Deposit Insurance and Bank Levies

I would like to compliment Senator Whish-Wilson for a very considered speech. This is a very important topic. It goes to the security and safety of our financial system. However, I do take issue with the senator for the fact that he does not seem to have dealt with the full details of this motion.

When I spoke earlier in the Senate I referred to the Burke and Wills expedition, but I did not quite get to finish my remarks, because other senators wanted to have time. So, bear with me while I draw a bit of a long bow, because I want to get this on the record. I read a book by Sarah Murgatroyd on Burke and Wills. The book had a great description about how the expedition started out. I quote:

Luxuries were well catered for: a large bath tub, a cedar table with two oak stools, and 45 yards of gossamer for fly veils. Yet the party took just two sets of field glasses, two watches and only 12 water bottles. Were 12 sets of dandruff brushes and four enema kits really necessarily? There were six tonnes of firewood, 200 kilograms of medication for the camels and horses, and enough ammunition to win a small war.

Why do I bring that up here? It is that just as the Burke and Wills expedition was very overloaded—it was one of their big problems—this motion, too, is way too overloaded.

It is always a good idea to travel to Queensland, as Burke and Wills were doing, and it is always a good idea to debate financial regulation, Senator Whish-Wilson, but it is not a good idea to overload your motions with too many ideas. I note that until the very end of your comments you had barely mentioned the first part of this motion, so I think it is worth reading out to the chamber that the motion we are discussing in general business this afternoon is:

That the Senate is of the opinion that, rather than punishing the unemployed, sick, elderly, students and families, revenue should be raised through applying a 'public insurance' levy on the big four banks that are too big to fail.

My reading of that motion is that you are considering that we should be using a too-big-to-fail levy, if you like, to fund other types of expenditure, in this case largely social security type expenditure. But that is not what your previous comments went to. When you spoke about creating such a fund and charging such a levy on the banks, what you were talking about was in fact a 'rainy day' fund. It was that we should build up some kind of capital reserves for the government, such that if the worst were to happen—and let us all pray it will never happen—we would have some resources there to offset the damage and carnage that would ensue.

You cannot spend a rainy-day fund while the sun is shining and still have a rainy-day fund. If the whole purpose of what you want to do is to put aside some funds for when something might go wrong, you cannot spend that money before that event happens. That is what the Greens are suggesting we do here. I was listening to Senator Whish-Wilson quote the RBA. He said that the RBA had suggested this idea to the financial services inquiry chaired by David Murray. I agree with him. It is not a crazy idea in and of itself. The RBA and other eminent economists have suggested it. I wrote down their quote which said that this fund will build up a fund that will help pay claims in the event of a default. I do not believe that the RBA went on to say—and I have not read their submission so I will stand to be corrected—that the fund will help build up a fund to help pay for benefits to the unemployed, the sick, the elderly, students and families. That is not what the fund is for. That is not what the RBA has suggested to the Murray inquiry. It is certainly not what other economists have suggested either.

What we are seeing here today is the sequel—the mining tax sequel, right here. I have listened for the last few years and the Greens have constantly referred to the mining tax as an endless pit of funds to fund all kinds of weird and wonderful ideas. Whenever they are on the ropes in a media interview about how they are going to fund high-speed rail and how they are going to fund universal dental care, they can always just say, 'We are going to tax the mining companies.' That is the common response from people. We have seen over the last few years that that was a completely misguided dream. I remember hearing the Leader of the Greens—who is here in the chamber now—at the Press Club in February last year make this comment:

Labor refuses point blank to fix the loopholes in their dud of a mining tax… It is foregoing the revenue needed for key reforms including implementing Gonski and dramatically increasing funding to our public schools, fully implementing a National Disability Insurance Scheme, expanding Denticare or building high speed rail.

All of those five promises were going to be funded by the mining tax. Admittedly, the Greens preferred Rudd's original resource super profits tax—what a great name that was. I had forgot about that—who came up with that? That was a fantastic name—10 points. That tax, we know from Treasury estimates through FOI documents, was going to raise $100 billion in its first 10 years—as it was proposed. Obviously it never made it into law. It was planned to raise $100 billion in 10 years. Senator Milne had made all these promises from that mining tax. Gonski was about $5 billion a year at the time. It has since changed, but at the time it was about that. So that was $50 billion over 10 years. The NDIS was about $75 billion over 10 years—and that is quite conservative. Denticare, or universal dental care, would be about $55 billion, and of course—I think from an Ernst and Young study—the high-speed rail is $100 billion. All of those promises add up to $280 billion. They were all going to be funded by a mining tax of just $100 billion. In one paragraph we had a black hole of $180 billion.

