Minority Report by
Senator Xenophon
Introduction
1.1
The
inquiry into Bank Funding Guarantees was established to examine their impact on
the Australian financial sector, interest rates, consumer and business
confidence and government contingent liabilities, and to compare the guarantees
with similar arrangements overseas.
1.2 Following
the serious deterioration of global financial markets in September-October
2008, Australia followed other governments to change or introduce caps on
wholesale funding guarantees applying to existing deposit-protecting
arrangements.
"The Irish
Government was the first to act in late September by providing a guarantee with
an unlimited cap for deposits at the largest institutions, an approach followed
by Austria and Denmark. In other countries, including the United States, United
Kingdom and a number of EU countries the existing caps were significantly
increased."[1]
1.3 Australia's
measures were announced on 12 October 2009; guarantee arrangements for deposits
and wholesale funding and a guarantee fee on large deposits.
"They were
designed to support confidence of depositors in authorised deposit-taking
institutions and to help ensure that these institutions continued to have
access to capital markets."[2]
Under the
Financial Claims Scheme, all deposits under $1 million with Australian banks,
building societies and credit unions and Australian subsidiaries of
foreign-owned banks are automatically guaranteed by the Government, with no fee
payable.
Under the
Guarantee Scheme for Large Deposits and Wholesale Funding, eligible authorised
deposit-taking institutions can, for a fee, obtain a government guarantee on
deposits greater than $1 million, and wholesale funding with maturity out to
five years.
The guarantee
arrangements became full operational on 28 November 2008, following
consultation between Council agencies and authorised deposit-taking
institutions.[3]
1.4 Australia's
measures were unprecedented in terms of its duration, the amount covered, fee
and its scope. According to Professor Milind Saythe, from the ANZSOG Institute
for Governance,
"The
duration announced was three years (longer than that announced by several other
countries), amount of coverage was without limit and 100 percent (several
countries had put limits on amount and percentage insured), and it included
both retail and wholesale deposits at all banks (several countries restricted
it to retail deposits and certain institutions only) and was fee free (several
countries had fee in place)."[4]
The effects on
competition
1.5 Under
the Guarantee Scheme, the government introduced a series of tiers based on the
institutions credit rating, to determine its fee per annum.
For institutions
rated AA- and above, the fee per annum is 0.7 percent (70 basis points);
For institutions
rated A- to A+, the fee per annum is 1 percent (100 basis points); and
For institutions
rated BBB+ or below and unrated institutions, the fee per annum is 1.5 percent
(150 basis points).
1.6 Abacus–Australian
Mutuals, which represents credit unions and mutual building societies and
authorised deposit-taking institutions, argued in its submission to the
Committee:
"In order
to put competitive pressure on major banks in the interests of Australian
households and small businesses, mutual authorised deposit-taking institutions
(ADIs) need to be able to access wholesale funding, either directly in the case
of large mutual ADIs, or indirectly through aggregation vehicles in the case of
small mutual ADIs."[5]
1.7 This
argument was also supported by the Finance Sector Union of Australia (FSU).
"Successive
Australian Governments have endorsed the 4-pillars policy that prohibits
mergers between the major banks. The FSU endorses this policy but has ongoing
concerns that Australia appears to be moving slowly by inexorably towards a
banking system that has only 4 pillars. The major banks largely dominate
the Australian market – the guarantee should not assist them to become even
more dominant."[6]
The Finance
Sector Union goes on to state:
"The first
priority of the guarantee was understandably to ensure stability and confidence
in the banking system at a time of crisis (which it achieved); however it is
critical that competition in the sector not be further eroded due to unintended
ongoing consequences of the guarantee."[7]
'Moral Hazard'
1.8
One
of the unintended consequences of bank guarantees by government is that there
is the propensity for 'moral hazard'.
Moral hazard' is
a notion that says a party insulated from risk may behave differently from the
way it would behave if it were fully exposed to the risk.
