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2014 Financial System Inquiry
The 2014 Financial System Inquiry was annouced by the Treasurer, the Hon. Joe Hockey MP, on 20 November 2014. The Inquiry's Final Report was released on 7 December 2014 and the Inquiry has concluded. For more information please visit the 2014 Financial System Inquiry website.
Financial Systems Inquiry
The Hon Peter Costello MP
Wednesday, 9 April 1997
SUBJECTS: FINANCIAL SYSTEM INQUIRY
[At the end of] the Press Conference the copy of the report will be available.
Today I release the final report of the financial system inquiry, otherwise
known as the Wallis Report. This Report paves the way for a major shake up of
the Australian finance industry to inject greater competition, more choice,
better returns, to enhance Australia's position as a financial centre in the
The Report finds that the total assets in the Australian financial system in
1995 were $931 billion, today this is a $1 trillion industry. It finds that
whilst we are not the worst in any particular area of our financial system,
we're not the world's best practice in any area of our financial system - we're
middle of the range. We have our strengths, we have our weaknesses. The strengths
of the Australian financial system are the safety and prudential controls, the
reliabilities in relation to the payments system, the provision of housing mortgage
and competitive mortgage rates, but only in relation to the last year, and I'll
have something to say about that, and the access for large lenders to finance.
It finds that the Australian financial system has weaknesses in competition
for retail transaction accounts, in availability of finance for small business,
in the lack of development of the corporate bond market, and lack of depth in
those markets. In relation to costs and profitability, as I said before, Australia
and its financial system is again somewhere around mid-range. The total cost
of Australia's financial system to users is $41 billion, or 4.3 per cent of
assets. Of this 2.8 per cent is operating costs and 1.5 per cent goes to cover
bad debts, taxes and profits.
Whilst this is lower than the United States and the United Kingdom it is higher
than many other countries including Canada, Switzerland and Germany. Australia
is still heavily reliant on cheques which are a relatively high cost payment
instrument. A 10 per cent improvement in the efficiency of the Australian financial
system would translate to $4 billion worth of savings.
McKinseys estimate that at Australian retail banking, labour productivity is
up to 40 per cent behind that of the United States.
Banks represent the main financial institutions for small business - up to 98 per cent - and they are the main financial institutions with the widest coverage in Australia.
The analysis in the report suggests that the cost to consumers of Australia's
four major banks is better than for some overseas banks but below world's best
practice. Net interest margins remain relatively high. Fees and charges comparatively
Margins have been falling since the late 1980s and are likely to fall further through increasing competition. And in particular, as I've noted on many occasions, new entrants into the house lending market, such as the mortgage originators, have had a definite effect on the margins in relation to housing finance.
Total income to total assets ratio is average by international standards but
reducing. Profits to total equity are comparable to full service banks overseas
but profits to total assets remain high in Australia.
The recommendations of the report are that Australia should have a more focussed
regulatory framework; there should be increased competition and contestability
in markets; that mutuals should be able to provide banking services; that the
exchanges should go head to head in competition; that there should be non-bank
entry into the payments system.
The Report recommends a new regulatory structure for the Australian financial
system. It recommends that the Reserve Bank continue to provide system stability
and regulate payments, but there be a single prudential regulator for licensed
banks, building societies, credit unions, insurance companies, friendly societies
and superannuation funds to be called the Australian Prudential Regulation Commission.
That would take over work currently performed by the Reserve, AFIC, the ISC
and some other State agencies.
That recommendation would also allow deposit takers to form and grow more easily
under the one prudential regulator.
The Report also recommends a single market conduct and disclosure regulator built on the ASC to be named the Corporations and Financial Services Commission, the CFSC, which would take over work currently performed by the ASC, the ISC, the RBA, the ACCC and some other State instrumentalities. It would exercise the responsibility for disclosure and consumer protection in respect of all financial services.
The Report also makes recommendations in relations to mergers and acquisitions.
The Government has considered the recommendations in relation to mergers and
acquisitions and while we will provide a comprehensive statement on financial
market reform in response to the report, market speculation in the area of mergers
requires an immediate response.
