Good afternoon.
First, allow me to thank the Australian Institute of Credit Management (AICM) for inviting me to address your 2008 national conference.
Credit practitioners play a vital role in ensuring that our financial markets continue to operate on a sound footing. And the emphasis of the AICM on accreditation and continuing education can only further the professionalism of your members and the overall integrity of the Australian economy.
Today, I would like to talk to you about the Government’s ongoing work to ensure that the Australian financial system is flexible, modern and strong. I would also like to discuss other recent developments in our financial markets.
Financial market volatility
As I’m sure you are all aware, Australia cannot be immune from the fallout of the global credit crisis.
More than 25 banks around the world have failed or been bailed out. Global stock markets have suffered significant losses.
The crisis has buffeted confidence around the world and is contributing to a serious slowdown in the global economy.
The International Monetary Fund now expects growth of less than one per cent in six of the world’s largest developed economies next year.
This will be the slowest growth in the advanced economies for over a quarter of a century.
As a member of the global economy, Australia is affected by these developments.
But we are in a much better position to weather the storm than many other countries. As the Treasurer has said, if there’s one country in the world you would want to be in, in the current circumstances, it is Australia.
Australia has underlying strengths that virtually no other country in the world has.
Less than two weeks ago, the International Monetary Fund endorsed the strength of our four major banks, which represent 85 per cent of the Australian banking system. The IMF concluded that our major banks are weathering the financial crisis admirably… are well-regulated… and soundly-capitalised.
The OECD expressed similar sentiments on the robustness of Australia’s economy last week when it released its 2008 Economic Survey of Australia. It stated that Australia’s economy has stood up well to the ongoing global financial market turbulence and the financial sector has, so far, withstood the crisis — thanks to prudent management, high profitability and strong capitalisation.
As the Treasurer has indicated, this is a strong endorsement of our economy.
Australia’s “four pillars” are among the world’s 20 AA-rated banks. This is due to three factors — the strength of our regulatory system… the integrity of their balance sheets… and their minimal direct exposure to sub-prime.
The exposure of our banks to sub-prime accounts for less than one per cent of Australian total mortgages. In contrast, the exposure of US banks to sub-prime is about 15 per cent. So the circumstances of our banking and financial system are fundamentally different to those in the United States.
Government response to financial market volatility
Throughout this global financial crisis, the Government’s approach has been to plan ahead… to examine unfolding events… to act early… and to act decisively.
That’s why we are working closely with other governments around the world to address the global financial crisis.
And that’s why we have implemented several measures over the last week to strengthen growth and protect Australians from the effects of the global financial crisis.
Economic Security Strategy
One example of our decisive action is the $10.4 billion Economic Security Strategy, designed to strengthen the Australian economy and support Australian households through these difficult times.
The Economic Security Strategy will complement the Reserve Bank’s recent moves to reduce official interest rates. It also builds on the measures the Rudd Government announced in the 2008-09 Budget.
The package specifically bolsters recent weaker growth in household consumption and housing, and provides much-needed assistance to Australian pensioners and families.
The package includes $4.8 billion immediate down payment to Australia’s four million pensioners, carers and seniors. From 8 December 2008, pensioners will receive a lump sum payment.
These payments are intended to provide additional support in the nine months between now and mid-2009, when long-term pension reforms will take place in line with the recommendations of the Harmer Committee of Inquiry.
The second part of the package is a $3.9 billion payment in support for low and middle income families. In total, about 3.8 million Australian children will receive a $1,000 one-off payment to their families. These payments will also be made from 8 December this year.
The third part of the package is a First Home Owners Boost to ensure first home buyers will be eligible for grants of up to $21,000.
The First Home Owners Boost is a decisive initiative to stimulate housing activity, because the housing sector is critical in terms of the overall performance of the economy. This initiative will also give first home buyers a better chance in the housing market.
The fourth part of the Economic Security Strategy is an investment of $187 million to create an additional 56,000 new training places this financial year.
Increasing productivity and the skills agenda are central to the Rudd Government’s economic platform. These new training places will provide more skilled labour to meet the needs of industry.
The fifth part of the Economic Security Strategy is the acceleration of projects to be funded through the three Nation Building Funds announced in the Budget to strengthen our economy.
Ministers will bring forward interim Infrastructure Reports to December 2008 so that work can start in 2009 on projects in the key areas of education and research… health and hospitals… and transport and communications.
Fast-tracking the nation-building agenda can secure economic activity in the short term and expand growth potential in the medium to long term.
The Government took the tough decisions in the Budget to build a strong surplus to act as a buffer during an economic slowdown. This is now providing the flexibility we need to respond to the dramatic deterioration in the global economy.
