Reserve Bank of Australia Annual Report – 1992 Surveillance of The Financial System
The Banking System
Australian banks entered 1991/92 with falling profits, a large stock of non-performing loans and sluggish demand for new finance. Although pressures from these sources have continued, signs emerged during the year that banks generally were getting on top of their problems.
As one indicator of this, the rate of increase of non-performing loans slowed markedly. After rising from around $15 billion (3 per cent of total assets) to $28½ billion (5½ per cent of total assets) in the year to June 1991, the further increase over the past year was $2 billion. Although this slowdown was a welcome development, the existing high stock of problem loans will continue to constrain profitability for some time to come. At current interest rates, the cost to banks in forgone income is around $2 billion annually.
Banks also have augmented their cover against non-performing loans. Specific provisions rose from $8.5 billion in June 1991 to $10 billion in June 1992; as a proportion of non-performing loans, specific provisions averaged around 31 per cent in 1991/92, compared to about 29½ per cent in the previous year. The decision by one major bank to bring its valuation of property exposures, and associated provisioning, more into line with other banks contributed to the rise in this ratio.
An important indicator of the soundness of the banking system is its capital position. Despite the high level of non-performing loans and the further provisioning which has been necessary, Australian banks have emerged from the recession relatively well-capitalised. The aggregate risk-weighted capital ratio for the banking system stood at around 10 per cent in June 1992, about the same as in June 1991. Although retained earnings fell over the year, this was largely offset by substantial new capital raisings. The ratio for Tier I capital (predominantly shareholders' funds) in June 1992 was around 7 per cent, compared with 6.4 per cent a year earlier.
Australian banks rank highly on capital adequacy by world standards, with all banks meeting the 8 per cent minimum international standard, and most having ratios above 9 per cent. In a number of major countries, the 8 per cent minimum will not be reached until late 1992 or early 1993. While the capital position of banks in some countries has raised questions about their ability to expand credit to assist economic recovery, banks in Australia are generally well-placed to respond positively as the demand for credit picks up.
Bank Supervision Policy
Following the lending losses incurred by banks in recent years, bank supervision has been under scrutiny in various inquiries. Some of these have still to report publicly but the process has already promoted some useful discussions of basic issues, including the objectives of bank supervision and how these might best be achieved. Throughout those discussions two key points keep surfacing. The first is that prime responsibility for the sound operation of banks must remain with their managers and their Boards of Directors. The second is that it is neither desirable, nor practicable, for bank supervisors to have as an objective that individual banks should never make losses. Although views differ on where to draw the line, there is broad agreement that a balance needs to be struck between the intensity and intrusiveness of official supervision, on the one hand, and the long-run efficiency and innovativeness of the banking system, on the other.
The Report from the inquiry into banking conducted by the House of Representatives Standing Committee on Finance and Public Administration (the Martin Committee) was issued in November 1991. The Committee broadly endorsed the Bank's present responsibilities for prudential supervision, with their prime emphasis on the banking system. These responsibilities, which were described in last year's Report, include:
♦ preserving confidence in the banking system as a whole;
♦ promoting the stability and integrity of the banking system, and of the payments system; and
♦ protecting bank deposits.
The Committee also endorsed a number of evolutionary steps which had been in train in the Bank to improve its supervisory arrangements. Four particular areas were moves to formalise arrangements for supervising State banks; improvements in the quality of information on banks' loan portfolios; closer contact between the Bank and external auditors of banks; and development of a capacity in the Bank to conduct limited on-site reviews.
The Reserve Bank has no statutory authority over State banks and its prudential supervision of them had been based on voluntary undertakings from the banks concerned. During the past year the Bank has moved to a more satisfactory basis by entering into formal agreements with the South Australian and Western Australian Governments for the supervision of the State Bank of South Australia and the R&I Bank of Western Australia, respectively. These agreements provide for the Bank to exercise powers similar to those it has in relation to Banking Act banks, except for powers to take control of the banks and manage them in the interest of depositors; the liabilities of State banks are fully guaranteed by the Governments which own them. The agreements also provide for direct communication between the Bank and the relevant Governments. The New South Wales Government is to introduce legislation which will bring the State Bank of New South Wales under the Banking Act and, thereby, fully and formally under the Reserve Bank's supervision.
