Transcript of Question & Answer Session The Transformation in Maturity Transformation

Hi Kristen Westlake from the Continuum Partners. There’s been a lot of global regulatory chatter about intraday updating of pricing on liquid assets, do you think that daily unit pricing update is enough?

I think it depends partly on the frequency with which one can withdraw the units, if in a mutual fund generally you can withdraw at the end of the day price and I think then updating frequently is enough, updating daily is enough. Many of … or there’s been as you know large growth in the exchange traded funds and they’re obviously the prices update kind of right through the day, but if you can only withdraw once a day at the end of the day price I think the daily updating is sufficient.

Thank you, any other questions please.

Yes I have one.

Yes sir.

Thank you very much indeed for your speech, Nile Coburn from Thomson Reuters, one issue I’d love to ask you, since you’re here, is that you’ve got issues of regulation occurring in Australia, you’ve got issues from the Financial Stability Board in the UK, you’ve got interests in the USA, how do you see all this being able to merge if you like? Because I mean everyone’s trying to put the bolts on the ship but how’s it – in your view I mean just – how’s it going to look?

Well the co-ordination is really done through the … on banking regulation through the BASEL Committee and on these broader issues on the financial system through the FSB. So, my colleagues and similar officials in other central banks right around the world are working very extensively on this and meet a lot to try and co-ordinate the various issues to make sure that there aren’t necessary overlaps in the issues that are being left out. I think one issue that has caused a lot of attention is the making sure that regulatory requirements in one country don’t affect outcomes and structures in another, and so there’s a lot of conversations at the international level to try and address that. But it’s really the BASEL Committee and the FSB that are the main co-ordinating bodies here.

I believe the Professor had a question. Could we have a microphone down here please?

Phil, Kevin Davis from University of Melbourne. You started off talking about maturity transformation and the short term assets and long term assets, but one of the characteristics of the Australian economy is we’ve got this huge superannuation sector where they actually have long term savings and they’re typically investing in short term assets, does that change the nature of the problem for Australia compared to other countries where you don’t have this huge stock of long term savings locked in or is it the same problem as elsewhere because of the fact that super funds outsource a lot of their asset management to funds and therefore you’ve got the same liquidity problem?

Well that’s a good question. The judgement or the tentative judgement that I think we’ve reached here is that because a lot of our assets under management are locked up in effectively pension funds, so the system’s more stable and if they are in just regular public offer mutual funds. Because while you can withdraw funds from particular super vehicle you can’t withdraw funds from the system, so money would have to go from one super fund to another compare that to kind of a mutual fund that invests in equities or emerging market debt, the investors can withdraw the funds completely from the sector and put the money in bank deposits or some other assets. So I think that’s a source of stability in our own system that so many of the assets under management are tied up in long term pension funds. The related issue raised is just what the pension funds are investing in and many in the super industry I think would like to invest in long term assets, long term infrastructure assets, the issue there is I think not anything with superannuation regulation but really supply of those assets coming on to the market and the attractiveness of the assets that have been presented to the super funds.

Any other questions please. Yes sir at the very back.

Dr Lowe, Simon Fraser from ABC News. I wanted to ask you about the property market and particularly how closely the RBA has been monitoring the situation in New Zealand where they have instituted now region specific lending controls for Auckland in particular, is that something that you have been discussing with regulators here given the repeated I guess issue that Sydney and Melbourne are going one way and everywhere else is not?

Obviously, we follow these issues very carefully. Of course New Zealand’s not the only country that’s implemented some type of what’s called macro prudential regulation, the number of countries that have done that over recent times is very large and so we watch, we’re studying the experience of other countries carefully. But I think you know kind of in a slightly longer context APRA’s approach is one that I think has a lot of merit because they have embedded within their micro prudential supervision a macro prudential perspective and so they haven’t go this kind of overlay of macro prudential tools that we see in some other countries and it’s really embedded into their supervisory processes and we’ve seen that it work over recent times, they’ve reviewed the lending standards of banks, they’ve written to boards of the banks making sure that they are on top of the risk and the property portfolios. They’ve issued a prudential practice guide around sound risk management practice, they’ve recently talked about the importance of the income measures that are used in loan evaluations and they’ve articulated a 10 per cent benchmark for for property lending to investors. So those various measures are kind of part of the way that they go about their business and I think we’re starting to see some effects of this.

