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Tuesday, December 01, 2009

Don't support banks that don't support us - Fraser

Withdraw their guarantees

Former Reserve Bank Governor Bernie Fraser has called on the government to withdraw deposit and wholesale funding guarantees from banks who act more like speculators than deposit-takers.

Although he would not be drawn on naming the banks he had in mind he said guarantees that were "intended to allow depositors to sleep well at night" were at risk of being siphoned off into high risk activities that would leave the government liable should things go wrong.

Asked at an economic governance conference whether it would be easy to withdraw the deposit guarantees now that they were in place he replied "what governments give, they can take away," adding that retail customers would soon move their business away from banks that had lost their deposit guarantee...

He later told the Herald that it would be open for banks to split their activities into safe retail businesses and less-safe arms as the Commonwealth Bank had been up until the 1980s when it comprised both a savings bank and trading bank.

"I am talking about the big four as well as the entrepreneurial banks such as Macquarie," he said, adding the bank he provided consultancy services to, Members Equity, would not need to be split as it did not engage in risky activities.

The United States was going down that path by considering reinstating a version of the Glass–Steagall Act under which banks speculative arms were kept separate form their retail arms. The Act was repealed in 1999.

Asked whether he supported a new Wallis Committee type of inquiry into Australia's financial system he said he opposed the first one as Reserve Bank head and couldn't' see the point of one now.

He nonetheless lent support to one of the ideas put forward by academics proposing a new financial system inquiry saying he could see a case for a government run "people's bank" that would take deposits though the post office.

"All many Australians want is a basic banking service," he said. Whether the government or one of the private banks provides it, I would like to see it."

Treasurer Wayne Swan yesterday directed the Australian Office of Financial Management to invest up to a further $8 billion in Australian residential mortgage-backed securities in order to support non-bank lenders, but said he had decided against creating a permanent liquidity facility with the money given "mixed industry views."

Former Reserve Bank Governor Fraser also sketched out a path by which Australia's rate of compulsory superannuation contributions could be increased from 9 per cent to 12 per cent and ultimately 15 per cent.

"It can't happen now because the tax treatment of super unfairly benefits high income earners. Once the tax breaks are made fairer, as they might be in the wake of the Henry Tax Review, then it will be time to lift contributions. Until then, I can understand if the government has little enthusiasm for the idea."

Speaking at the same conference Reserve Bank board member Warwick McKibbin proposed sliding extra government revenue from the next mining boom into superannuation.

"The important thing is that we don't spend it now,' he said. "Locking it away in compulsory savings would be a good idea if the government won't agree to parking it in a sovereign wealth fund."

Published in today's SMH

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