Steps have been taken to enhance the Bank's capacity to assess a bank's standing against peer group benchmarks. To this end, discussions have been initiated with banks, external auditors and the accounting profession on developing more precise guidelines for the reporting of non-performing and other doubtful loans. Ideally, such guidelines will apply both to the statistics provided to the Bank and to published financial statements. Some subjective elements can be expected to remain in banks' individual approaches, but the prime objective is to narrow the current divergences in practices.
Recent experience underlines the importance of the banks' possessing systems to review and grade the quality of all assets on their books, not only those classed as non-performing. These systems allow banks to better monitor changes in the quality of their loan portfolios. The banks themselves have recognised the value of such systems and are improving their practices in this area. The Bank plans to review with banks their loan grading systems with the aim of developing a set of “best practices” for assessing asset quality. Individual banks would be expected to adopt those standards, or to employ systems which produced similar outcomes.
External auditors of banks play an important role in bank supervision through regular reporting to the Bank. The Bank is developing its contact with the auditing profession with a view to improving the effectiveness of these arrangements, and ensuring that its expectations of auditors are both well understood and realistic.
The Bank is continuing to examine options for limited “on-site” examinations of banks. Bank supervision in Australia is conducted essentially “off-site”, through the analysis of statistical data collected from banks and frequent formal and informal contact with banks. The external auditors provide another level of oversight. In some other countries supervisors conduct their own on-site examinations of banks, which can cover not only their operations, systems and management quality, but also the status of their loan portfolios. Such examinations are costly and, on the basis of foreign evidence, their benefits unproven.
The Bank's present thinking is to restrict its on-site examinations to banks which appeared to pose particular concerns. Current efforts to improve the reporting of problem loans, and to sharpen the focus of asset quality issues generally, are a prerequisite for any future on-site examinations. In addition, the Bank has held discussions with overseas supervisors to improve its understanding of possible on-site techniques, while secondments have been arranged with foreign supervisors who conduct on-site reviews. Bank staff also accompanied US examiners on inspections of American-owned banks operating in Australia during the year. Discussions have been held with accountants and external auditors on aspects of this whole process.
An important issue raised by the Banking Inquiry concerned the risks posed to banks by the activities of subsidiaries engaged in financial intermediation. The Bank at present imposes a limit on the size of these subsidiaries relative to banks, and requires that banks and subsidiaries meet minimum capital and large exposure limits on a consolidated basis. Banks are not permitted to guarantee the liabilities of their subsidiaries, and may be prevented from providing support to a subsidiary in difficulty if that would jeopardise the interests of the bank's depositors. Beyond that, bank management is expected to ensure that subsidiary operations are conducted prudently.
This approach is subject to some practical limitations. It is inevitable, for example, that major problems in a subsidiary will spill over to some extent to its parent, possibly affecting confidence in that bank. Earlier problems in subsidiaries of the State Banks of Victoria (Tricontinental) and South Australia (Beneficial Finance) also demonstrated that the present requirements are not necessarily sufficient to adequately protect a parent bank's capital. The Bank is not proposing general changes to its policy on non-bank subsidiaries; in the absence of good commercial reasons for retaining them, however, the Bank prefers that a banking group's financial intermediation be conducted through the bank itself, rather than through non-bank subsidiaries. This is what has been happening over the past couple of years, when the size of subsidiaries relative to banks' balance sheets has contracted significantly. The Bank also will be requiring a greater degree of accountability from a bank's management regarding activities of any subsidiaries engaged in financial intermediation and will be raising the issue of non-bank subsidiaries with external auditors of banks.
Several reviews of other policy issues were concluded during the past year, including:
Securitisation: In January 1992, the Bank detailed its policy guidelines on banks' involvement in loan transfers and securitisation. This followed extensive discussions with banks on a draft policy statement issued in February 1991. Australian banks to date have not engaged in asset securitisation to any significant extent, but United States experience suggests that securitisation can be used by banks as a means of freeing capital for other purposes and as a source of funding. As explained in last year's Report, the Bank's objective is to ensure that where a bank sells assets as part of a securitisation arrangement, it is released from holding capital against those assets only when the sale effectively passes all the associated risks to other parties. The guidelines address both the legal and “commercial” risks which might be involved in securitisation arrangements.
