Reserve Bank of Australia Annual Report – 1996 Surveillance of the Financial System

The Reserve Bank has a general responsibility for the stability of Australia's financial system, and particular responsibilities for supervising the banking system. In its latter role, it requires banks to manage their affairs prudently so that they do not destabilise the financial system, while encouraging innovation and competition in banking. In the event that a bank were to get into difficulty, the Bank has a statutory obligation to protect the interests of bank depositors. The Bank's general approach to supervision, therefore, is to require banks to observe a framework of prudential standards and employ appropriate risk management techniques, without unnecessarily interfering in their commercial judgments or restricting their flexibility to respond to market developments.

Flexibility is essential in markets buffeted by competitive pressures and technological changes. The effects of these and other influences over the past 15 years, and the regulatory responses to them, are canvassed in the next chapter. The emergence recently of non-bank mortgage originators, funded through loan securitisation, is a good illustration of competitive pressures at work. The banks' initial response to these pressures was to segment new borrowers from existing borrowers but in recent months they have been forced to reduce the standard variable rate paid by existing, as well as new, borrowers. Mortgage originators have become a more potent competitive force as funds managers' appetites for securitised loans have increased, and as home borrowers have become more willing to “shop around”; refinanced loans accounted for almost 20 per cent of total housing lending over the past year.

Such changes are adding to the pressures on banks to reduce their operating costs, or find other revenue sources, as interest spreads narrow. They are also adding to the premia on investments in new technology which deliver more convenient and efficient banking services.

Acquisitions and mergers are seen as one way of spreading administrative and technology costs over a larger customer base. In some cases, mergers can also provide a mechanism for rationalising expensive branch networks. Further consolidation of the industry has occurred over the past year in pursuit of these ends, with the completion of the round of sales of State banks – one bought by an Australian life office, one by an Australian regional bank and a third by a combination of an overseas bank and domestic shareholders. Over the year, Australia's major banks also made two overseas and one domestic acquisition. Expanding their customer base is another way for banks to reduce their costs, but competition from other banks and from “outsiders” (eg from mortgage originators and funds managers) is constraining this.

The Bank's monitoring of developments in this competitive environment has not uncovered any serious lowering of prudential standards by banks. Some regional banks have been reminded of the need to be appropriately careful in attempting to diversify from housing into business lending. More generally, the Bank has emphasised the need for boards and managements of banks to implement robust risk control systems encompassing all a bank's policies, limits, procedures and compliance mechanisms related to risk, and to ensure that those systems are adhered to in day-to-day operations. The Bank's sharper focus on the quality of banks' overall systems for managing risks has been prompted by the knowledge that risk profiles can change rapidly. Supervisors need to be satisfied that banks too recognise this fact, and can respond appropriately. It is no longer sufficient assurance for a bank to be able to record – at its previous reporting date – that various quantitative standards were being observed.

With strong capital ratios, some banks have announced buy-backs of their shares. Such moves essentially reflect judgments that returns on shareholders' funds are more likely to be enhanced by reducing the level of those funds, rather than by attempting to expand operations. The Bank has not stood in the way of capital reductions where these still leave a healthy margin over the regulatory minimum.

Financial intermediaries generally reported good profits in 1995/96, helped by healthy growth in lending volumes, tight cost controls and lower charges for bad and doubtful debts. Notwithstanding the competitive pressures, bank profits improved further, albeit at a slower pace as the favourable impact of lower bad debts diminished. Average after-tax return on equity was again about 16 per cent, suggesting quite strong profitability by international standards.

Impaired assets of banks had fallen to around $8 billion, or 1.2 per cent of total assets, by June 1996, compared with $11 billion (1.8 per cent) a year earlier, and the peak of around $30 billion (6 per cent) in March 1992. Loans on which repayments are 90 days or more overdue have been growing for the past year or so, but from a cyclically low base. All loans in this category are classified by banks as well secured and losses are not expected. Housing loans, on which losses have been negligible in the past, account for about half of these overdue loans.

The aggregate risk-weighted capital ratio for Australian banks was 11.2 per cent at end June 1996, with an average Tier 1 capital ratio of 8.3 per cent. These figures are down from the levels of 12.1 per cent and 9.1 per cent a year earlier, mainly because of the cost of acquisitions by some banks, which more than offset the increase in banks' retained earnings. The ratios remained well above the internationally accepted minima of 8 per cent for total capital and 4 per cent for Tier 1 capital.

Recent policy developments

This section outlines progress on a number of major supervisory policy issues during the past year.