Treasury advises that the Budget will still be in surplus after these measures.
Deposit guarantees
The Economic Security Strategy follows the announcement by the Prime Minister last weekend that, as part of coordinated international action, the Australian Government will guarantee all deposits in Australian-owned banks, building societies and credit unions, as well as Australian subsidiaries of foreign-owned banks.
This guarantee will be legislated as part of the Financial Claims Scheme, and will operate for three years with no cap. We will review the situation in three years.
In addition, the Australian Government will guarantee the overseas borrowing arrangements of our banks so that they can secure long term credit to continue to fund business and mortgage lending in Australia into the future.
This initiative will enable Australian institutions to raise funds overseas in the current tight conditions and will restore confidence in credit markets.
By acting in concert with the governments of other countries, we are helping to stabilise financial markets, restore the flow of credit and support global economic growth.
And by guaranteeing the savings of hard-working Australians, we are providing them with certainty about the future.
AOFM purchase of residential mortgage‑backed securities
To further underpin the Australian financial system, the Australian Office of Financial Management will purchase an additional $4 billion in residential mortgage-backed securities from a wide range of Australian lenders.
This move takes the total AOFM purchase of residential mortgage-backed securities to $8 billion.
This initiative will benefit Australia’s mortgage market and ensure that this sector of the lending market has access to funding for its operations.
It will also provide a level playing field for new and smaller mortgage lenders to compete with the major banks.
I should add that this investment is very different from the $700 billion rescue package the United States Treasury recently initiated in response to financial market conditions in that country.
The US Treasury was effectively forced to issue debt to invest in existing troubled mortgage assets, such as securities backed by sub-prime mortgages with high default rates.
This contrasts sharply with our approach.
The Australian Office of Financial Management will invest only in newly-issued, prime, AAA-rated residential mortgage-backed securities that meet strict criteria in relation to the quality of the underlying mortgages.
This initiative demonstrates the Australian Government’s determination to promote the efficient operation our financial markets. And our commitment to ensure robust competition in the mortgage market to put downward pressure on mortgage interest rates.
Short selling
Australia’s response to the international financial market turmoil includes several other initiatives to ensure the continued integrity… fairness… and transparency of our markets.
Transparency is vital for promoting investor confidence. And in turn, investor confidence relies on the integrity of market systems and the institutions that serve the market.
This is why the independent regulator, ASIC, introduced a temporary ban on short selling... limited the number of allowable “covered” short sales... and increased disclosure requirements for these allowable covered short sales.
The ban applies for 30 days. After then, ASIC will reassess market conditions and review the ban.
In addition, the ASX announced that it was amending its Market Rules 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 short selling has a role in the effective operation of markets, it was 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 proposes to introduce legislation to require the disclosure of covered short sale transactions on Australian financial markets. Public comments close on the exposure draft shortly and I would welcome any comments that you may have.
In short, the Corporations Amendment (Short Selling) Bill 2008 requires sellers to disclose sales of certain financial securities that are covered by a securities lending arrangement. Sellers must disclose to their executing broker, who in turn discloses the sale to the market operator.
Review of credit rating agencies
The review of credit ratings agencies will alsoencompass the role of research houses.
The review has three broad objectives.
First, to examine the issues surrounding the role of credit rating agencies in the recent market volatility, particularly in relation to structured and securitised products.
Second, to analyse whether the circumstances under which credit rating agencies operating in this country have been granted an exemption from holding an Australian financial service licence are still current or justified.
And lastly, to examine, consider and report on the range of issues raised in recent international reports on credit rating agencies, such as those released by the Financial Stability Forum, and the International Organisation of Securities Commissions.
Credit rating agencies play an important role in modern economic and financial systems. To ensure that ratings are determined through a better and more effective process and to provide for better supervision by regulators, the review has taken account of international developments and met important stakeholders.
Given the global nature of credit rating agencies, I can assure you that the position Australia will adopt will complement — and not supplant — international efforts coordinated by the Financial Stability Forum (FSF) to better regulate these important organisations.
While Government can play a role, so can some of you. I call on originators of structured debt products to better disclose to rating agencies information necessary for accurate ratings and I encourage those who use ratings to really test the validity of the advice you receive. Together we can drive the reforms identified by the FSF as necessary to ensure the effective functioning of ratings advice.
I expect the review process to conclude within a reasonable period and lay the foundation of a regulatory framework that will contribute to restoring confidence in the ratings process.
National regulation of credit
One of the more far-reaching ways the Government is reforming our financial services regulatory regime is by developing one single, national system to regulate consumer credit.