In the past couple of weeks you’ve seen a number of banks say they’re acquiring larger deposits for investor loans, they’re offering smaller discounts on interest rates and smaller rebates, they’re acquiring higher serviceability hurdles and my conversations with a number of banks around the country is the various APRA measures are having an effect, we’ve got to wait and see what the long term effect of those area and while we’re seeing how the measures that APRA have taken are playing out we also get the opportunity to study what’s going on globally, but I think the measures so far seem to be having a positive, all be it modest effect and it’s worthwhile seeking how those play out.

Thank you, I think we had a question from the corner, then I’ll come to you.

Dr Lowe, Jonathon Shapiro from the Financial Review. Following on from that question and given some of the comments you’ve made today about the asset management industry perhaps a search for yield creating kind of a shadow, or emphasising the shadow banking system, I just wondered if you thought a rise in non-bank lending could limit the ability of macro prudential policies to achieve their objectives?

Well that’s a very astute question because if you look back at our own experience over many decades, in the 70s and the 60s we had a lot of the tools that are currently in vogue and we ended up getting rid of them because what happened was that institutions found out ways of getting around the rules, finance is very flexible and people are very good at moving the money from the people who have it to the people who want it. So there is a risk here and you’ve seen this in as I said a number of other countries have had macro prudential tools for a while now and when I listen to their experiences some of them proudly say they’re up to round seven or eight on the macro prudential, they’ve had seven or eight rounds of this, and the reason they’ve done that is things happen and the system adjusts and they feel like they need to do more. So, this is an issue that’s very clearly on our radar screen, how far can you push the tighter regulation of the banking system without causing the loans to be made the same volume of loans to be made but just through a different financial intermediary. At the moment I don’t think this is really a first order issue, at the margin maybe a few more loans are being made through non-bank lenders than through the banking system as a result of the tougher requirements but it’s very much at the margin, but it’s a margin that we do need to watch very carefully and history tells us that over … If you make the incentive to miss a line between the banks and the non-banks that the funding will follow to the non-banks, we need to watch that.

There was a question at the back please.

Dr Lowe, Carrington Clark from Sky News Business, I’m just wondering if you were heartened by Fed Chairwoman Janet Yellen’s comments this week suggesting that the Fed will raise interest rates and the flow on effect that that will have especially to the Australian currency hopefully or whether or not you thought that might risk stalling US growth and the flow on effects for global growth?

Well I think the Fed will raise rates when the US economy is strengthening. So any sign that the US economy strengthening, I think is good news, its good news for us all. No doubt when the Fed raises interest rates there will be some market turbulence but this is very well telegraphed and people have had plenty of time to adjust. If they’re doing it, which I think they will do it because the US economy is strengthening when they do it because the stronger growth in the US and that’s basically good for the world and people have had time to adjust. In terms of our own experience I think at some point when they raise interest rates the US dollar will probably strengthen further against the Australian dollar and that’s something that we would welcome as we’ve said a number of times recently.

Are you okay to take another question? Yep perfect. So one more question from the floor please, yes.

Hi Sean Drummond from the Financial Review again, the macro prudential measures that you’ve been taking is one of the aims to give the Reserve Bank more scope to lower interest rates further and not rise prices in the property market as a result?

Well that’s not the aim, I mean the aim is to make sure that the banking system is adequately dealing with a rise in risk in the mortgage loan portfolios and these things are very judgemental, they’re very subjective but my subjective assessment would be that the level of risk in bank’s mortgage portfolios has risen over the past couple of years, household debt’s high, property prices are very high, household income growth has slowed, the unemployment rate’s drifted up. So all those things would suggest that there’s been an increase in level of risk, particularly as people have brought properties for investment purposes and in that environment it’s entirely appropriate that APRA has a very close dialogue with financial institutions about the risks in those portfolios and makes sure that there are plenty of buffers there in case things don’t turn out so well and it’s entirely appropriate that households be careful as well because the level of risk there, while I don’t think it’s extreme it has moved up, and when risk moves up both financial institutions and households need to respond to that. So that’s very much the objective here. If it helps get a better balance between monetary policy and prudential policy I think that’s a side effect, but the primary objective is to make sure that the banking system’s dealing appropriately with an increase in the level of risk.

Phillip thank you very much for taking the time to be with us today, ladies and gentlemen please thank Mr Phillip Lowe.