Market risk: In January 1996, the Basle Committee on Banking Supervision released its final guidelines on “market” risk, that is, the risk of losses faced by banks as a result of movements in interest rates, equity prices, exchange rates or commodity prices. These guidelines are intended to augment the 1988 Capital Accord dealing with “credit” risk by specifying a capital cushion related to banks' trading activities. The Bank intends to adopt the final Basle framework, which is little changed from that released in April 1995; the guidelines are to be implemented at the end of 1997. In calculating capital requirements for market risk, banks will have the option of using either a “standard measurement” approach, or their own risk management models. In the latter event, banks will need to satisfy a number of qualitative and quantitative criteria. The decision to allow the use of sophisticated in-house models to measure risk represents a significant departure from past supervisory methods, and recognises the shortcomings of a prescriptive approach in an area characterised by ongoing innovation.

National supervisors will have discretion in several areas in applying the new arrangements. The Bank has informed banks that, at this stage, it does not propose to accept term subordinated debt with maturities as short as two years (Tier 3 capital) as eligible capital, even with “lock in” features designed to prevent repayment if this would leave capital ratios below the required minimum. The Bank's market risk guidelines will be issued shortly as a Prudential Statement.

The Bank has continued to develop its program of on-site reviews of banks' systems for managing market risk. These visits focus on the internal control mechanisms used by banks in their trading activities, including in relation to derivatives. The problems experienced by Barings and Daiwa banks and Sumitomo have highlighted the crucial importance of effective management systems, and their strict observance. Reviews at all Australian banks with substantial treasury operations, which commenced at the end of 1994, have now been completed. It is the Bank's judgment that risk measurement methodologies used by these banks are relatively advanced by international standards, although this does not preclude operational shortcomings. Scope also exists for some systems to be better integrated than they currently are, and for more work to be done on stress testing ie subjecting portfolios to the shock of unexpected but plausible changes in financial markets.

Asset quality: The Bank is well into its second round of on-site reviews of banks' systems for managing credit risk. In this program, which has been operating since 1992, the focus is on assessing the efficacy of each bank's systems of credit approval and control, against the risk framework determined by its board, and against best practice. A marked improvement in banks' systems for maintaining quality control in their lending operations has been evident in recent years – as there needed to be – after the damaging experience of high bad debt charges in the early 1990s. This new-found discipline will need to be maintained as the pressure of competition intensifies and starts to impact on profits.

Funds management and securitisation: Revised guidelines covering the involvement of banking groups in funds management and securitisation were released in October 1995. These replaced guidelines issued in 1992, and followed extensive consultations with banks.

Banks can incur various risks as a consequence of undertaking these “non-traditional” activities, including the risk that a bank might feel a moral obligation – or a commercial need – to support, beyond any legal obligation, an associated funds management or securitisation scheme. The revised guidelines require banking groups to ensure that there is clear and prominent disclosure to investors that their investments do not represent deposits or other liabilities of the banking group, and are subject to the risk of loss of principal. Funds management and securitisation schemes also must be clearly separate from the banking group involved, with clear limits established to any involvement by the banking group. With these safeguards, the new guidelines lessen the earlier constraints on the explicit provision of various services by a banking group to these schemes (such as credit enhancement and liquidity support), subject to satisfying specific capital requirements when such services are provided.

The new approach is expected to have its greatest impact in facilitating securitisation. Since the release of the new guidelines, banks have been involved in schemes to securitise some $800 million of their own assets. This relatively subdued response reflects the high initial costs of establishing securitisation programs – legal, audit, ratings charges and systems changes – and the lack of pressure to move in this direction, given banks' current strong capital positions. Banks, however, have become more prominent in providing services to third parties wishing to securitise a variety of assets, including housing loans, payment receivables, geared equity loans and leases.

External auditors: In consultation with banks and their external auditors, the Bank has sought to improve the arrangements under which auditors provide it with independent assurances about the effectiveness of banks' management systems for monitoring and controlling risk. Agreement has been reached to move to a new framework whereby the chief executive of each bank will provide an annual declaration to the Bank that management has identified the key risks facing the bank and has established systems to monitor and manage those risks including, where appropriate, by requiring adherence to a series of prudent limits and by timely reporting processes; that these risk management systems are operating effectively and are adequate having regard to the risks that they are designed to control; and that the descriptions of systems held by the Reserve Bank are current. These declarations are to be endorsed by boards of banks or, in the case of foreign bank branches, by a senior executive of the bank overseas with appropriate responsibilities.