When the Inquiry was established I said that we would consider mergers policy
in the light of this Report. Today I announce that the six-pillars policy is
abolished. The Treasurer will retain the power to reject mergers under relevant
banking and insurance laws. In exercising those powers the Treasurer will take
account of the assessments of the Australian Competition and Consumer Commission
and prudential regulators on prudential considerations.
The Government has decided that at this time mergers amongst the four major
banks will not be permitted. This will be reviewed when the Government is satisfied
that competition from new and established participants in the financial industry,
particularly in respect of small business lending, has increased sufficiently
to allow such mergers to be considered.
The Government has decided to remove the blanket prohibition on foreign takeover
of any of the major banks. Any proposed foreign takeover will be assessed like
any other proposed takeover or acquisition under the Foreign Acquisitions and
Takeovers Act of 1975. They will be considered on a case by case basis. In making
assessments in relation to any proposed foreign takeover of a major bank however,
the Government will apply the principle as was concluded by the Inquiry that
any large scale transfer of Australian ownership of the financial system to
foreign hands would be contrary to the national interest.
I wish to say in closing that on behalf of the Government I would like to thank
the Wallis Committee, the Chairman Mr Stan Wallis, the members Bill Beerworth,
Professor Jeffrey Carmichael, Professor Ian Harper and Mrs Linda Nicholls. They
were given a nine month gestation period and they brought forth on time. They
have made a major report which lays the basis for great reform and restructuring
in a $1 trillion industry in this country. Their report has provided the opportunity
not only for consumer benefits through increased efficiency and competition
but for Australia to anticipate and place itself to develop as a regional financial
centre. This is a major contribution to public policy and I thank them for their
What did the report recommend on mergers and acquisitions and why did you not
accept those recommendations?
The Report recommended in relation to foreign takeovers an analysis under foreign
investment policy on a case by case basis, along the lines which the Government
today announces as its policy. In relation to mergers, the Report recommended
that mergers be considered on competition grounds by the ACCC and on prudential
grounds by the prudential regulator. It had two options, one was for the Treasurer
to retain a reserve power but to exercise it as informed by those considerations.
The other was not to keep a reserve power. The Government's policy is that the
Treasurer will keep a reserved power and at this time will use that reserved
power not to allow any mergers between any of the four majors.
However, the six pillars policy is abolished and there is no restriction on
mergers between mutuals and banks which will be progressed through the three-stage
process as it were: one, clearance on competition grounds; two, clearance on
prudential grounds; thirdly, reserve power of the Treasurer.
Why did you decide to keep the four-pillars policy?
Well it's not a four-pillars policy at all, it's a policy to prevent at this
time any mergers between the four majors, but to review it after we've put in
place pro-competitive measures, because the important thing is to make sure
that the pro-competitive measures are put in place to facilitate new entrants
and new institutions before mergers which could possibly reduce the number of
institutions took place. The Government didn't want to see a situation where
conceivably four banks would go down to two in a short period of time before
it had put in place measures which would allow new deposit taking institutions
to form, new foreign entrants to come into the market and to facilitate the
enhanced competition that we believe is necessary. And in particular the report
finds that we do not have a competitive enough market in access for small business
to financial services. As I said earlier small business almost totally relies
on the banking system for access to finance. One of the things that we would
be interested in seeing is new entrants, non-bank institutions, starting to
develop widely used financial lending practices in relation to small business.
Will you allow Westpac to take over the Bank of Melbourne?
Well, time can start ticking in relation to that now. It wasn't ticking until
12 o'clock today as I made entirely clear. That offer will have to clear the
ACCC. It will have to clear the prudential regulator but the policy that I announce,
which is we will not allow mergers between the big four, of course does not
apply in relation to regional banks. Now, I'll just make this observation, that
the ACCC has put down some guidelines in relation to what it considers necessary
to promote competition in respect of regional banks, and I will be guided very
much by its findings on that.
So if they give it the green light, you will too?
If the ACCC is convinced that it is a pro-competitive outcome, and if the prudential
regulators say that they are happy with it, they will be well on their way.