Funds Management: In February 1992, the Bank issued final guidelines on banks' involvement in funds management activities. (This too followed the release of a draft policy statement in early 1991, and subsequent discussions with banks.) Funds management business of banks has grown rapidly in recent years to the point where subsidiaries of banks currently manage over $50 billion of assets in life offices, superannuation funds, public unit trusts and common funds. These assets represent about 12 per cent of the total assets on banking groups' Australian books. The guidelines seek to ensure that a bank conducts its funds management activities separately from the bank itself; that the bank has no obligation or commitment to support the funds under management; and that investors are made fully aware, through appropriate disclosure arrangements, that the bank does not stand behind the investment. Where sufficient separation is not achieved, the bank may be required to hold capital against its managed funds.
Regulation of funds management and other collective investment schemes is being reviewed by the Australian Securities Commission, and jointly by the Companies and Securities Advisory Committee and the Law Reform Commission. When these reviews are completed the Bank will review some aspects of its prudential guidelines to ensure consistency in the various approaches.
Future Income Tax Benefits: A review of policy on the extent to which future income tax benefits might be counted for capital adequacy purposes was completed and banks informed that, from September 1992, future income tax benefits (net of deferred tax liabilities) arising from losses or other factors will not be included in capital adequacy calculations. This will extend to all banks the approach which applied previously only to banks with a history of loss-making.
Market Risk: Current capital adequacy guidelines deal almost exclusively with credit risk, ie the risk of counterparties failing. In addition to credit risk, banks could be exposed to potentially large losses as a result of movements in exchange rates and interest rates. Such exposures to market or position risk can stem from dealings with customers, or from banks taking positions in markets in an attempt to profit from favourable movements in prices. The Basle Committee on Banking Supervision has been working on incorporating an allowance for banks' market risks into the capital adequacy framework. It has also sought to coordinate this work with the International Organisation of Securities Commissions (IOSCO), with the aim of agreeing an approach which could be applied both to stand-alone securities firms and to banks doing securities business. In January 1992, the Basle Committee and IOSCO announced broad agreement on a consistent approach to assessing capital adequacy for market risk. It is expected that the proposals, covering eligible capital and measurement of market risk, will be available for comment later in 1992; at that time the Bank will need to assess the benefits and costs of complicating the capital adequacy rules in this way.
Netting: Netting of credit exposures has been debated in the international supervisory community for some years. Recent work has sought to identify the main issues which require resolution before netting arrangements among banks can gain wider recognition by supervisors, particularly for purposes of reducing capital requirements. Of most importance here is the legal certainty of netting (particularly across borders and different legal jurisdictions), and the appropriate way of measuring netted exposures. The Bank has held extensive discussions on this subject with the industry.
Institutional Changes in Banking
The issue of foreign bank entry was examined extensively by the Government and the Bank during the past year, as well as by the Parliamentary Banking Inquiry.
On 26 February 1992, the Government announced that new foreign banks would be permitted to apply for a banking authority in Australia and that foreign banks, including those presently in Australia, would be permitted the option to operate with a branch structure. (The foreign banks granted authorities in the mid 1980s were required to operate as locally incorporated subsidiaries.) Approved entry of new banks and changes in status of existing banks would depend, inter alia, on the bank concerned being able to meet the Bank's prudential requirements.
The “depositor protection” provisions of the Banking Act provide the Reserve Bank with the power, under certain circumstances, to take control of and manage a bank in the interests of its depositors. The exercise of these important “depositor protection” powers, however, would be problematic in the case of foreign-owned branches, which have no legal status separate from their parent bank. Most of the prudential standards applying to locally incorporated banks would apply equally to branches but the Bank would not have the power to supervise the solvency of branches; consistent with international practice, this would be the responsibility of the “home” supervisor.
Given these limitations, and the importance of protecting the interests of ordinary Australian depositors with banks, it was decided to restrict foreign bank branches mainly to wholesale deposit-taking. Branches will be able to take deposits and other funds, without restriction, only from incorporated entities, non-residents and employees of the bank concerned. Branches will be able to accept funds from other customers only if they have an initial deposit of $250,000. A foreign bank wishing to engage in wider retail banking will be required to establish a subsidiary bank and be clearly subject to the depositor protection provisions of the Banking Act.
Several taxation issues flowing from the new policy remain to be resolved. These concern aspects of the transition of subsidiaries in Australia to bank branch status (such as the treatment of tax losses), and ongoing arrangements for the taxation of branches. These questions are under examination by Treasury and the Australian Taxation Office. Apart from the resolution of tax matters, the Banking Act will need to be amended before any branches can be authorised.
