Transcript of Question & Answer Session The Risk Environment and the Property Sector

Malcom, g'day. A question for you on dealing with the banks, how they temper their profit motive and their shareholder value versus the regulatory guidelines that you ask or talk to them about; that would be question one. The second question is China recently has started an Asian investment development bank and I understand that the Reserve Bank, among others, has been involved in assisting them with some financial regulatory assistance. Perhaps you could comment on those two things.

Okay thank you. If you don't mind, I think I might just stick to the first one of those questions because the second one is really from a part of the Bank that I don't have oversight of. But let's talk about the banks and their profits and costs and so on. It's been in the news a lot in the last few days and weeks. I think the first thing that I want to say is that I'm not here to defend the banks, I don't see that as my role. That's up to the banks to defend their own actions. What the regulators want is safe banks and they've taken actions, principally APRA has taken actions, to require the banks to do things that will make them safer, including raising capital. And it was always recognised that particular regulatory action would have a cost component to it. The Murray report recommended actions on this front and recognised that there would be some increased cost on that.

Now the Reserve Bank Governor's been out yesterday talking about some of the numbers on that. The figure that Murray quoted was that a percentage point increase in capital for the banks would add about 10 basis points to banks' costs. But to convert that into ‘what banks should be doing on their own interest rates’ you have to make a whole lot of different assumptions about how much cost recovery they need to make of that: how much should be borne by shareholders, how much by customers and should you attribute all of that cost just to the mortgage lending book or should it be spread far more widely?

I think if the banks were here trying to defend the way they came up with those numbers they would give you some kind of a formula for how they've done that. But it does seem as though the string of calculations that you have to make to get the sort of increases we've seen do rely on a number of assumptions that tend to steer you towards the upper end of the range. But it's really up to the banks to themselves defend the interest rate changes that they've made.

Any other questions?

With the Basel recommendations that come out in the next little while - I think I heard that you are on this committee - I guess we can presume that we're going to have another round of interest rate or margin changes by the banks. How from an Australian perspective can we see that, the ranking of those recommendations over and above the Murray recommendations, what he saw as a safe return or capital adequacy. Is it going to just over-ride that from an Australian perspective?

Okay well, I think I could start by saying we need to set bank regulations that are in our own interests in this country, so it's not a case of being automatically dictated to by some foreign committee. But that said, the Basel committee does set global standards for banks and our banks need to be able to operate in global markets in order to be able to function efficiently. So it is actually in our interests to at least take the Basel standards into account and to do our best to implement them here in a way that best suits us. So I think APRA is very well aware of those tensions that you raise in your question and they work very hard at getting a good balance on that.

On Murray, the Murray report does say some things that are relevant to this question as well and the Murray report concluded that it's in the interests of Australian banks to be unquestionably strong and to be seen to be unquestionably strong in a global context. And I think that does support the need for APRA to adhere fairly closely to the Basel standards and in some cases there may even be a case for being tougher than the Basel standards. And in some cases in the past APRA has done that and that approach has actually served us well and given us better financial stability outcomes than in other countries.

Superannuation, Malcolm. It's contentious at the minute, obviously the politics of it, but talking today you've mentioned the Australian Council of Financial Regulators and I wanted to understand what the Bank's role was in understanding the implications of superannuation and whether it has any effect, or discussions with say APRA or ASIC and its involvement, you know, going forward with what they plan to do about it, I don't know what you can comment on that.

Okay well the Reserve Bank itself doesn't have a strong role in superannuation, but you referred to the Council of Financial Regulators which is the co-ordinating body for the four main regulatory authorities in Australia. And the Reserve Bank chairs that, and that serves as a body for co-ordinating regulatory actions where that's needed or for making recommendations to the Government where that's needed. The Council did discuss superannuation issues in the context of the Murray inquiry. I think the only general comment I'd make on our particular perspective on that is that we support the sorts of things that Murray recommended to make super more efficient, because it is a very big vehicle for savings in Australia and it's important that that operate as efficiently as possible.

Malcolm does the Reserve Bank have a current view on raising the GST?

I don't think I could give you a view on that one. When I'm asked about these sorts of things the answer I usually give is: ‘we want an efficient economy, and the best contribution that we can make to that is good monetary policy and well-regulated financial institutions and efficient financial sector‘. We're working hard on all of those things. It's good that the Government is talking about these wider issues and how we can get maximum efficiency in tax and in other areas, but it's not something where we would feel we want to give public advice on that.