In that takeover policy that you've just announced, Mr Costello, will there
be any changes to the existing guidelines, so far as the ACCC is concerned,
or the Foreign Investment Review Board is concerned, so far as banks are concerned?
The ACCC guidelines on banks will be what's in the Trade Practices Act. That
is, it's a substantially lessening of competition test and that will be applied
by the ACCC. Now the point I was making in relation to this is if you look at
previous decisions, the ACCC has given some guidance in previous decisions as
to what it considers the substantial lessening of competition test to mean in
relation to regional banks. That is as you like an ACCC interpretation of the
legislative requirements, so I won't be changing the legislative requirement
and it's up to the ACCC as to whether it follows it's own principles or not.
And we'll be very much guided on the competition aspects by its findings. In
relation to foreign investment requirements, at the moment the question of foreign
investment in the major banking institutions has never actually got to the FIRB
tests because there's been a blanket prohibition. The blanket prohibition comes
off and the FIRB tests apply in relation to the foreign investment, but subject
to that one caveat, which is the Government policy that we will not allow any
large scale transfer of Australian ownership of the financial system into foreign
Do you expect, Mr Costello, as a result of that decision that foreign banks
will be interested in acquiring regional Australian banks and you expect to..
Well, they might be interested in having a look at a major. Now they could
have a look at a major, but the application would be carefully considered in
relation to the national interests provision.
Well it could, consistent with the FIRB guidelines, it could put a proposal
to us of either of those alternatives and consistent with the policy of promoting
competition but protecting the national interest, we would consider it.
Treasurer, will bank depositors have a safety net and will it be extended to
other deposit taking institutions?
There's not going to be any deposit insurance, if that is the thrust of your
question. The safety net which will be applied will be prudential requirements.
Now I think one of the great things about having a single prudential regulator
is that at the moment we have various categories but in fact what you have in
respect of financial institutions is a spectrum, a spectrum of services requiring
a spectrum of prudential requirements. With one prudential regulator, a deposit
taking institution, forming say as a credit union, would come under it's perview
and could grow all the way from credit union to bank, moving across the spectrum
of risk of the prudential regulator and I think it will be one of the major
achievements if by getting a regulatory system like that, you can encourage
new deposit taking institutions and grow them. That's certainly the way in which
the report is framed. And obviously, as the prudential requirements increase,
the protection to depositors increases commensurately. But that's the way in
which deposit protection is going to be handled under this proposal with the
one regulator and the spectrum of risk for deposit taking institutions.
...(inaudible) Government guaranteed?
Because there's confusion in the community because most don't understand that
they're not at the moment. Are you going to ....
Well, what happens at the moment in relation to banks, what happens at the
moment is that there is a statutory requirement which is put on the Reserve
Bank to ensure that it takes such steps to protect depositors. Now in relation
to the prudential requirements, there will be a range of prudential requirements,
that requirement only applies to banks at the moment, it doesn't apply to credit
unions. It doesn't apply to Friendly Societies, they have different requirements,
but there will be, I would imagine, a requirement at the upper ends of the bank
or bank-like institutions for similar protection as there is today. The point
that I make is, if I understood the question right, there was some speculation
as to whether the Inquiry would recommend deposit insurance, and it doesn't.
There was some speculation as to whether there'll be clarification of the legislation
in relation to whether the deposits are protected or not in any form at all.
Do you propose any change to the law about protection for deposits to clarify
the confusion that exists in the community about that?
As I said, I think that there will be, in relation to banks as we know them
today, the similar level of protection as is currently provided under the Australian
prudential regulator, but there will be graded requirements in relation to other
What changes will consumers now see as a result of what you've announced today?
Well I hope that consumers get more choice and lower prices. This is all about
increased competition, more choice, lower prices. Let's see if we can get more
mutuals and insurance companies offering bank or bank like services. Let's get
greater access to the payment system for non-bank financial institutions. Let's
provide a mechanism where deposit taking institutions can form more easily and
grow more easily. These are the opportunities for competition, choice, lower
cost. One of the things that you'll find in relation to this report is that
it's looking at historical data, say up until 1995 - 96 and notes, for example
that margins on mortgages are high, always were high, by international standards
in Australia. Now there's been a marked change through 1997 through the advent
of new mortgage originators that cut margins that banks were charging and what
we want to ensure that there is opportunity for new entrants to come in in relation
to small business lending to do exactly the same for small business. What the
report says is margins were high on houses, they've now improved, the banking
system was doing pretty well for big business, but there was an area in relation
to small business where it wasn't providing the best available and cheapest
products. So we want see if we can get new institutions to provide that competition.
