Transcript of Question & Answer Session Remarks to a panel discussion at the Australian Banking and Finance (AB+F) Financial Services Institute of Australasia (FINSIA) Conference 2014

Thank you Andrew and it is indeed a pleasure for SAS to be sponsoring this panel this after … still this morning I think, but into this afternoon. Like all the panels I’ve been listening to this morning, I would probably say this panel reserves the right of reply, is probably the fair comment. We’ve heard from the market makers, we’ve heard from the economists and certainly what I want to do, the title being Positioning for Growth, really a key part of how the regulators maintain that stability and integrity of the markets, but also I guess when we’ve had a number of earlier briefings on this panel, how do we make sure that the right competitive tensions are there for growth. Also making sure behaviours in the right shape. So they’re the sort of themes I want to work on, markets, individual consumers and then really some dimensions of personal behaviour and risk appetite.

But to open the panel up, what I’d like each of the panel members to do is perhaps, a question I always like to ask to get it rolling is: what are some of the head winds and tail winds? So I guess we’ve had a number of perspectives from the commentators earlier this morning. what are some of the head winds or tail winds each of you as regulators are facing in the current climate and perhaps over the next 18 to 24 months? Perhaps Malcolm firstly from RBA.

Thank you very much. I think the first thing to say in response to that is that the Reserve Bank is not primarily a regulatory institution, we’re a monetary policy institution. So we’re all about macroeconomics, stability, low inflation, promoting sustainable growth and that’s our core business. Having said that my part of the Reserve Bank and the reason why I’m on this regulators’ panel is that I have in my portfolio financial stability and that’s a very important part of the overall picture. The Reserve Bank has some regulatory powers in relation to that, particularly in relation to the stability of certain kinds of financial market infrastructure, clearing and settlement services and we are focused very much on that and making sure that our regulatory framework there is compatible with international frameworks so that there are not unnecessary impediments to banks and other financial businesses doing business across borders. A big part of my role in the financial stability space is financial stability analysis and we’re focussed very much on: what are the risks? Where are they coming from? What should we be doing about them when we identify risks? A big part of that is that we produce a Financial Stability Review twice a year, and our latest one came out a couple of weeks ago.

We attracted quite a bit of attention in that because of the focus that we gave to the risks associated with the build-up of pressure and imbalances in the domestic housing market. That’s very much a focus of ours. As we said in our report we’re engaged in talking with APRA and with other regulatory agencies about how we should develop an appropriate and proportionate response to that. Wayne is on the panel and he may have more to say about that, but that’s probably enough from me at the moment.

Thanks Malcolm. I guess one of the comments that’s come out a few times today is macroprudential tools. And I don’t propose my own view on that, but I guess I’d rather reframe that perhaps into the framework and I’m just going to pick up on one of the points you are raising there, Peter. How do you look at broader stability and integrity of markets and then put that into some form of macroprudential framework? Malcolm, I might get a perspective from you, and I want to come back to you Peter just to talk perhaps more for the consumer side of things. Malcolm, perhaps a perspective?

Yes thanks, well I fully endorse that comment about the word macroprudential, we didn’t invent it. But when people talk about macroprudential what they’re really talking about is use of prudential tools with a focus on risks that are material to the system as a whole, as opposed to the concept of risks that might be just idiosyncratic to an individual institution engaging in risky behaviour. But as Wayne said, in practice that’s often quite an artificial distinction. I think it’s worth just putting this in a bit of international context as well because a lot of the talk about macroprudential tools, instruments, policies and so on, is coming from the international arena. What’s really going on is that we’re in an extended transition period post-GFC globally to try and get financial systems back on a financially stable, sustainable footing where they can support growth and not be a source of instability in the future. But this comes in an environment where globally there’s a correction that had to be put in place from a system where certain kinds of risk taking had gone way too far. So there are parts of the global financial system that need to go through an adjustment to get back to more normal positions.