At the same time, the Bank has proposed that the reports it receives from external auditors focus more closely on the nature, scope and effectiveness of systems used in particular areas of a bank's operations. It is envisaged that the meetings held each year with banks and their auditors would identify the particular system to be subjected to a detailed review; such targeted reports should be more useful for all the parties involved.

Banks' equity investments: In December 1995, the Bank modified its policy on equity investments by banks to facilitate their making modest equity investments in the businesses of their customers. This change complemented other measures announced at the time to promote a more vigorous small and medium business sector. Longstanding policy in Australia has been to discourage banks from taking significant equity positions in non-financial businesses, except in “work-out” situations, or as part of their trading portfolios. This policy reflects the greater risks inherent in equity investments, along with the potential for conflicts of interest to arise where banks are both investors in, and lenders to, the same business enterprise. A limited equity involvement by banks in non-financial businesses, however, can be accommodated without compromising prudential supervision policy; such investments are now permitted up to an aggregate amount equal to 5 per cent of a bank's Tier 1 capital, without prior reference to the Reserve Bank. To avoid undue concentrations of risk, individual investments are generally subject to a limit equal to 0.25 per cent of Tier 1 capital.

Derivatives

Derivatives business of Australian banks has remained relatively steady over recent years. The credit equivalent amount of derivatives contracts outstanding represented only 6.7 per cent of total banks' on-balance sheet business at end March. The bulk of derivatives products continues to be basic interest rate and foreign exchange instruments, rather than equities and commodities derivatives.

Banks' derivatives activity
(Contracts outstanding – $ billion)

Banks' risk management systems have been adapted in recent years to better measure and monitor risks associated with derivatives; the larger players have established Board risk management committees. In keeping with the Bank's encouragement of greater transparency, banks have begun to disclose considerably more quantitative and qualitative information on their derivatives activities in their published accounts. The major banks now publish “value at risk” (VAR) figures, which are estimates of the potential loss – at a given level of confidence – on their trading portfolios using historically based models of interest rate and exchange rate movements.

Institutional developments

The structure of the banking system changed further during 1995/96 as new banks were authorised, some foreign bank subsidiaries converted to branch status, and several mergers occurred. The change from subsidiary to branch status has been facilitated by the Foreign Corporations (Transfer of Assets and Liabilities) Act 1993, under which stamp duty and capital gains tax on the transfer of a business are waived; that legislation is scheduled to lapse at the end of 1996.

Australia now has 52 authorised banks organised into 42 banking groups.

Authorised banks in Australia

August	1995	1996
Banks	49	52
of which:
• Domestic	19	20
• Foreign	30	32
– locally incorporated	15	13
– branches	15	19
Banking groups*	43	42
of which:
• Domestic	16	15
• Foreign	27	27
* Some banking groups include more than one authorised bank (eg foreign banks which operate through both a locally incorporated subsidiary and a branch, and local banking groups which temporarily comprise more than one authorised bank following a takeover).

National Australia Bank's acquisition of Michigan National Bank in the US was completed in November 1995. About half of the group's assets are now located offshore, primarily in the UK/Ireland, New Zealand and the US.

In December 1995, Westpac Banking Corporation (WBC) acquired Challenge Bank Ltd (CBL), a predominantly Western Australian regional bank. The Treasurer approved the merger after the Trade Practices Commission (now part of the Australian Competition and Consumer Commission) concluded that the merger would have no adverse effects on banking competition in Western Australia. The Commission commented that, in assessing proposals to acquire regional banks, it was inclined to see the existence of a substantial regional bank in each State as necessary for effective competition. The operations of WBC and CBL in Western Australia are to be integrated before the end of 1996, and will operate as a division of WBC using the CBL brand name. CBL's operations outside Western Australia are to be merged into existing WBC branches, except for its Victorian business, which has been sold to Bank of Melbourne. WBC also purchased Trust Bank of New Zealand in June 1996, making WBC the largest bank in New Zealand with in excess of 20 per cent of the market. It also lifts Australian banks' share of New Zealand banking system assets to 70 per cent.

In its 1995/96 Budget, the Federal Government announced its intention to sell its remaining 50.4 per cent interest in the Commonwealth Bank of Australia (CBA). In May, non-Government shareholders approved a plan by the bank to buy back from the Government 100 million shares, or about 10 per cent of Tier 1 capital. In July, the Government sold the balance of its shareholding to private investors through a public share offer. The final price was set at $10.45 per share, and is payable in two instalments. The Government's 8 per cent interest in the Commonwealth Development Bank was sold to the CBA.