Competition, choice, efficiency.
If you can't stop them from doing that now, what will you do to get people
to do it? I mean, there's no reason why another institution can't lend to small
business for instance now.
There is, well, if you are a institution that hasn't had the name "bank".
This apparently has been quite a big psychological barrier.
Is the reason the banks have....
No. It also points out to you that having the name "bank" in your
franchises gives you a very enhanced market position in certain markets, particularly
in relation to small business lending. Now, if you provide the opportunity for
a gradation of prudential regulators and you recognise that there is a continuum
of institutions, I think it will provide better opportunity for some of those
institutions to be recognised in a market sense, and to be available. The other
thing, too, and this is not so much any recommendation that would arise out
of here, but technology I think. As long as we provide the opportunity for technology
to flower in relation to the financial system the technology will provide access
to new fund lenders. What gave the opportunity in relation to mortgage originators
was basically the telephone. They didn't have to have a branch structure. You
don't walk into a branch of a mortgage originator. You ring up the phone number
and it's put out to a travelling salesman on a mobile phone who's in a car and
he comes around and he sees you. Now if you get the market regulation right
so that you can protect prudential standards and consumers and give the full
flower to technology, in relation to the delivery of service, the transfer of
service, the makings of the payments system. I think you can get greater choice
If you have got the ACCC and your prudential regulators to do the job, why
was it necessary to maintain that veto?
It's necessary to maintain the veto because it's the Government's policy not to allow mergers between the four major banks.
But if that's on competition grounds the cause is not enough competition, why
can't you trust Alan Fels and the ACCC to do that by themselves?
Well we, as a matter of Government policy, reserve the right to ourselves to
make the final say in relation to the broad questions of ensuring competition
and ensuring the public interest in respect of foreign ownership. We are a Government.
We are elected. We are going to account the Australian people. And we have reserved
to ourselves, at this stage, the decision that there will not be mergers between
the four majors, and we have reserved to ourselves the decision to ensure that
the Australian financial system still has healthy Australian ownership. We consider
that a matter of public policy.
It's national interest factors.
Mr Costello, retaining the lender of last resort facilities for bank deposits,
or in the long term do you intend to move to a system that relies solely on
I imagine that there will always be in respect of those sorts of deposits,
the kind of protection that exists now, and I would not argue that it shouldn't
At the moment you've got people who like investing in a major bank unit trust,
who think that is sort of like a bank deposit when it is not, don't you think
this graded system is going to only exacerbate that sort of confusion about
Well, you are saying that there is apparently confusion in the market at the
moment because people are investing in the trust which has the name 'bank"
in it. Now if there is that confusion, that's proving that our disclosure is
not good enough. One of the recommendations, this is a disclosure point, in
this report, which I think is a good one, is to have a beefed-up, consumer protection
and disclosure commission for financial products. The important thing in that
kind of example which you raised with me is to ensure that people know what
they are investing in. Nobody is holding out to them, I don't think, at the
moment if they're going into a property trust, that they're putting deposits
in a bank like institution with the Reserve backing. But if they have that misconception
at the moment, it must be failure of disclosure or information and what this
report recommends is improving disclosure and information, and I think it's
The Government is considering the recommendations on regulation but the comments
actually, the Government is actually in favour of the having the Australian
Prudential Commission and a corporate ...?