The Bank expects that, in time, new banks will be authorised and add modestly to competition, particularly in Australia's wholesale financial markets where foreign-owned banks will be able to participate with the full status of their parent banks. The Bank has emphasised that, in considering applications for new authorities, it will be expecting foreign banks to plan a significant presence in Australia, and to be in a position to contribute depth and competition to local markets. The Bank also will have regard to the Basle Committee's recently promulgated minimum standards for establishment of new operations of international banks; these standards require, among other things, that all international banks be supervised by a home-country authority which is capable of delivering effective supervision of the consolidated parent bank group.
Other Institutional Developments: Trust Bank Tasmania, which was formed by the merger of SBT Bank and the State Government-owned Tasmania Bank, commenced operations in September 1991. The Perth-based Town & Country Building Society was granted a banking authority on 30 September 1991; the new Town & Country Bank Limited is wholly owned by ANZ Banking Group and will be integrated eventually with ANZ. In November 1991, the operations of National Mutual Royal Bank (NMRB) were integrated with those of its owner ANZ, and NMRB's banking authority was surrendered. The operations of Canberra Advance Bank Limited were combined with those of Advance Bank Australia Limited on 1 June 1992, and the former's banking authority was revoked later that month. St George Building Society was granted a banking authority and commenced operations as St George Bank on 1 July 1992.
On 1 July 1992 the ANZ became the first bank to merge, in a formal legal sense, its savings and trading banks under the provisions of the Bank Integration Act 1991. This Act was introduced to facilitate the integration of trading and savings banks following the Commonwealth Government's decision in 1989 to abolish the distinction between those types of banks.
Other Financial Institutions
Apart from banks, the Reserve Bank has responsibilities for supervising authorised dealers in the short-term money market. It also maintains an oversight of the foreign exchange market.
Authorised Dealers in the Short-Term Money Market: The authorised short-term money market dealers are securities traders – currently seven in number – in a trading relationship with the Bank. As key market-makers in short-term Commonwealth Government securities, they are the prime counterparties for the Bank in undertaking its monetary policy operations; they also provide a repository for the cash reserves of the commercial banks and other participants in the short-term money market. The Bank grants the dealers certain facilities to assist them in fulfilling these roles, including clearing accounts through which they can transact with the commercial banks on a same-day settlement basis, and access to short-term liquidity support from the Bank.
In return, the dealers have certain dealing obligations and are required to observe the Bank's guidelines on the conduct of their operations, and to report frequently on these operations. The guidelines are designed to ensure that the dealers are managed prudently and have adequate capital and liquidity. Two dealers – All-States Discount Limited and Short Term Discount Limited – merged their money market operations in April 1992.
Foreign Exchange Dealers: Under the Banking (Foreign Exchange) Regulations, dealers in foreign exchange in Australia require authorisation by the Bank. During 1991/92, the number of authorised dealers declined from 77 to 72, comprising 29 banks and 43 non-bank financial institutions. This mix could change if some of the latter were to gain branch banking status in Australia; a deeper market could develop as a result since branches would tend to have a greater trading capacity than locally incorporated subsidiaries. The Government's decision, announced in February 1992, to tax profits from offshore banking business at a concessional rate of 10 per cent, also has the potential to boost market activity.
After declining through 1990/91, turnover in the foreign exchange market steadied during the past year, averaging about $38 billion a day, compared with $43 billion a day a year earlier. Trading in third currencies – ie trades not involving the Australian dollar – has continued to grow, and now accounts for around 60 per cent of all turnover, compared with around 40 per cent in the mid 1980s.
Supervision of Other Financial Institutions
In addition to the areas in which it has formal responsibilities, the Bank keeps abreast of other developments, in keeping with its broad responsibilities for the stability and efficiency of the financial system as a whole. The Bank has contributed, for example, to various reviews of regulations affecting building societies, credit unions and collective investments (particularly superannuation).