In June 1996, a private bill was passed in the UK Parliament to enable Australia and New Zealand Banking Group Ltd to change the domicile of its London-based subsidiary, ANZ Grindlays Bank Plc (ANZG), to Australia. ANZG was granted a separate banking authority in Australia in July and is required to meet all prudential requirements on a stand-alone basis. Given the policy of restricting the number of banking authorities in any group, ANZG's activities in Australia will be confined to wholesale markets, in much the same manner as branches of foreign banks. This change in ANZG's domicile is expected to facilitate more effective management of the Group.

Legislation defining the Queensland Industry Development Corporation (QIDC) as a bank under section 5 of the Banking Act received Royal Assent in September 1995 and from that time QIDC, owned by the Queensland Government, formally became subject to Reserve Bank supervision. In August 1995 Advance Bank purchased Bank of South Australia from the South Australian Government to become the fifth largest bank in the country. In December, the privatisation of the Western Australian Government owned Bank of Western Australia Ltd (BWA) was completed with its sale to Bank of Scotland (BOS). BWA was granted an authority under the Banking Act at that time. Under the terms of the purchase agreement, BOS was obliged to offer 49 per cent of the shares in BWA to the public; this occurred in January.

In March, St George Bank and Metway Bank announced a proposed merger, to be accomplished through an offer by St George to purchase all the shares in Metway. In May, however, the Queensland Government and Metway announced an alternative proposal to form a new financial services group comprising QIDC, Metway and Suncorp (also owned by the Queensland Government), with combined assets of about $20 billion. Both sides increased their initial offers but in the shareholders' meeting in June the St George bid failed to obtain the necessary support from Metway shareholders. The Bank of Queensland, which has assets of about $2 billion and is 44 per cent owned by Suncorp, rejected an invitation to join the merger.

Five foreign branch authorities were approved during the past year. In September 1995, Chase Manhattan established a branch. (Chase's banking subsidiary authority was revoked in December.) Citibank established a branch in February to operate alongside its banking subsidiary. In April, The Asahi Bank Ltd was granted an authority to operate as a branch. Oversea-Chinese Banking Corporation commenced operations as a branch in July 1996; Bank of Singapore (Australia) Ltd, a member of the same foreign banking group, is to surrender its subsidiary bank authority around end October. Rabobank established a branch in August 1996 to operate alongside its wholly owned subsidiary, Primary Industry Bank of Australia.

Bank of America, which had established a branch in 1994, surrendered its banking subsidiary authority in December. Two Japanese banks, Bank of Tokyo and Mitsubishi, merged in April. Those banks' Australian subsidiaries merged on the same date to form Bank of Tokyo-Mitsubishi (Australia) Ltd. Around the same time, the local branch operations of NBD Bank were transferred to The First National Bank of Chicago, the parent bank holding companies in the US having merged in December; NBD surrendered its local authority in August 1996.

Other financial institutions

The Bank is responsible for authorising and supervising foreign exchange dealers in Australia. At 30 June 1996, there were 73 authorised dealers, two fewer than a year earlier. The Bank meets regularly with the Australian Forex Association to exchange information, discuss matters of mutual interest and keep abreast of issues relevant to the market from the participants' point of view.

Daily turnover in the market averaged $A52.2 billion in 1995/96, up from $A50.7 billion. Australian dollar activity continued to account for around half of this turnover. International comparisons based on April 1995 data showed that total turnover in the Australian foreign exchange market (in all currencies) accounted for about 2½ per cent of global foreign exchange turnover.

During the year, the Bank acted under the Banking (Foreign Exchange) Regulations to suspend financial sanctions against nationals of the Federal Republic of Yugoslavia (Serbia and Montenegro) in accordance with a United Nations Security Council resolution and a directive from the Treasurer. Transactions involving the authorities of that country still require Reserve Bank approval. Sanctions against the Republic of Bosnia and Herzegovina also have been suspended, while those against Iraq and Libya remain in place.

Relations with other supervisors

Developing close working relationships with other regulators of financial institutions and markets, both in Australia and overseas, remains an important objective of the Bank.

