Transcript of Question & Answer Session Household Indebtedness and Mortgage Stress

Thank you so much, Michele. Michele's prepared to take a few questions from the audience.

Good morning. Thanks, Michele. A lot of our clients are at that base of your spectrum, those that are worrying and starting to feel financial stress. And we've reached around a quarter of a million people over the last little while with our programs. The question that I have, there's two short parts to it. One is (concerned with) everything the RBA is doing relating to financial stability, and you gave an excellent broad and narrow definition of financial stress. I'm interested in your definition of financial stability and whether it's seen by the RBA as the stability of the participants in the market, i.e. the banks and the financial service organisations, or those in whose interests, the people, the 24 million of us in Australia (for whom) they act, and how you see that.

The second part of my question is about the short term-ism of institutional investors since the global financial crisis. And, quoting David Murray in a conversation I had with him in giving advice on the financial system inquiry, he observed that when he was the CEO of Commonwealth Bank, they had institutional investors representing maybe 60 to 70 per cent of the book of the share registry of Commonwealth Bank. Back maybe 10 years ago (when they) had an investment horizon of around two to three years. Now it's somewhere between, sort of, three to six months. So putting pressure on short term-ism and I think that's where we've got to see some of this, sort of, you see this rising pressure cooker of interest-only loans and so on. So how do you see that impacting financial stability as well?

Sure. Let me see if I can remember; so the first question, it's a very good question. There are many and varied definitions of financial stability. Some focus solely on the stability of the financial system, that is, the banks. I think in Australia we have a slightly broader, we think slightly broader than that. Certainly, the financial system and the financial institutions are very critical. And we would all see that from the experience of the global financial crisis. If the financial institutions are not strong and well capitalised and able to bear losses, then it has a very big implication for the real economy.

So I think, yes, that is absolutely central to it. I think though that APRA, let me just make a point about APRA. So APRA are critically focused on that as well. The Reserve Bank thinks slightly more broadly about it. Clearly, that is very important. But we are also looking at things such as, and talking about, household debt, household balance sheets, things like that. So financial stability, I think we think of slightly more broadly in terms of whether or not the financial system and the interactions, what's going on in the financial system is going to have flow-on effects to the real economy. And as I mentioned earlier, there are human costs to some of these things.

So I hope that answers your question. We do think of it broadly. But we don't go down into the micro, which you clearly do. We don't go that far. But we do try to think very broadly. And I know the governor has spoken on a number of occasions about how you balance interest rate cuts and rises versus, what that might do, given that people have high debt levels and so on. So, it's at the back of the Reserve Bank's mind in this case. It's broader than just simply focusing narrowly on financial institutions, and does try to take into account the broader economy.

On the issue of institutional investors, I don't think I have many different views to David Murray probably. I think there's a lot of work, and not just in Australia, internationally, going into culture. I know this is an issue that APRA's focusing very heavily on. And culture, risk culture, it really tries to get at how the institutions think about their returns and their attitudes to risk. I think that's quite critical in this discussion because the institutional investors, if they are pushing for higher returns with short time frames, that pushes the risk culture in a particular direction.

So I think it's a very important debate to have. It'll be interesting to see where this heads in the future. But it is a tension for the financial institutions, very much so. Probably not just financial institutions, I'd say broadly across all companies at the moment.