We are now seeing the sequel to this process. Over the next few months we are probably going to have a debate from the Greens that, 'Well, the mining tax has gone, and that proved to be a bit of a false dawn, but we still want to spend all this money on all these programs. We still want to have a high-speed rail and we still want to have our ice-cream and our cake and all our dessert as well as everything else. We are going to have to find another rich daddy to come and pay for that,' and that is now going to be the banks according to the Greens. The financial sector can help pay for it.

About that time or just a year or two before Senator Milne made those comments, you might remember that Ken Henry, the former Treasury secretary, once said that there was not a computer big enough in Treasury to cost the Greens' policies. I think we are seeing the same example. No costings have been presented by Senator Whish-Wilson on this process. He mentioned some estimates of what the levy could raise but, as I said before, this is not a motion only about a deposit insurance levy. Apparently it is going to be used to fund all these other things. But there are no costings about exactly how much he wanted to spend on all these other things. But we are used to that from the Greens.

I want to seriously engage with the issues that Senator Whish-Wilson has remarked on. As I said in my opening remarks, it is a very, very important issue. I do not believe it was fully dealt with or fully explained by the senator in his previous remarks. He is right in that a few years ago we made the decision to introduce a Financial Claims Scheme, a large-scale deposit insurance scheme, at the height of the global financial crisis. I agree with him that it was the right thing to do—an unfortunate thing to do but something that was necessary. For decades we were very lucky in this country to not have to rely on a deposit insurance scheme like other countries, but the scale and speed of the global financial crisis necessitated change. At the time I think the coalition was a little concerned about how large the deposit insurance was in its initial form—originally a million dollars cap, which was much, much higher than other countries. However that has since been reduced to $250,000 on every deposit account, which is in line with the United States, so it is not too far out of whack.

What Senator Whish-Wilson did not refer to in his remarks is that the former government did not just roll out this without a plan to fund the Financial Claims Scheme. The then Treasurer Wayne Swan decided we would not introduce a deposit insurance, as exists in the United States, and as the senator said, exists in the United Kingdom, but that we would fund it through an ex-post levy. Not an ex-ante levy, but an ex-post levy—and that was not mentioned in the senator's remarks. What that means is that we have decided with the Financial Claims Scheme that—God forbid—if the worst happens and there is a default in a financial institution, we would seek to recover the costs of the deposit insurance from two sources. Firstly, from the remaining assets of the financial institution that becomes insolvent but, by definition, if they are insolvent those assets will not be enough. To fund the remainder at the time we would put in place an ex-post levy, a levy on the financial sector on what is remaining. It will eventually be funded by the financial services sector if we were to get to that spot. If we were to get to that place—and let us hope that we never do—it will still be a charge to the financial sector. Of course the financial sector knows that. It is publicly available. They will factor that into their decision making because they know that, if there is a default or a failure, they will be up for a charge.

The other thing that I do not think was mentioned by Senator Whish-Wilson is that, while he is right to say there is a market failure here and, to use some jargon, a moral hazard, we do not just have the tool of levies, either ex post or ex ante, to deal with that market failure. The other way we seek to deal with that market failure through our system is prudential regulation. We require all of our banks, insurance companies, building societies and credit unions to put aside a certain amount of capital against the liabilities that they have on their balance sheets—that is largely their deposits. Depending on the riskiness of those liabilities and the assets they hold, they have to hold a certain amount of capital.

Those prudential requirements are changing at the moment. The much maligned Basel II process, which some say helped cause the global financial crisis, is coming to an end. There is a new set of prudential regulations coming in through Basel III which will change a lot of the risk weightings for banks, will require financial institutions to adjust their positions and which we hope will help other countries avoid what we saw in the global financial crisis.

We in Australia did not face the crisis that other countries did. Some might argue that it was because of our superior level of financial regulation. I am a bit sceptical of that. I think we do have a very good financial regulatory structure, but we should never be complacent and think that what happens somewhere else cannot happen here. So there is a case to make sure that we continually improve that in a methodical and careful way, because these are very serious issues.

