authorised product list to prohibit people from entering into "naked" short sale transactions that are not otherwise allowed by the Corporations Act.
While I believe that appropriately regulated and disclosed covered short selling has a role in the effective operation of markets, it is a prudent decision to restrict it at a time of heightened market volatility.
Corporations Amendment (Short Selling) Bill 2008
To further ensure the integrity and transparency of our markets, the Government has introduced legislation to require the disclosure of covered short sale transactions on Australian financial markets.
The Corporations Amendment (Short Selling) Bill 2008 establishes a disclosure framework for covered short sales. The default position in the Bill is for sellers to disclose short selling information to their executing broker, who in turn discloses the information to the market operator.
However, this default position may be changed by regulations, for example, to require sellers to disclose information directly to the market operator. Regulations will also set the procedural requirements of disclosure, such as what form of data is released to the public and when.
The Government will finalise these regulations, in consultation with industry and other stakeholders, over the coming months. This will ensure all views are taken into account as part of establishing the requirements.
The Bill also bans naked short selling subject to ASIC's ability to grant exemptions from this prohibition. The Government foresees the ASIC exemptions may allow some non-speculative naked short sales to ensure the ordinary operation of the market. In addition, the Bill provides certainty about the powers of the ASIC to regulate short selling.
Bond market
In addition to the initiatives I have just outlined, the Government has been working quietly to strengthen the robustness of Australia's financial system and reduce its vulnerability to adverse shocks.
One of the ways we have been doing this is by ensuring that our bond market is active and efficient.
In May, the Treasurer announced increased issuance of Australian Government Treasury Bonds. He also announced changes to the securities lending facility for Treasury Bonds operated by the Australian Office of Financial Management.
Issuance of bonds will be increased by up to $5 billion in 2008-09 to provide liquidity, and to meet the sharp increase in demand for the bonds. More than $3 billion in additional bonds have already been issued. The AOFM will monitor market conditions closely and provide additional issuance as required.
The strengthening of the securities lending facility has also smoothed the operation of the Treasury Bond market by providing dealers with greater confidence about the availability of stock if needed for short periods.
The Government has also introduced legislation to exempt bonds issued by State and Territory governments from interest withholding tax. This will help improve the depth and liquidity of the semi-government bond market.
Government purchases of RMBS
Another way that the Rudd Government is strengthening Australian markets is by purchasing residential mortgage-backed securities. These investments are part of the Government's commitment to maintain strong and effective competition in Australia's mortgage markets.
I understand that there has been extensive discussion at this conference about this initiative and the arrangements for implementing it.
The Government recognises the important role that securitisation has played in residential mortgage lending and encouraging competition. This is why we think it's important to support the residential mortgage-backed securities market during this period of dislocation.
A first round of purchases of RMBS connected with Member's Equity Bank and FirstMac has already been completed, involving investments by the Government totalling approximately $1 billion, and another round is currently under way. Up to $8 billion is available for investment, with at least $4 billion to be allocated to issuers that are not authorised deposit-taking institutions.
I'm sure that originators here at the conference would welcome the Government's efforts to support mortgage lenders in an environment of tight credit markets. The work of the AOFM to increase the opportunities for securitisation of mortgages is a practical demonstration of our commitment to encourage lending in the economy.
I would encourage originators to consider the benefits of the Government's initiative and encourage you to take advantage of it.
According to the ASF submission to the inquiry into competition in the bank and non-bank sectors, the dominance the major banks enjoyed in the 1980s was reduced in the following decade due to financial deregulation and lower inflation. Together, these factors reduced the gap between the bank bill rate and the deposit rate.
Importantly, these changes in market conditions allowed a new type of lender — non-bank mortgage providers — to enter the market offering home loans at lower interest rates.
As the ASF submission notes, these non-bank mortgage providers utilised broker networks to originate mortgages. They also accessed the wholesale capital markets for funding, via securitisation, rather than requiring retail deposits.
This new business model underpinned by securitisation played an important role in contributing to the arrival of non-bank lenders in the mortgage lending market. This also introduced an additional source of competition into the mortgage lending market.
Strengthening the integrity of our regulatory architecture
ASIC strategic review
Ladies and gentlemen, as well as protecting Australians from the effects of the global financial crisis, we are also looking to the longer term and strengthening our regulatory architecture.
This is why we are providing a funding injection for both our regulators, ASIC and APRA.
And this is why we strongly support the recently-announced restructure of ASIC.
The restructure will ensure that ASIC better understands the markets it regulates… is more forward-looking in its decision making processes… and communicates clearer messages to the market in relation to its activities.
The restructure will also enable ASIC to reallocate its resources towards priority areas. One of the key changes flowing from the review is additional investment in market research and analysis.
The Government is committed to ensuring that ASIC receives the support it needs to meet the challenges of the current market conditions. ASIC's funding in 2008-09 is budgeted at over $303 million. This represents an increase of about 85 per cent in real terms since 2000‑01.
A month ago today, the Prime Minister announced that ASIC will receive additional funding of $10 million in 2008-09 and $20 million in 2009-10 to provide "front-line" resources to undertake market monitoring and enforcement activities.
The banking regulator, APRA, will also receive extra funding to meet its additional workload.
These measures will help to reinforce confidence in the soundness and integrity of Australia's financial markets.
Review of credit rating agencies
The global financial crisis has prompted universal consensus for improved regulation of rating agencies. Their role has come under scrutiny due to their involvement in providing inaccurate ratings of structured financial products in the lead-up to the US sub-prime crisis.
