Australia seeks a financial future

By P. Usmanto Njo

PERTH, Western Australia (JP): The financial system of Australia, having recovered from the "post-deregulation blues" of the late 1980s and early 1990s, may undergo further fundamental surgeries in the years ahead.

A recent discussion report launched by the federal government's review team for the financial system has indicated the possibility of a far-reaching and radical shake-up to banking and other areas of the country's finance industry. The report has been derived from various opinions and suggestions put forward by industry participants, regulators and consumer groups alike.

Chairman of the review team, Stan Wallis, said that today's financial system is being driven by technological innovation, globalization, changing consumer needs and new forms of competition. In turn, according to Wallis, "the (existing) law and its application by regulatory agencies are lagging many aspects of financial market development." The review team was established six months ago and is due to submit its final report, including its recommendations, to the government by the end of March 1997. Between the present time and January 1997, a series of consultations and discussions with various related parties will still be made.

Australia deregulated its financial sector and floated its currency in the early 1980s, following a similar review that began a few years earlier. Deregulation has since boosted the finance industry, as capital flowed in from overseas and many foreign banks began operating in the country. A decade later, however, the banking sector found itself saddled by bad debts to the tune of A$28 billion (US$ 22.6 billion). In this particular decade, the country witnessed the biggest corporate boom in its history, only to be followed by a painful bust, whereby major corporations collapsed and left behind property and other collaterals of slumping values.

This notorious chapter of Australia's financial history originated from luring adventures of several "corporate cowboys", such as Christopher Skase (who now lives very comfortably in his mansion in Spain), Allan Bond, Abraham Goldberg and Laurie Connel, who built business empires rapidly on mountains of debts, and with a determined strategy of hostile takeovers.

The shortsightedness of bankers and financiers unaccustomed to a deregulated environment, as well as the impotence of financial regulators, were understandably part of the problem.

However, the financial system has since been nourished back to health. Australian regulators have prided themselves in the system of comprehensive safeguards they have thus installed.

Among the rules in place for banks operating in Australia, for example, are ownership restriction (no more than 15 percent per individual or group shareholder), the standard capital adequacy requirement (8 percent of risk-weighted assets; with banks in Australia generally already achieved 12 percent), and the legal lending limit provision (no more than 30 percent of equity capital). At present, nonetheless, the country has four separate regulatory agencies assigned to supervise segments of the finance industry: banking (supervised by the Reserve Bank of Australia), insurance and pension fund (Insurance and Superannuation Commission), the stock exchange (Australian Securities Commission) and other financial institutions, such as credit unions and building societies (Australian Financial Institutions Commission).

Each of these agencies have their own prudential requirements and surveillance activities. They get together every three months for a meeting of the Council of Financial Supervisors, with the objective of avoiding overlap and underlap. Despite such a coordination, however, there appear to be unavoidable inefficiencies. A broker selling a superannuation (pension fund management) product administered by a life insurance company, for example, operates under a different set of consumer protection rules from those facing a financial planner selling a similar product administered by a bank. To complicate matters, certain activities of banks and non-bank financial institutions have increasingly looked the same. The difference remains in that savers at a bank are legally called "depositors", whereas those with a non-bank finance company are named "investors".

Central in the current inquiry is an assessment whether there have been too many prudential standards enforced on the finance industry achieving too little in terms of efficiency and consumer protection. Wallis noted that in certain important areas, Australia is behind the market performance of some other countries, as shown by the higher costs of certain products and services abroad.

In particular, the report elaborates on the issue whether a wholly new system of prudential supervision is to be adopted and how. While indicating no preferences, the team has tabled a few possible options to the current system. These include the possibility of the central bank to attend only to monetary policy; whether to divide prudential surveillance into a part dealing with the systemic risk of finance as a whole and another part pertaining to other regulatory areas, such as particular financial products; and whether to establish a single, mega regulator to oversee the operations of all financial institutions.

The report also discusses possible changes of other major policies, such as those on mergers, deposit insurance and competition. On mergers, the report ponders if the present rule -- the so-called "six-pillar policy", whereby mergers among four of the largest banks and two of the largest insurance companies are prohibited -- should be scrapped. The report also perceives the public's misunderstanding on the government's present stance on deposit insurance. Hence it registers two alternative moves: whether to make it explicitly clear that the government provides no such insurance, or to make it explicitly clear that it does. In tackling the issue of competition, the report discusses, among others, whether non-bank financial institutions should have a direct access to the payment settlement system, and whether foreign acquisition of Australian banks or insurance firms should be allowed.

The importance of the report can be easily recognized by the wealth of responses already made. Not only is the review expected to furnish a framework for an efficient and globally competitive financial system in the country in time, but also commentators have viewed it as a crucial process in which Australia's future economic performance may be determined.

Obviously there remain some heated disagreements over certain aspects covered by the report. For example, Treasury is known to disagree with the Reserve Bank on the present enforcement of special prudential standards for banks. Treasury believes that bank self-regulation (that is requiring banks to publish important information for the public on a regular basis), following the example by New Zealand at the beginning of the year, is the way forward. Thus, the responsibility of prudential supervision of the banks should be taken away from the central bank.

The Reserve Bank, on the other hand, claims that disclosure rarely provided early warnings that a bank is in trouble. In the words of Brian Gray, chief manager of bank supervision, "there is little evidence that the relevant information becomes available until it is too late to respond."

Gray cited the example of the State Bank of South Australia's losses early in the 1990s, which were initially stated at A$50 million, but ended up as A$3 billion.

The review process itself is a very interesting example of a visionary attempt to forge collective action and understanding in a very important economic area of the society. To some extent, the structure of finance in Indonesia is simpler, in that there are three, rather than four, regulatory agencies, especially after the 1992 Banking Law did away with non-bank financial institutions (LKBB) in the country. Since December last year, Bank Indonesia has also gained greater access to the supervision of insurance and other finance companies. Furthermore, the situation in Indonesia -- with the presence of several very large and powerful industrial-financial conglomerates, a determined political agenda targeting distributional concerns, as well as the significantly greater number of banks operating -- makes the story very much different.

After all, Indonesia is facing the same globalization forces and technological changes as Australia. As an intellectually democratic process with which to brace the potentially volatile future of global capital, the review process undertaken by Australia could be a useful model for Indonesia in setting its vision to meet challenges ahead.

The writer is Ph.D. student at the Asia Research Center, Murdoch University, Western Australia.