Some themes which are common to many of these reviews, and which the Bank would generally endorse, include:
♦ the importance of diversity, in both the range of financial institutions and the risk/reward profile of the products they offer, in encouraging competition and offering a wide choice for savers/investors and borrowers;
♦ the need to maintain an appropriate balance between the benefits from enhanced prudential oversight and the costs of bureaucratic intrusion into financial markets;
♦ the desirability of supervisory frameworks being flexible enough to evolve with, rather than stifle, innovations in products, market practices and strategies of financial institutions (and, in particular, to assess whether codes of conduct and non-legislative standards are more effective than “black letter” law);
♦ an emphasis on measures to prevent problems (for example, by higher requirements on capital, liquidity, ownership and dealing with associates), rather than to deal with crises after they have occurred;
♦ the need for the primary responsibility for prudent operation of institutions to remain with boards/management/trustees, rather than with governments (ie taxpayers); and
♦ the importance of high standards of disclosure in assisting investors to understand better the risk/reward characteristics of financial products, where the responsibility for performance lies, and how disputes might be resolved.
A new framework was established by the States on 1 July 1992 to upgrade the prudential framework for building societies and credit unions. This will lift prudential standards and apply them uniformly in all States. The coordinating body, the Australian Financial Institutions Commission (AFIC), will set prudential standards, monitor the evolution of the framework and supervise industry-funded emergency liquidity support arrangements. States have reorganised their supervisory authorities to undertake the day-to-day supervision of institutions. The Bank has participated in the development of these new supervisory arrangements and will have an ongoing association with AFIC; it will not, however, be directly involved in supervision, or in liquidity support, of building societies or credit unions.
Cooperation Among Supervisors
The Bank maintains contacts with banking supervisors in other countries. It participated in the SEACEN (South East Asian Central Banks) Meeting of Directors of Supervision in Jakarta in November 1991 and in the 5th Conference of SEANZA (South East Asia, New Zealand and Australia) Banking Supervisors in Tokyo in March 1992. It also follows closely the work of the Basle Committee on Banking Supervision. Detailed discussions were held with regulators in the United States. Examiners from the United States and Hong Kong visited Australia during the year to examine the local operations of institutions from their jurisdictions. The Bank also hosted visits to Australia by supervisors from New Zealand, China, Cambodia, Vietnam and Tonga.
Domestically, the Bank has been developing its contacts with other supervisors as new linkages have been forged between financial institutions and traditional delineations have become more blurred. The new Council of Financial Supervisors, which will establish more systematic contacts among supervisors, will be chaired by the Bank; other participants will be the Australian Securities Commission, the Insurance and Superannuation Commission and the recently formed AFIC. This Council will help to avoid unintended regulatory gaps, and promote the sharing of relevant experience and information among the different agencies. It is not intended that the Council become a “ mega-regulator”, with a supervisory role in its own right.
Payments System
The payments system is the set of arrangements for transferring funds among members of the community. While many everyday payments are made with cash, the bulk of payments by value is made using non-cash instruments and services offered by financial institutions. This involves financial institutions in complex “clearing” and “settling” arrangements. Clearing is essentially the sorting, transporting and accounting process, which varies with each payment instrument. Net obligations established between financial institutions in the clearing process are extinguished in the settlement process, usually by adjusting accounts held with the Reserve Bank.
Given its responsibility for the stability of the financial system as a whole, the Bank has a major interest in the integrity and efficiency of the payments system. The efficient functioning of the economy requires that payments be processed quickly and reliably. Australia's payments system is efficient and reliable but further improvements in risk management can be made. In particular, while the spread of electronic means for transmitting payments has improved efficiency, it has also introduced new risks and ambiguities about the legal standing of parties to transactions. These potential problems have provided the impetus for a wide-ranging reform process which extends to closer monitoring and oversight of interbank exposures; better control of risk; and reduced reliance on less efficient, paper-based transfers.
The Bank has participated actively in a steering committee of industry representatives established in 1990 to oversee reform of the payments clearing system. This committee has been transformed progressively into the Board of the Australian Payments Clearing Association Limited (APCA), which was incorporated in February 1992. The nine directors represent the Reserve Bank (at present the Chair), the four major national banks, State banks, other banks, building societies and credit unions. A chief executive and supporting staff have been appointed.
APCA will eventually oversee the various clearing streams and establish broad policy appropriate to ongoing shifts in payments practices and technology. Under APCA, four divisional management committees will be responsible for arrangements governing the clearing of paper payment instruments, such as cheques; bulk electronic (direct entry) payments; and low-value and high-value electronic funds transfers (EFT). The formalities of this transition process should be completed over the next twelve months. The functions of some traditional banking industry bodies, such as the Australian Clearing House Association, which have long managed the clearing system, are being absorbed into APCA.