The Council of Financial Supervisors was established in 1992 to promote co-ordination among Australia's main financial regulatory bodies. The Council comprises the Bank (chair), the Insurance and Superannuation Commission, the Australian Financial Institutions Commission and the Australian Securities Commission. The supervisory issues posed by financial conglomerates, where two or more agencies are involved, have received particular attention over the past year. To this end the Council is seeking legislative amendments to facilitate information-sharing among its members. It has also recommended a framework for supervising financial conglomerates headed by special-purpose holding companies; under this framework one agency would act as “convenor” or lead regulator. In June 1996, the Treasurer announced his agreement to the Colonial Mutual Group establishing a holding company structure as part of its plans to demutualise by the end of 1996; demutualisation had been a condition of the agreement to the purchase by the Colonial Mutual Group of the State Bank of NSW in 1994. The Treasurer noted that the Colonial proposal would be facilitated under existing legislation but that the Government would introduce legislation at a later stage to provide for more direct regulation of holding companies.

Regular contact is maintained with overseas bank supervisors, and with the Basle Committee on Banking Supervision. During the year, senior officers participated in several regional and international conferences on prudential supervision. Globalisation and increased complexity of financial markets are making closer ties more important.

Internationally, banking supervisors have been working to ensure that all banks are adequately capitalised and subject to effective consolidated supervision, and that minimum standards for banks' cross-border operations are being implemented. Efforts have continued towards strengthening banks' internal management systems and increasing transparency through improving disclosure standards, particularly in relation to derivatives and trading activities. The emergence of large corporate groups offering a wide range of financial services poses new regulatory problems and has resulted in the forging of closer links between banking, securities and insurance supervisors. At the beginning of 1996, the Basle Committee, in conjunction with the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS), established a new Joint Forum on Financial Conglomerates. The Joint Forum is carrying forward, in a more formal way, the work of an informal Tripartite Group of supervisors formed in 1993. Its mandate is to facilitate the exchange of information within and across sectors; examine possible criteria for identifying lead regulators for conglomerates; and develop principles for the future supervision of those groups.

Payments systems

Real-time gross settlement (RTGS): Considerable progress has been made towards implementation of real-time gross settlement for high-value payments since the Bank announced its decision to proceed down this path a little over a year ago. When the system becomes operational at the end of 1997, Australia will join 13 countries already operating RTGS systems, and a similar number planning to have such systems by that time.

The move to an RTGS system will minimise settlement risk for high-value interbank payments and thereby reduce the risk of financial sector instability through a bank being unable to settle its high-value payment obligations. All high-value interbank payments currently made to settle transactions in government securities, most other fixed-interest securities and foreign exchange will be settled on an RTGS basis. Many high-value and time-critical customer payments also are expected to be made through the RTGS system. No immediate changes will be made to the settlement arrangements for paper-based and low-value electronic payments; these will continue to be settled on a deferred net basis at 9 am on the following business day.

Australia's RTGS system will be based on the Reserve Bank Information and Transfer System (RITS), the settlement system owned and operated by the Reserve Bank for transactions in Commonwealth Government securities. Banks and Special Service Providers for building societies and credit unions already access their Exchange Settlement Accounts at the Reserve Bank through the RITS terminal network. Under RTGS, all interbank payments made on RITS will be settled individually across Exchange Settlement Accounts during the course of the day. This will also apply to all securities transactions and cash transfers made through Austraclear which involve settlement between two banks.

Under the arrangements being developed for RTGS, each individual securities transaction in RITS and Austraclear will be settled on a delivery-versus-payment basis during the day, with all aspects of interbank settlement finalised at the same time as the ownership of securities changes hands.

In December 1995, the Australian Payments Clearing Association (APCA) announced that Australian banks had agreed to use a service provided by SWIFT as the main payments delivery channel for submitting large-value payments not involving securities trades to the RTGS system. These payments will include the Australian dollar leg of foreign exchange transactions and customer payments. APCA is co-ordinating implementation of the SWIFT arrangements.

The Reserve Bank will not provide overdrafts to banks in the RTGS system but it has taken a number of initiatives to ensure that the system is adequately primed with liquidity. An important liquidity-conserving feature of the RTGS system is a facility which will allow payments from two banks to be offset against one another; this will reduce the need for one of the banks to wait for incoming payments before payment flows can start.

The primary source of liquidity for banks in the RTGS system will be their balances in Exchange Settlement Accounts at the Reserve Bank. In the past, banks have maintained negligible balances in these accounts because they were non-interest-bearing but since 12 July 1996 the Bank has paid a market rate of interest on these end-of-day balances. The new arrangements have resulted in the banks transferring balances previously held with authorised short-term money market dealers to their Exchange Settlement Accounts. On 9 August, the Bank withdrew all the facilities it had provided previously to authorised dealers. These simplified arrangements will make it more convenient for banks to hold liquid assets in a form that can be used to fund payment flows throughout the day.

