Treasurer Scott Morrison: Banks hold enough capital to withstand a financial storm

Treasurer Scott Morrison talks about APRA enforcing strong capital ratios for the banks and encouraging new entrants into the banking system

Introduction: Treasurer Scott Morrison banks hold enough capital to withstand a financial storm.

Ross Greenwood: These new banking ratios at around the place. It’s been a situation where today a statement has come out from the banking regulator APRA, which says that the banks now need to hold in the future 10.5% of what would be called tier one capital. Now what this means effectively is that the government wants the banks to be “unquestionably strong” whatever that means.

I spoke to David Murray the chairman of the financial system inquiry, the former chief executive of the Commonwealth Bank earlier. He said, “well, look you can never guarantee that a bank won’t go broke. By doing this, you do guarantee tax payers have to put money in, if the assets of the banks become illiquid, at least the taxpayer can get their money out in a reasonable period of time.”

I did also said that the bank shares on the market today jump sharply. The reason for that is because they have until 2020 to comply. In fact some of the banks I spoke to today said they would already comply with these new rules. Don’t need to go to their shareholders to raise this additional money. Well, let’s go to the federal treasurer at Scott Morrison who is online right now. Many thanks for your time Scott.

Interview: Scott Morrison, Treasurer

Scott Morrison: Good day Ross.

Ross Greenwood: Can you just explain in regards to this words unquestionably strong. What should a taxpayer, an Australian citizen make of those words?

How to do it by 2020

Scott Morrison:Well, it means the banks are in a position where they hold enough capital and this is, and we’ll put it around about 10.5%. To ensure that a bank is in a position to withstand the financial storms that come and has a reasonable position of strength. Now these aren’t unquestionable guarantees necessarily. It is meaning that when they achieve this mark, which as the banks have indicated today they’ll be able to do in their stride.

Certainly, because they only know how to do it by 2020 and many of them now collectively anyway. Then now what that means is that our banks are now stronger than they were before they went into the global financial crisis. We all know that strong regulatory financial system we had at that time ensured that our banks were able to move through that and continued lending through the global financial crisis which was so critical to so many businesses.

What is thrown in it in the future?

Ross Greenwood: The other thing also I do notice Standard & Poor’s today indicated that after this has come out from APRA that they see no immediate impact on any of the bank ratings in Australia. They also believe that a buildup of capital for the four major banks would naturally be a net credit positive. In other words they’ve been given a tick of approval by one of the biggest credit ratings agencies in Australia.

Does that merely mean that a person who was banking not withstand the fact that there is a $250,000 guarantee from the government on deposits in individual institutions? The people can have full confidence in that banking system no matter what is thrown in it in the future?

Scott Morrison:Well, I think what it means is you can have that view more strongly in Australia than than arguably every other part of the world. I mean we’re at the cutting edge of this. What we’ve been waiting for is for the global financial community through a process called Basel 4 to land at a position about what these new requirements should be. That was taking them forever to do it. We had the view as a government and they communicated this to APRA.

Equally, APRA was of a similar mind that we would give it some time for that to land. If they if they couldn’t come to a position then we should just get on with it. That’s what APRA have done. That’s consistent with what the Murray inquiry and their great leader David and his explanation of it. That’s what has happened. Look, we’re just getting on with it in Australia and we have arguably one of the strongest most stable banking and financial systems anywhere in the world.

It’s not enough to be unquestionably strong as you know Ross. It should also be unquestionably fair. It should also be unquestionably competitive. We’ve been taking a lot of steps in those areas. The banking executive accountability regime which we announced in the budget. Also, things we announced earlier this week which was allowing smaller financial institutions to call themselves banks.

Moving towards a more open banking regime we’ve announced that. We’re moving towards that by the end of the year. That’ll create more competition which is always good for customers.

Ross Greenwood: Of course also, you could argue that the bank levy itself on the big four banks and Macquarie was a deliberate effort to try and create more competition by not levying the smaller banks or regional banks with their particular levy.

Scott Morrison:Well, that’s right, they enjoy the major banks about a 20 to 40 paces point advantage over the the smaller regional banks. Obviously that levy to some extent addressed that issue. It was a modest levy certainly in that context.

Ross Greenwood: One of the things is and speaking with some senior bank executives and they believe that one of the biggest risks to their business is government. That they say that really if they go back and have a look at the things that cause a dilution of their profits, or if you’re like risk to their earnings over a period of time, that it generally has changes in bank legislation by the Federal Government or by Government generally. Would you accept that that’s one of the biggest risks to a bank shareholder and a banks balance sheet?

Scott Morrison:I think that’s a crock. I think that’s an absolute crock.