That is why the coalition government has established the financial system inquiry, as Senator Whish-Wilson mentioned, chaired by David Murray. We are serious about making sure that we look at all of the issues that are involved to ensure that we make the right decisions, that we make no sudden changes and that we think through all of the ramifications, perverse or otherwise, of any change. The financial system inquiry released its draft report a month or two ago. It dealt with the issues that are before us in this motion. I want to quote a little bit from that because I think it helps explain the issues that are involved. The Murray inquiry said:

Currently, the FCS the Financial Claims Scheme—is post-funded. This means that, if it were activated, the Government would initially pay out claims and then recover those funds from the assets of the failing institution. If that was not sufficient, the remainder would be recovered through a levy on the rest of the banking sector, which could be delayed until the crisis was over to avoid exacerbating the situation.

An option, as Senator Whish-Wilson has suggested, is to charge authorised deposit-taking institutions an ex ante fee, or prefunding, for the Financial Claims Scheme. The IMF recommended this in a recent report that the Murray inquiry quoted from. This is very important to understand so that we all know what could happen here if we introduce something like this.

The Murray inquiry went on to say:

However, an ex ante model—

that is, a levy in the form that Senator Whish-Wilson is proposing—

would impose a cost on the financial sector. In particular, industry would need to pay a fee that would likely be passed on, at least in part, to depositors in the form of lower deposit interest rates or higher fees. This would be the case even if there was no need to activate the FCS. By contrast, the current ex post funding only imposes a cost on industry if the guarantee is needed.

Let's be very clear here: if we were to introduce such a fee and do what Senator Whish-Wilson has proposed, it would impose a cost on our financial sector. It would lead to the higher fees that Senator Whish-Wilson was complaining about. It would possibly lead to lower deposit rates for consumers. There is no free lunch here. Somebody would have to pay for this. So we should be very careful before we even consider implementing something like this.

Because we are being careful, we have put in place the Murray inquiry. That is why we are taking this step by step. It is regrettable that the former Labor government did not follow such a careful process. They had years to think about this issue. I believe the Financial Claims Scheme was introduced in early 2009. They did do a review of it, admittedly, and reduced that threshold, as I have said, from $1 million to $250,000. But they did not take the opportunity of that review to introduce an ex ante levy. What did happen, though, is that, just before last year's election—surprise, surprise!—the Labor Party announced that they would, in fact, introduce an ex ante levy. Convenience of convenience, they not only introduced a levy; they used the levy to help reduce their bottom line and reduce the deficits they accumulated and could no longer escape from because the pre-election forecast outlook was about to come out. The real figures were about to come out just before the election, so at the last minute they introduced this fee to help offset the massive spending and deficits they had presided over in a final and futile attempt to cover up their mistakes.

There were two mistakes with that decision. The first, as I said earlier, was that this decision should not have been made in such a rushed way. It was sprung on the financial sector. Nobody knew it was coming. It was very much the mining tax mark 2 because the affected parties had absolutely no knowledge that they were going to be up for such a charge. The second problem with the Labor Party's approach was that it should not have been used to fund the general revenue. It should not have been used to go into the underlying cash balance to go above the line, in the jargon of accountancy, because it was, as I said in my remarks at the start of this contribution, to offset any potential future problem. It was a rainy day fund. It was an insurance pool. It was not something to be used to fund general expenditure, which was what the Labor Party tried to use it for.

I am very confident that the coalition government will not follow the approach of the Labor Party; we will go through these things in a methodical way. We will not be supporting this motion, because we cannot use such a fee, as I said earlier, to fund all these other things that have not been costed or thought through. We will not make rushed judgements on this issue. We will wait for the Murray inquiry findings and consider them in due course. At this stage, my understanding is that the coalition government has no plans to introduce such a fee, because it would be a cost on the financial consumers of this country. Given our strong levels of prudential regulation, given that some of those regulations are currently being strengthened and given that we already have a mechanism to fund the financial claims scheme in an ex post way, it is probably something that we do not need.

I conclude by saying that I give credit to the senator for bringing this forward. I have some sympathy for him having to sit in the Greens party room. I think this motion would have been much better designed if it did not have the preamble, which smacks of green ideology and wanting to be all things to all people. This is a very serious issue and we must to approach it in a mature way. I thank the Senate for hearing my contribution to this debate.

The official Hansard of this speech is available here.

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