Another important source of intraday liquidity will be banks' holdings of government securities. Banks are presently required to meet, at all times, a Prime Asset Requirement (PAR) equal to 6 per cent of their liabilities. On 11 June, the Bank announced that, from the implementation of RTGS in 1997, that requirement will need to be satisfied only at the end of each day. Banks will be able to obtain intraday liquidity in exchange for their PAR assets through repurchase arrangements with the Reserve Bank.

To allow banks to use their holdings of government securities to fund their Exchange Settlement Accounts in an efficient manner, the Bank will introduce a facility in RITS so that banks can automatically sell government securities (for subsequent repurchase) to the Reserve Bank at an agreed price. If a payment cannot be settled because a bank has insufficient funds in its Exchange Settlement Account, the RTGS system will seek automatically to acquire the necessary amount of securities from the bank's specially nominated securities account in RITS. Banks will be required to reverse all intraday repurchase agreements with the Reserve Bank by the close of day, to maintain a strict separation between intraday liquidity and overnight liquidity. The separation is necessary so that the Bank can distinguish the need to provide daylight liquidity to the RTGS system from the ongoing need to implement monetary policy through its conventional market operations in the overnight market.

The planning stage of the RTGS project is largely complete. The architecture of the system has been decided and the roles of the parties clarified. Following extensive consultation with the industry, the Bank has released final Functional Specifications for the RITS/RTGS central site and contracts have been signed with Austraclear to establish sites, communication links and write the software. APCA has established a project team to complete its work on the SWIFT delivery system and expects to finalise contracts shortly. Full-scale testing of the RTGS system is scheduled for the third and fourth quarters of 1997, prior to the changeover in December 1997.

Other developments in the payments system: Trials of stored-value cards (SVCs) have continued over the past year, and potential promoters and issuers are now assessing the commercial viability of the various schemes. Some payments arrangements proposed to be operated on the Internet have a number of broadly similar characteristics to SVCs and raise similar issues for policy makers.

The introduction of SVC schemes with cards issued by banks would require the consent of the Bank as the bank supervisor. Other bodies would also need to be consulted, given the possible implications for government revenue and money-laundering activities. In informal discussions with promoters and potential issuers of SVCs, the Bank has identified the following public policy issues:

• the security of a scheme, including its capacity to cope with counterfeit cards or unauthorised use;
• the financial standing of card issuers and associated organisations, in particular their ability to redeem the outstanding value on cards at short notice;
• any design characteristics capable of being used to facilitate money-laundering or other criminal activity; and
• arrangements to ensure that seigniorage earnings currently accruing to the Government through the issue of notes and coin were not eroded by private-sector organisations operating in a privileged market position.

Several of the schemes being trialled have an international dimension. The Bank is working with other central banks and relevant supervisory authorities to ensure that internationally consistent supervisory requirements are applied to these schemes.

Consumer issues

The Bank is of the view that, to realise the potential benefits of financial deregulation, institutions should disclose clearly all relevant information about the facilities they offer to borrowers and other customers. Customers should also understand their responsibilities in any contract, and have an avenue through which to resolve disputes that may arise with their banks. While the Bank does not have an explicit consumer protection role, it promotes arrangements designed to improve disclosure and dispute resolution, and is mindful of the need to avoid adding unreasonably to costs or reducing the flexibility of banks in introducing new products.

A nationally uniform consumer credit code, covering consumer lending by all credit providers, has been under consideration for over a decade. Legislation for the Consumer Credit Code was passed eventually in Queensland in 1994, with the expectation that the other states would follow soon afterwards. In the event, however, two States have still to pass enabling legislation, and the commencement date has been delayed again, to 1 November 1996. These delays in the implementation of the Consumer Credit Code have delayed the adoption of the codes of practice by banks, building societies and credit unions, and given rise to unnecessary uncertainties and costs.

All codes of practice require the establishment of an internal and external means of handling disputes. Retail bank customers seeking redress from their banks have been able to approach the Banking Industry Ombudsman since 1990. Building societies and credit unions are also taking steps to introduce similar schemes for their customers. The Bank has welcomed these developments and is represented on the Board of the Banking Industry Ombudsman Scheme. In March, the Board agreed to allow the Scheme to deal with disputes involving sums up to $150,000 (previously $100,000).