Well, it's a good question cause I should make this clear. As I say in my press
release, and as I've said in my opening comments. The only policy the Government
announces today is the six pillars policy is abolished. The Treasurer's discretion
will prevent merges amongst the four majors and the foreign ownership blanket
prohibition has been replaced with case by case analysis under the Foreign Acquisitions
and Takeovers Act 1975. That is what I announced on behalf of the Government
today. The remaining recommendations are recommendations to the Government which
the Government will consider and announce a position on after the Budget and
after they have been considered. My comments in relation to those recommendations
today are to give you a broad indication as to how the Wallis Inquiry envisages
those institutions would work and also to give you the feel that I think there's
a lot to commend them. But I do not announce them today. It is not the Government's
position today to introduce all or any of them. These are recommendations. Now
as I say in my press release, the submissions provided a very valuable and detailed
body of knowledge as a consequence in considering the recommendations, the Government
is not going to duplicate the formal consultative process. We are not going
to redo the whole thing over again. That's the starting point. If there are
things that have not been taken into account or any major points, they will
be taken into account before the Government announces its response. But this
is a, it will be after the Budget and after the Cabinet has considered the position
with all due processes. I'll then call another one of these and I will comment
on all of those matters as well.
When you announced the Inquiry last year, you made it clear that you saw a
lot of benefit in the idea of having a single regulator to cover deposit taking
institutions and investment capitalists. Now that the Inquiry has reached a
similiar conclusion are you prepared to....?
Well I said when I was in Opposition, I thought about this and I tentatively
come to the view that this would be a more modern and efficient regulatory system.
I said that there was no preconception, that this Inquiry would be asked to
come to its own conclusions. It has come to similar conclusions. This fortifies
my inchoate sense as it was back then but somebody may still have a knockout
argument as to why both of us were wrong. We're always willing to hear it.
Why is the Government's position on foreign ownership so different?
On foreign ownership?
On banking and in the media, they are completely different positions.
What are the completely different positions?
Well you are allowing a foreign bank to takeover or acquire a major interest
in an Australian bank whereas you are cutting right back on foreign ownership
in the media.
Quite wrong. In the media, we assesed it under the Foreign Acquisitions and
Takeovers Act on a case by case analysis and you want to look at the print media.
Most of it is currently in foreign hands. I mean, the argument that in relation
to print media, there should be further foreign investment is what, to take
foreign ownership in the print media up from what 60% to what 90, 100? At the
moment, in relation to the financial system, foreign ownership in relation to
the major banks is zero. What I am saying is it can move off zero but we won't
allow it to go to substantial foreign ownership. We certainly would not allow
it go as high as foreign ownership in the print media in this country.
When you set the Inquiry up last year, you made it quite clear that you were
attracted to the national champion's argument in relation to banks. Certain
banks were getting offshore. By retaining the four pillars policy, it seems
to me that you've reversed that position you had ten months ago? Is that the
case? Are you now persuaded the national champion's argument doesn't hold water
or is there some other interpretation of that?
Well without going into the national champion's theory. What we do here is
we liberalise cross ownership between insurance and banking. What we also do
here is we liberalise policy in relation to foreign investment on what has previously
applied. But certainly, by no means, have open slather. And what we also say
is if we can get to a position where we can be sure that new entrants and new
competition is such that you can open up this question of the merger of the
four majors, we'll have a look at it then. As I said earlier, I think this is
the important point, it would be the wrong thing when you want to take a whole
lot of measures like opening up the payments system, everything else to say
that will be put in place in what a year's time and in the mean time, we'll
let a market which is not particularly competitive at the moment, go down from
4 to 2. Now in the interim, you have lost an element of competition before you
have been able to put in place measures to facilitate it. What I'm saying is
that we get the measures to facilitate the competition in place, then you could
relook at the question. But if we sat down in a year's time and we said oh well,
we've opened up the payments system and you know we've now got the opportunity
for new deposit taking institutions to form and this will let the flower of
competition run and what's the structure of our industry - two major banks.
You've gone the wrong way in the process. We'll let the flowers bloom before
we revisit that question.
Did the Inquiry see any any evidence of foreign interest?
No, I told you what the Wallis recommendation is. The Wallis recommendation
was to have ACCC and Prudential Screen with no reserve power. I'm keeping the
reserve power in place because I think it's a timing thing, that it would be
wrong to go down that path until you've got....they didn't address that timing
It's a pretty substantial gap in the analysis?
Tom, I wouldn't be as hard hearted as you.