At the same time you’ve got some of the major economies around the world, in fact most of the major economies around the world, over recent years have struggled to get sufficient growth without having extremely expansionary policy settings and especially monetary policy. And you can see the kind of conundrum that in some of the major jurisdictions this throws up because we have expansionary monetary policy settings, in the major global economies, but at the same time you have concerns that we don’t want to promote over expansion in certain kinds of financial risk taking that already went too far in the run up to the GFC. Now Australia has actually entered and come through this period in a much more normal position than most other economies and so we’ve been less dragged into the same sort of conundrum that others are facing, but nevertheless we are an economy that’s integrated with the rest of the world and it’s always going to be unrealistic to think that we’re going to be unaffected by global conditions. And so, the same sorts of questions that have arisen internationally have come up here. How do you manage the financial system in an environment where interest rates are unusually low? That’s the positon we’re in at the moment and we are seeing some concentrations of risk taking now developing in parts of our economy, particularly in the housing market. And so the same sorts of issues that have been looked at internationally inevitably have to be looked at here.

But I think I also want to emphasise something that Wayne said that there’s an essentially continuity between what’s being looked at now and the framework that has already been in place and has served us well for quite some time. We’ve already had arrangements in place for APRA to be focused on these things and to be engaged in coordination with the other regulators, including the RBA. So we see what we’re looking at now as really a continuation of that in response to these somewhat unusual circumstances.

There’s a view out there that yes Australia has had a very good long run economic record, it’s very stable, but interestingly enough there’s still a lot of discussion and debate around the whole concept of systemically important institutions. I realise it’s global, but maybe just give a perspective on, if there were to be a significant adverse event and take it to an extreme level, what is the response from you particularly, RBA, and I’ll get a view from APRA as well, what are some of the things that are topical for you? Because I get a lot of questions around institutions and their ability to handle stress testing and the like to get through it, but what do you see in the 18 to 24 months, what are some of the things?

Ah well, this is an area where it’s very dangerous to speculate. Probably the first thing to say is just that we’ve come through the biggest real life stress test that you could expect to see in a life time in the form of the GFC. And our system stood up well. The banks stood up well and I think the policy response stood up well also. And I think part of the reason for that was that, you know when I’m asked about this I always say it was a mixture of good luck and good management, there were some fortuitous things that assisted us in the way that we were, that Australia is linked to the fast growing part of the global economy and we were able to draw some resilience from that source. But I also think that getting the fundamentals right, which is sound management of monetary and fiscal policies really helps you a lot in preparation in readiness for those kinds of events. Because of very good fiscal decisions by successive governments, our government was in very good shape to respond quickly when it needed to.

Similarly with monetary policy, we were very well placed to cut rates quite dramatically at a time when it was most needed. So I think our arrangements stood up well, it’s not particularly a secret to say that we do a lot of crisis work inside the financial regulatory community. It’s the sort of thing that I don’t like to go into detail about because it’s just not helpful to speculate and go into details. But we are very focused on crisis preparedness on arrangements for coordination across the agencies and on doing thought experiments about what would happen in very adverse scenarios, making sure that we’ve got the arrangements in place to deal with that. So I can assure you that we’re well focused on it but I probably don’t want to go into any further detail than that.

Hi my name’s Karvey I’m from NSW Treasury; my question is to the Assistant Governor of the RBA. You mentioned how important it was during the GFC for fiscal and monetary policy to both do the heavy lifting to pull us out of the situation we were in. My question, when we talked about head winds, one of the things that’s been very topical has been erosion of the tax space. And one of the favourite articles that Fairfax tends to bring out every once in a while is the Cayman Island subsidiaries of all the big corporates and how they basically pay bugger all in tax. Now my question is, assuming that is even remotely accurate, how much pressure do you think it would take off monetary policy if some of these big corporates were to pay anywhere near 30 per cent tax?

Ah well, I have to say you’ve largely pitched a question outside my portfolio because I’m not really in a position to give advice on tax avoidance policies. But the last part of your question you did refer to the question of linkages between monetary and fiscal policy and I think you used the term fiscal policy taking the pressure off monetary policy. Whenever I hear those sorts of arguments my immediate reaction is that people tend to overstate that point. And our Governor has been asked this question many times by many people: is fiscal policy influencing monetary policy or making monetary policy harder? And I’ve never heard him say anything other than ‘no that’s not the case’. People tend to exaggerate those links and I don’t know of anyone that’s making a credible case at the moment that this is causing a serious problem for monetary policy. It doesn’t mean that it’s not worth addressing in its own right, but that’s a matter for tax policy and fiscal policy, it’s not really a Reserve Bank matter.