As noted in last year's Report, the Bank has been reviewing operational procedures for Exchange Settlement Accounts. In the past year, work has focused on ways to reduce settlement risk by shortening the settlement cycle. New arrangements, which are expected to become operational in the first half of 1993, will require interbank obligations to be settled before the commencement of business on the day following the processing of the payments through the clearing system. At present, settlement is not final until the third day, by which time a further accumulation of cleared payments has entered the settlement stream. Earlier settlement will require changes to operations in the interbank and short-term money markets, including earlier opening times.
Further consideration has been given over the past year to requests by building societies and credit unions for direct access to settlement account facilities with the Reserve Bank. Before completing this review, the Bank wished to evaluate progress toward a more effective system for the prudential supervision of these intermediaries. Following the recent establishment of AFIC, the Bank has decided, in principle, to make available to the societies and credit unions some form of direct settlement facility. The operational arrangements have yet to be finalised but the Bank's preference is that settlement facilities for non-banks be conducted through a small number of central industry bodies (Special Service Providers) supervised by AFIC.
Consumer Issues
Relationships between banks and their customers have on occasions become quite strained in recent years. In part, this reflects difficulties all parties have experienced in adjusting to a less regulated, more competitive financial system. For a time, banks concentrated more on devising a wide array of deposit and loan products, with sometimes complicated pricing and other features, to the detriment of the more mundane needs of their customers – such as explaining the comparative features of bank products and establishing arrangements for resolving disputes expeditiously and fairly. The unwinding of cross-subsidisation in pricing bank services, which was common in the regulated world, also has been unpopular with those customers newly confronted with explicit charges for services previously subsidised by other customers. As the banks began to turn their minds to these problems the recession struck, creating additional difficulties for borrowers and adding to banker/customer strains.
The Bank is represented on the Board of the Australian Banking Industry Ombudsman, which is now active in resolving disputes between banks and their personal customers. The Bank also liaises with the Trade Practices Commission and other Commonwealth and State Government bodies charged with protecting consumer interests.
The Bank's two main objectives in this area are clear, if not always well understood. The first is to see that the community is well-served by a banking system that is efficient, reliable and responsive to its needs. Secondly, the Bank is concerned that measures to redress deficiencies in present arrangements do not unreasonably reduce the flexibility of banks in pricing and designing products for the different needs of their customers. In the Bank's view, effective competition, supported by full and clear disclosure of information, will do more for consumers of banking services than is likely to be delivered through prescriptive law or regulation.
Recent experience has indicated, however, that scope exists for competition to be buttressed by a clear codification of “acceptable standards” in the main areas of bank/customer relationships. Following a recommendation of the Parliamentary Banking Inquiry, the Treasurer has announced that a comprehensive Code of Banking Practice is to be developed which will outline standards for disclosure of information about bank services and dispute resolution arrangements, and generally make clear the respective rights and obligations of banks and their customers. This Code will not be legislative, but its terms will be contractually enforceable. It should be of considerable benefit to both banks and their customers.
The Bank is represented on the working group of officials which is compiling the Code in consultation with banks, representatives of consumer groups and other interested parties. Compliance with the Code will be monitored by the Australian Payments System Council, which is to have its consumer representation expanded for this purpose. The Bank chairs this Council and provides its Secretariat.
The Australian Payments System Council is already responsible for monitoring the Code of Conduct governing retail EFT. Compliance with this Code, which applies more widely than to banks, remains very high and the incidence of customer complaints is low. To improve EFT systems further, the Council recently endorsed a set of guidelines covering aspects of security in EFT systems and procedures. These guidelines flow from an earlier survey sponsored by the Council, which identified four areas where industry-wide security could be enhanced. Two of the resultant guidelines cover the contribution which the careful location of EFT terminals can make to protecting the confidentiality of “personal identification numbers”. The other guidelines cover technical aspects of communication security in EFT networks and endorse industry best practice. These guidelines were developed in consultation with representatives from financial institutions, retailers and consumer groups working in cooperation with the Secretariat to the Payments System Council.
In June 1992 the Treasurer referred the profitability and pricing of credit cards to the Prices Surveillance Authority for inquiry. In the Bank's view, banks and other issuers should have reasonable freedom in pricing card services because that is most likely to lead, in a competitive market, to a wider choice of products and pricing which best reflects the costs of providing different services. The present proscription of up-front fees on credit cards has resulted in higher interest rates for those customers who make use of the credit facility.