RBA Annual Conference – 1991 General Discussion

Grenville and Valentine

There was general agreement that deregulation was inevitable, but some participants felt that in the account more emphasis should have been placed on bureaucratic and political factors. For example, it was pointed out that there was strong opposition to deregulation within the bureaucracy in Canberra. The main objections were to foreign bank entry and to the ending of foreign exchange controls. There was also the natural tendency of the bureaucracy to wish to adjust the old regulated system to make it more flexible rather than to move to a new system. Fred Argy quoted R.A. Johnston who said:

“We had become adept, indeed expert, in patching and mending. But the fabric was thin, and the garment decidedly dated. The Campbell Committee was very timely”.^[1]

As well as bureaucratic obstacles, there were political ones at first. Significant elements of the previous government in 1983 were reluctant to lift interest rate controls. The timing of deregulation was heavily influenced by political factors. A change of government provided a situation where there was an incoming Treasurer and an incoming Leader of the Opposition who were both in favour of financial deregulation.

Several participants disagreed with the view that there was significant opposition to deregulation. Maybe there was a lot of opposition in Canberra, but they thought that the surprising aspect of the period was that there was so little cohesive opposition anywhere else. They contrasted the ease with which financial markets were deregulated with the extremely slow progress that has been made on such matters as transport and the labour market. The three main reasons that were put forward for this contrast were that:

• deregulation of banking was more pressing because it has many close substitutes which were less regulated;
• banking is open to foreign competition. This provided alternative sources of finance which were not subject to interest rate controls;
• usually the resistance to deregulation is mounted by the industry which wishes to retain its privileges. By the early 1980s, the banks had no significant privileges. What they were gaining from some regulations, they were losing from others.

Several participants felt that Valentine's paper, while being generally modest in its claims for the Campbell Committee, had not given sufficient weight to the Committee's failure to forecast the subsequent surge in credit. Campbell had correctly suggested that bank credit would grow at the expense of non-bank credit following deregulation, but had not foreseen the strong rise in total credit. Valentine felt that people were overstating the significance of the rise in credit. He felt that there had not been major macro-economic consequences of the large rise in credit, because the relationship between credit and the general economy had broken down. The major problem had been bad debts. He was not convinced that the bad debts were due primarily to fast credit, but felt that they were also the consequences of poor lending practices by banks and the inexperience of bank staff (see additional discussion of this point in the third session).

There was some discussion of the significance of cash management trusts in the breakdown of the regulated system. Although they did not become very large, their rapid growth from nothing to about $2 billion in the early 1980s was an important catalyst in the process of deregulation. It made large depositors very interest rate sensitive and put pressure on the interest rate ceilings of banks. There was some discussion as to why it took so long for cash management trusts to appear in Australia since they were only a local adaption of the American money market mutual funds which had appeared as early as 1974. It was felt that for a cash management trust to be attractive, it needed both technological advances in the form of sophisticated computer systems, and high short-term interest rates. Both these conditions had been met by the early 1980s.

One other participant said that the first development to have a big impact on the interest rate sensitivity of the household sector was the introduction of the Australian Savings Bond in 1976. Many customers closely watched the relativity between the ASB and savings bank and building society deposit rates, and were prepared to switch funds between them. The same people quickly adapted to cash management trusts.

Footnote

R.A. Johnston, “The Monetary System in Transition”, The R.C. Mills Memorial Lecture, October 1985. [1]