1.9
In
his submission to the Committee, Dr Sam Wylie from the Melbourne Business
School at the University of Melbourne stated:
"The
deposit insurance gives banks an incentive to make higher risk loans that have
commensurately higher interest payments. Why?, because they are then betting
with the taxpayer's money. If the riskier loans are repaid the owners of the
bank get the benefit. If not, and the banks assets cannot cover liabilities,
then the Government must make up the shortfall."[8]
1.10
Similarly,
Professor Milind Saythe stated in his submission that:
"Unlimited
guarantees, in particular, increase moral hazard and distort financial flows
and investor behaviour, incentives and choice of institutions undergo a change.
This was confirmed when Colonial and other institutions froze funds withdrawal
within days of the announcement."[9]
1.11
Professor
Peter Swan from the Australian School of Business at the University of New
South Wales also shares these concerns, and says that there has been a long
history of 'bank protectionism' in Australia, and says that these guarantees
are:
"...
consistent with the Governments encouragement of the major banks to absorb the
next layer of banks, St George, BankWest, RAMS, Aussie and Wizard, and thus
further establish the Australian banking system as probably the most
concentrated in the world, thus hampering the growth of competition."[10]
1.12
Professor
Swan goes to say in his submission that:
"If the
scheme is allowed to linger on with ever increasing guaranteed borrowings,
there is always the likelihood of major bankruptcies and defaults. Banks and
their shareholders are not responsible for their actions when they borrow with
governmental guarantees. The taxpayer is, but other than voting the government
out, can do very little about it. In order to protect the Australian taxpayer
and solvency of Australian banks, the Government and Treasury should act now to
phase out the scheme."[11]
Moving forward
1.13
When
the bank funding schemes were announced in October 2008, the Government said it
would continually monitor the Guarantee Scheme and will look to phase it back
when market conditions normalise.
1.14
Professor
Milind Sathye suggests that the government uses a phase-out approach to
withdraw the scheme:
"... roll
back the deposit guarantee scheme in stages: to $100,000 by December 2009, to
$60,000 by June 2010 and to $20,000 by December 2010."[12]
1.15
A
number of economies are planning to coordinate their 'exits' from the full
deposit guarantee in their respective jurisdictions – the Hong Kong Monetary
Authority, Bank Negara Malaysia and the Monetary Authority of Singapore[13], for
example. It was suggested in another of submissions to the Committee that
Australia similarly look to mirror its withdrawal actions on other countries.
"... given
the interconnectivity of global financial markets, the wholesale funding
guarantee can only be removed when other members of the G20 do so."[14]
"... the
Government should also consider what international practice is, in respect of
guarantee arrangements, as critical factor in determining the timing and nature
of the alteration or removal of the Australian government's Guarantee
arrangements, so as to protect against any potential for a significant outflow
of funds from Australia that may seek to "chase the Guarantee" of
other jurisdictions."[15]
1.16
In
addition, the Finance Sector Union recommends that the Government look to
attach conditions to the guarantee in the interim, such as:
-
End off-shoring
and maximise Australian jobs;
-
Lend responsibly
and effectively to all market segments; and,
-
Observe basic
social obligations.[16]
These conditions
are designed to ensure that given the indirect taxpayer's support of banks,
institutions are unable to use the financial crisis as "an excuse to
retrench workers, downsize Australian operations or increase their interest
rate margins"[17].
The FSU suggests
breaches against these proposed conditions by authorised deposit-taking
institutions could result in sanctions placed the institution such as the
withdrawal of the guarantee.
Recommendation 1
That the government look to phase out
the Guarantee Scheme in stages, and that adequate notice is provided to
authorised deposit-taking institutions.
Recommendation 2
That second-tier banks are offered the
same fees as the major banks for guarantees, or that an alternative pricing
model for second tier banks is established, to ensure they are able to remain
competitive.
Recommendation 3
That the
Australian Prudential Regulation Authority monitors the investment behaviours
of authorised deposit-taking institutions to ensure that it is not of greater
risk than would normally occur without a Government Guarantee.
Nick Xenophon
Independent Senator for South Australia
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