The Commonwealth took a National Action Plan to COAG to transfer all consumer credit products to the Commonwealth. As you would all be aware, COAG agreed to this landmark decision on 2 October. The transfer of responsibilities follows on from the COAG’s decisions earlier this year.
This is an important initiative by the Rudd Government that will address the deficiencies that have long existed in credit regulation by establishing a consistent and robust consumer credit regulation framework.
The Rudd Government will implement national credit regulation in two phases, to make the transition as smooth as possible.
A phased approach achieves the goals of strengthening consumer protection, minimising disruption to business and timely implementation without exposing the initiative to any unnecessary risks.
Under the first phase of the plan, the Commonwealth will take responsibility for the existing State and Territory legislation — the Uniform Consumer Credit Code — by enacting it as Federal law.
The new national consumer credit law will not only cover mortgages taken out to buy the family home, it also will be extended to cover mortgages on investment properties to help stop borrowers racking up excessive levels of mortgage debt.
It will also establish, for the first time, a comprehensive national licensing regime to be administered by ASIC that will cover all credit providers, brokers and advisers.
Lenders will be licensed by ASIC, which will be given extra powers as the sole regulator to enforce the scheme.
The new national law will emphasise general conduct obligations which will require the provision of credit services honestly and fairly. Specific responsible lending requirements will also be in place to protect consumers from deceptive advertising and from being given loans they cannot afford to repay.
Unscrupulous lenders who charge extortionate fees and charges on small loans and cash advances to some of the most financially vulnerable people in the community — people who would not normally qualify for credit from a bank or other financial institution. They will be targeted.
Payday lenders will be brought under a national licensing scheme which forces them to lend responsibly and assess the capacity of borrowers to repay loans.
Important safeguards will be built into the national scheme. All borrowers will be able to appeal to an external dispute resolution body to which all licensed lenders must belong.
The Corporations Act will be extended to cover margin lending products and trustee corporations. Organisations which extend margin loans will have to provide product disclosure statements similar to those provided for the First Home Saver Accounts.
The first phase of the new regime will be in place in Commonwealth, State and Territory legislation by the end of June 2009. There will be a two-year transition period for affected businesses.
The second phase of the action plan will look at possible further rules to stem predatory lending practices, such as a review of credit card limit extension offers, an examination of State approaches to interest rate caps and other fringe lending issues.
The Rudd Government has been provided $71 million over four years to implement the national system to regulate consumer credit.
Ladies and gentlemen, this is a major step forward.
It means that we will have the kind of system we need — one single, national and standard regulatory system which covers all consumer credit and financial services.
A truly national regime that will help to ensure that the Australian credit market remains active and competitive — both domestically and internationally.
Cross-border insolvency
Before concluding, I would like to say a few words about the Cross-Border Insolvency Act 2008, which came into effect on 1 July.
The legislation enacted the Model Law on Cross-border Insolvency, as adopted by the United Nations Commission on International Trade Law.
In a nutshell, the Model Law is designed to avoid discrimination between local and foreign creditors.
Like the consumer credit reforms, the cross-border legislation recognises that we are operating in an increasingly international financial environment.
The adoption of the Model Law represents a departure from the “territorial approach” to cross-border insolvency, in which each country assumes that it has exclusive jurisdiction over a debtor and that separate proceedings will be undertaken in each country.
Not only does the territorial approach result in a significant duplication of costs — which are ultimately borne by creditors — but it also creates opportunities for debtors and creditors to take advantage of time delays and differences in laws to minimise their own losses.
The adoption of the Model Law will move us closer to the “universal approach” to cross-border insolvency. This assumes that one coordinated proceeding will be recognised by all jurisdictions in which the debtor has assets.
I should also recognise the leadership role of Australia in this area. Australia was actively involved in developing the Model Law, and continues to be actively involved in several forums — the United Nations Commission on International Trade Law… the Forum for Asian Insolvency Reform… the OECD and APEC, to name just a few.
Conclusion
Ladies and gentlemen, as you can see from my remarks this afternoon, the Government is tackling the effects of the global credit crisis head-on.
We are determined to ensure that Australia continues to stand strong in the face of global uncertainty.
Our response is based on the principles of responsible economic management… a comprehensive agenda of reform… and ongoing international cooperation.
In closing, I would emphasise that dealing with the effects of the global credit crisis will depend on a partnership — a partnership between the Government and the financial services industry.
Everyone in this room can be part of the solution.
For your part, I would ask that you continue to deliver the innovation, diligence and sound management that has played such a crucial role in Australia’s economic strength.
Thank you.