Ross Greenwood: Have you heard that story before or not?

Scott Morrison:I hear at some time make that claim. The bank’s credit rating has been secured because of the strength of the decisions that the commonwealth has taken. The strong financial and regulatory system that we have. They are the prime beneficiary of the strong financial regulation that we have put in place. If it wasn’t for the changes that Peter Costello introduced as treasurer prior to the GFC which upgraded our our regulatory architecture for our financial system.

Then who knows what would have happened during the GFC. Then that was a financial crisis and it was our strong regulatory framework by which Peter should take due credit and I give him that credit because he deserves it. That put our banking system in a very strong position. Now, we picked up where Peter Costello left off. When we came into government in 2013, we initiated the Murray Inquiry which has been refused to be undertaken by the Rudd-Gillard- Rudd government.

We got it on, we did that. It was an excellent inquiry from David. Now, we’re implementing it. One of those recommendations include unquestionably strong and ensuring that banks had adequate capital to put them in the strongest possible position. That’s happening. Now, a strong financial and banking system in this country is critical to our prosperity and are resilient in the face of potential shocks down the line. [crosstalk]

What does it say that line in the sand that they have drawn

Ross Greenwood: On the subject of prosperity could I just change course a little bit and go to the Reserve Bank. Yesterday, coming out in the minutes of its previous meeting where it also put a line in the sand. Effectively said it believes a neutral interest rate is 1% the real rate. Which if you add inflation, it put the number of 2.5% would put the cash rate at 3.5%. Now that’s somewhere into the future that is also pending on the economy picking up in a in a normal manner.

I mean what does it say that line in the sand that they have drawn not only for households that have got significant debts in Australia right now. Also potentially for the future of the Australian economy. Therefore your budget deficits or surpluses and even the government’s debt.

Scott Morrison:Well, I don’t think there any real implication of that certainly in the short to medium term or even potentially beyond that. I mean these sorts of things are sort of a topic for economists picnics most of the time. These things are important no doubt. Our Reserve Bank I think showed tremendous patience and a discipline on the way down as rates were falling around the world.

They certainly didn’t take them down as far as the rest of the world did. While we’re seeing movement now with the Fed or even in Europe where we’re seeing some easing in their QE process. They are still well below where we are today. I wouldn’t be leaping into any sort of early conclusions about having any real direct implications as we speak. I mean these are important analysis to be undertaken.

I think they mean more for the analysts taking a keen technical interest in these issues than they do for moms or dads or small businesses or anyone else. I mean-

Ross Greenwood: Okay. It doesn’t necessarily mean- let’s say for example if we get back to that normal situation, be it in a year’s time, two years time, three years time, that suddenly the economic growth rate picks up. That employment starts to pick up a little bit. Wages start to pick up. That would actually be a very significant outcome for the government of today.

Scott Morrison:True. I don’t see what that analysis that became public in the minutes in any way indicates the banks that is heading there anytime soon. Obviously that’s a decision for them. They’re an independent bank. They will continue to have regard to the employment market where inflation is all of these issues. They’ll continue to make astute judgments in a way that I think they have quite responsibly.

I think we’ve been very well served by both Glenn Stevens and Phil Lowe in those roles. I have full confidence that they’ll continue to make excellent judgments as they have.

Ross Greenwood: Tell me this, when you were a young bloke knocking around the Sutherland Shire, did you ever go surf fishing at all Scott?

Scott Morrison:Well, I grew up in Bronte. I happily moved to the Sutherland Shire but no, I didn’t do any rock fishing but if people do rock fishing they should wear a life vest.

Ross Greenwood: They should do that. I’ll tell you what, sad day today a little business in Ipswich called LV Reels been going a hundred years, employed people went broke today. They couldn’t keep up with Chinese imports.

Scott Morrison:Well look, that’s a heartbreaking story. I mean our economy is going through a difficult transition. As Phil Lowe says from the Reserve Bank, we’re about 90% plus on the way through that transition but that doesn’t mean those transitions are easy. It’s a competitive market and our business is made to be fiercely competitive, that’s why we want to take the corporate tax right there.

We got an enterprise tax plan that has a vision in Australia to see every company paying no more than 25% tax. I have talked about rate of marginal tax at 45. Now, the Labor Party has a vision which would have us have one of the highest rates of top personal tax anywhere in the world and one of the highest corporate tax rates of anywhere in the world. That’s a very dark economic vision for Australia and not one that people should entertain.

Ross Greenwood: Treasure Scott Morrison, and as always we appreciate your time here on Money News.

Scott Morrison:Thanks a lot.

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