How will you preserve the integrity of the payments system when you throw it
Well the report recommends a thing called the payments system board which would
be setup and accountable to the Reserve Bank to regulate access and the operation
of the payments system.
Will they have to carry capital to guard against potential loss of the payments
They would have to carry whatever was required to ensure that the payment's
system and it's integrity was preserved. One of the things I want to underline,
I think the report makes this clear as well, is that we are going to do nothing
which would interfere with the integrity of the payment system. The integrity
and the certainty and the confidence of the payment system is the cornerstone
of a financial system. And in Australia, it is one of the great strengths that
we've never had trouble in relation to that. But it's not competitive enough,
so there is room for more competition, as the report found. But whilst competition
will be promoted in relation to it, it's integrity will never be undermined.
Do you believe that the implementation of the Wallis Report will be far more
significant than the implementation of the Campbell Inquiry?
Well, look the floating of the dollar and the liberalisation of the capital
flows was obviously very dramatic for the Australian economy. It's a kind of
a once only thing unless you went back to controls you would never replicate
it. This is certainly the most far reaching reform proposed since then.
So do you believe that the Wallis Report will stamp your credentials as a major
I don't go into things with thoughts like that.
Are you aware of foreign investors who may wish to take advantage of this new
regime. Has anyone knocked on your door and said we'd like to have a shot at
a couple of Australian banks?
Well look, what we're saying is you know if they want to knock and they've
got a proposal now they can explain it. In the past they never could.
This is ... costings by 40 per cent. Is it fair to assume...........
40 per cent.
... just saying that in some cases it's ..
That was, I think that was a comparison of labour productivity to the US system
in relation ... but that's only ... can I, I just want to, before you get a
misapprehension about this, what the Report finds is, you know on all sorts
of indicators when you rate your financial system we come in about middle, you
know costs, profitability, profits to assets, you know it's, we're about middle
of the range, there's no one area where we really excel, there's no one area
where we really lag behind, we're about middle of the range. That was just one
indicator about labour productivity but you couldn't apply that measure across
the whole financial industry. I think the more relevant one is as I say in my
press release, if you got a 10 per cent improvement in efficiency, you know,
which might be conceivable, this would be a cost saving to the economy of $4
billion, it's not to be sneezed at.
Do you see as part of that process a fairly large scale job shedding and was your policy for four banks related to employment concerns at all?
The thing about the branch network is that what's driving changes in the branch
network, I think as the report makes quite clear, is not mergers, it's technology.
And they've got the figures in here, you want to compare the banking industry
today to the way in which it was ten years ago, well ten years ago you didn't
have EFTPOS and ten years ago the coverage of ATMs was quite minor compared
to today and what's been changing the nature of retail banking is technology
and regardless of the Government's position on mergers, the technology will
continue to drive those changes.
But in the final analysis, Australia is one of the most over bank-branched
countries in the world, only New Zealand is worse ... go to the basis? That
is one of the key features in the inefficiency of the system and it's almost
impossible for the banks to go ahead and close branches without copping all
sorts of public outcry.
Well, poor old banks. I mean hang on, poor old banks. You're saying the poor
old banks, they get an outcry when they try to get efficiency. Well look, I'm
not going to stand here and cry for banks.
On banks though ... (inaudible)
What issue of public policy did that conceivably raise?
Last question, yes, you were talking first.
What's your message out of this to rural and regional Australia?
To rural and regional Australia, I think that the great message for rural and
regional Australia is that if we can get the regulatory system right we can
grow new institutions for rural and regional Australia. Local credit union type
institutions where in a local town they have their own savings and loan institution,
where if the major banks say for technological reasons we're pulling back because
we want our consumers to do more over the phone or more down the PC, or more
however, if you get the barriers to entry down, if you get the regulators which
allow new institutions to form and grow, why can't the country town have their
own savings and loans institution. Maybe if they want to do more complicated
transactions than that they'll do them down the line. But let's get the opportunity,
this will be the opportunity to take new financial services, but they'll be
new institutions, small institutions with low overheads, into rural and regional
Australia. And if we can get that right I think it will be a great benefit to
rural and regional Australia.
So thank you all very much for your time and the report I think is outside.