Transcript of Question & Answer Session Remarks to ASIC Annual Forum 2015

And Malcolm Edey you've got the Reserve Bank's Financial Stability Review coming out tomorrow, obviously that's framed independently of what the FSI's been looking at but clearly you would be thinking perhaps I suppose about the way you would frame future reviews depending on what recommendations are taken up by government. Is that a fair assessment or just journalistic wishing for an answer?

Ah you might be pushing a little bit hard on that one. As you've said we've got a Financial Stability Review out tomorrow. I'm not going to tell you what's in it, because I'm not allowed to and it would be most improper but we're focussed on what are the risks right at the moment and what are the things that might happen further down the track. Now the system is going to evolve over time, recommendations from the FSI are going to be looked at and most likely many of them implemented, we'll think about what all of that means for the financial system over time. But I think the really big issues for us in our regular stability assessments, what's going on in the markets at the moment, who's taking the risk? Who's going to get into trouble? Who might get into trouble? What are the warnings we need to give to forestall that? That's what our report will be about.

David Murray, how concerned are you about Australia's international reputation given the issues of debt and deficit that you were talking about before and do you have specific concerns about Australia's triple A credit rating?

Let's go back to the start, if you're a prolific user of foreign savings then keep yourself a good reputation. If we don't know how the debt and deficit should work we leave them to guess, that's not a very solid position. And clearly with a commodity dependent economy then there will be swings in revenue. That means there will be swings in the deficit, it used to be a bi-partisan position, people will say it still is, but it's not clear that it is, that we should balance the Commonwealth budget through the cycle. Now that would suggest that it goes in and out of debt and has no debt through the cycle. But if you get an adverse event then you would go into debt for a period and work your way out. But the ratings agencies don't look at the Commonwealth debt, they look at Commonwealth net debt plus state net debt and in the Australian structure you would expect the states to actually have debt, because if you want to finance infrastructure the most beneficial way for the community you would do it at the government level, if the government can. So you would expect them to have debt and the Commonwealth to go in and out of debt because the Commonwealth just does a few war ships and apart from that it does social infrastructure, not economic infrastructure. Now getting that working well as a clearer shared values around that could only help us, but you know the budget's going to go back into surplus and then it's not for another five years, and then something else happens and everyone is left guessing, but that does leave our triple A rating vulnerable because the rating agencies take a forward looking view, not a today view, and on the numbers that some of them use if you take last years the forward estimates in the budget, add on the revenue measures that are not now going to be collected which have not been passed by the Senate, then throw in five more years of so much per cent GDP per annum of extra deficit we're getting close to the threshold.

So how are we going to be looking in say 10 to 20 years if none of the hard recommendations out of the FSI are taken up? How will we be placed particularly if there is another shock like out of 2008?

Well our recommendations are what you do inside the financial system to help the economy if it does get buffeted and our concerns were firstly if there is trouble and the taxpayer is drawn in can the taxpayer get out at no cost or even a small profit like the American's are good at? And in particular do you add more layers of risk? You know Paul Keating came to see me at the bank one time and there's a beautiful building up there at 48 Martin Place and there's a column like that with marble, he walked in and he slams his hand on the marble and he says well I'm not going to lose my deposit here am I? And I said well we only make it look like that, because if you look at our balance sheet we're horribly leveraged. Now what we said in our inquiry was don't add to a leveraged banking system a leveraged superannuation system. You know we had this great chat about culture before but listen to the radio and the advertisements about borrowing for residential property in self-managed funds. Set up a bare trust, looks clean as, but of course there's a personal guarantee over here to keep the bank happy. So you know if it smells like.

And Malcolm Edey, in terms of financial stability what concerns does the RBA have about this, given that in some ways we are seeing a return of the you know property spruiker for example?

Oh well the things we've been talking about recently we have highlighted the buoyancy in property markets and maybe I'll say a bit more about that later. Just responding to some of the things that David has said, sound banking is very important, the banks play a very important role in the financial sector and they run a type of risk that needs to be very carefully managed. We've heard about leverage, banks are highly levered, in some ways if you're running another type of business you might think the leverage banks are running sounds enormously high, but what you've got to remember is banks are in the leverage business, it's their business to take money from depositors and lend it to the people that want to borrow. It's the role of the regulators, and especially APRA to make sure that that is done safely, that leverage isn't excessive and that it's properly managed. One of the motivations for that is what David's already talked about, we need to have proper international access, be fully trusted, all of that. Another very important thing that also needs to be emphasised is we need to minimise to the extent reasonably possible the risk of crisis, because crises are enormously expensive. We didn't have a financial crisis here when the rest of the world did but some of the countries that did saw their GDP fall by amounts in the order of 5 or 6 per cent. To think back to one of our bad recessions, the early 90s, GDP fell by about 1 per cent, this is a 6 per cent fall so really big things can happen in a financial crisis and we need a safe system to safe guard against that.

Well speaking of payment systems and you might be able to actually answer this Malcolm, but does anyone on this panel still write cheques or use cheques. Anyone in this room write a cheque.

Oh about four.

A few okay. How long is it going to be before banks actually say we are no longer going to be using cheques as a payment system?

Well you've got to go and talk to the conveyancers first. You still have to settle a real property transaction with a bank cheque.

That's right.

Which according to a High Court case that we ran at the Commonwealth Bank you can dishonour. So the conveyancers haven't caught up, but that's an old issue. So there's a lot to be done and if you really wanted to fix it you'd have to legislate for it.

Right okay. Malcolm.

I'll make a brief comment on that and then I wanted to come back to something that Kevin said. I think on the cheque the thing about the cheque is usage is going down because it's being replaced by other things, but the cheque is still for many people a useful all purpose payment instrument and it's not going to disappear until the system collectively can find something that does with just as much convenience what the cheque can do. So that still has to happen before cheques can disappear. But to come back to Kevin on this futurism about the payment system, it is good to think through those kind of futuristic scenarios and I may not look it but I'm old enough to remember you know with the 70s and the 80s when an old regulatory system was overtaken by events and we had to deregulate because people had found cumulatively over time so many ways to innovate around regulation that the old system didn't work, we need to make sure that doesn't happen again. So we need what Helen talked about, the flexible capacity for the regulators to work together despite what's going on, make recommendations to government, to make sure we can adjust to it and so on. But having said all of that I think we're a long way away from that world of the existing regulatory structure being overtaken by events. Still even though there are all these very innovative payment devices where you can flick money from one person to another, most people when it comes down to it, when they want to make a payment from person A to person B they want money in person A's bank account to get to money in person B's bank account where they might bank with different banks. And that means we have to have safe banks and we have to have infrastructure that connects the banks to each other to enable that to happen efficiently, that's actually the next big innovation in payments being worked on at the moment.

And Malcolm Edey a final word from you.

Oh well we want the system – same objective as what's set out in the FSI, we want the system to be safe and we want it to be cost effective and innovative, like I said all those things, to me that means crisis avoidance, that's a really big priority and then obviously there's going to be a whole lot of innovation that will facilitate better service delivery to the customer.