The Rudd Government is prepared to take decisive action to upgrade the supervision of credit rating agencies to promote and maintain confidence in our financial system.
On 13 November, I announced significant reforms to the regulation of credit rating agencies and research houses.
Following the review, ASIC will require rating agencies to have an Australian Financial Services Licence. This is to ensure that our financial system meets the highest standard of regulation.
Rating agencies will now also be required to issue an Annual Compliance Report. The report will outline in detail to ASIC how they have complied with the recently updated International Organisation of Securities Commissions Code of Conduct Fundamentals for Credit Rating Agencies.
This move will also ensure uniform international regulation. Australia's efforts in this area complement the work of the US Securities and Exchange Commission.
ASIC will also strengthen its oversight of research houses and require them to comply with an annual compliance report. The compliance report will cover management of conflicts of interest and the procedures, methodologies and assumptions that result in research house advice.
By requiring rating agencies and research houses to report annually on the quality and integrity of their ratings processes, conflicts of interest management and responsibilities to the investing public and issuers, the Rudd Government is boosting the integrity of our financial system.
Before concluding today, I would like to briefly outline the state of play on two important and related initiatives — mutual recognition arrangements between Australia and other countries, and our work to establish Australia as a leading financial services centre in the Asia-Pacific region.
As part of the review, Treasury and ASIC officials consulted with representatives from the ASF. The views of industry participants such as yours were welcome and helped to formulate the reforms to the oversight of credit rating agencies. Thank you for your contribution to the reform agenda in this important area of financial markets policy.
Once the reforms are implemented by ASIC, I hope that they work to improve the Australian securitisation market.
Mutual recognition arrangements
Mutual recognition of securities regulation is an important area of corporate law reform. As well as making it easier for overseas investors to invest in Australia and vice-versa, mutual recognition reduces red tape… enhances cross-border law enforcement activities… and enables greater capital flows between Australia and overseas destinations.
On 25 August this year, the Chair of the US Securities and Exchange Commission, Christopher Cox, the ASIC Chair Tony D'Aloisio and myself signed a mutual recognition arrangement between our respective agencies.
The arrangement will provide Australian investors with greater access to US markets, while maintaining strong investor protection and ensuring market integrity. It will also make Australian markets more attractive and accessible to investment from the United States.
Australia is the first country with which the US has sought such an arrangement. This testifies to the strength of our law… our regulators… and our financial services industry.
In fact, when describing the agreement, Chairman Cox stated:
"We hope that this enhanced level of enforcement cooperation will serve as a model for other jurisdictions, and possibly set a new international standard."
The agreement with the US is Australia's third mutual recognition arrangement. The first was with New Zealand and covers securities offer documents. The second arrangement was with Hong Kong and covers the sale of retail funds to investors in each other's market.
Mutual recognition arrangements enhance the global reputation of Australia's financial services industry. This can only strengthen our role as a financial services centre for the region.
Financial Services Centre
Every challenge presents us with an opportunity.
And looking ahead, we can expect the global financial crisis to provide opportunities. Many of the world's investors will be more conservative than they have been in the past. They will be looking for safe havens. For stable and well-regulated markets in which to invest.
Markets like Australia.
This is why the Rudd Government is working to promote Australia as a leading financial services centre in the region.
Our financial services sector has many positives. It is dynamic, innovative and highly successful. The rapid economic growth within the Asia-Pacific region presents Australia's financial services sector with significant opportunities.
The sector also makes an important contribution to Australia's wealth. In fact, the finance and insurance sector contributed about seven-and-a-half per cent of GDP in the year to June 2008, making it the third-largest sector in the Australian economy.
This is an impressive performance.
And yet the sector has an untapped capacity for growth — both in terms of adding more value to the Australian economy, and in its export potential within the Asian region.
In fact, the sector exports only about three per cent of the value of its production. I'm sure you will all agree with me when I say that we can do a lot better.
This is why we have created the Australian Financial Centre Forum. Its job is to progress the Government's objectives in the financial services sector... advance Australia's interests in the region... and position Australia as a financial services centre.
The Australian Financial Centre Forum is a joint Government‑industry partnership comprising senior financial sector representatives... a Treasury Taskforce... and a Reference Group, which includes representatives from the peak financial sector industry associations, the State Governments, and Austrade.
The Forum will capitalise on Australia's competitive advantages and exploit opportunities in the region to increase cross-border trade and investment in financial services. And in the longer-term, increase the sector's contribution to economic growth.
When the world's markets recover from the current crisis, Australia will be ready.
Conclusion
Ladies and gentlemen, as you can see from my words this afternoon, the Government is tackling the effects of the global credit crisis swiftly and decisively.
We are stabilising and strengthening our economy.
We are boosting Australia's productivity performance.
We are maintaining investor confidence in our markets.
And just as importantly, we are looking to the longer term. We are working with other governments of the world... strengthening our regulatory architecture... and seeking out new opportunities.
As I mentioned earlier, securitisation has played an important role in encouraging the emergence of non-bank lenders as a competitive force in the Australian mortgage market.
The Government, through the actions of the AOFM, has shown its eagerness to revive confidence in the securitisation market.
These measures support our efforts to push-back against the challenging economic conditions sweeping the globe. They also recognise the important role securitisation plays in the Australian economy.
Thank you, and I trust that you enjoy the rest of the conference.