Tuesday, October 14, 2008

Where bipartisanship stops

At guaranteeing bank borrowings

The Opposition leader Malcom Turnbull has drawn a line in the sand on bipartisanship, making clear that stops at the government's proposal to guarantee the overseas borrowings of Australian financial institutions.

Mr Turnbull is happy with its offer to guarantee depositors’ funds. He modestly points out that he suggested a version of it. He is happy too with the plan to buy a further $4 billion of non-bank mortgages, an idea he has also championed.

But he is worried about the third element of the Prime Minister’s weekend response to the financial crisis. Underwriting the overseas borrowings of Australian banks, building societies and credit unions potentially exposes Australian taxpayers to very big losses.

“These are very large licks of money,” he said after Question Time. “We don’t know what the Commonwealth will do to make sure that that money is advanced safely.”

In Question Time he asked the Prime Minister four times how he proposed to ensure that the guarantees would not result in large bank losses being borne by the taxpayer...

The nearest Mr Rudd came to providing an answer was to say that each financial institution would be charged a fee for the guarantee determined in accordance with its individual circumstances.

Asked how the government would determine the health of each institution the Prime Minister said it would be worked out between the Treasury and economic regulators including the Australian Prudential Regulation Authority.

Mr Turnbull, himself a former merchant banker as the Australian head of Goldman Sachs, is sceptical of the ability of APRA to obtain the information.

His concerns are backed up by one of the fathers of APRA, Professor Ian Harper, now with Access Economics and in the late 1990s a pivotal member of the Wallis Inquiry which recommended its creation.

“It is clear from the legislation that Malcolm is quite right,” he said last night.

“The legislation says that APRA is there to protect the depositors of authorised deposit taking institutions. It is not there to protect the interests of wholesale creditors of the banks.”

“The Commonwealth will now become potentially a creditor of the banks. Protecting its interests is not normal business for APRA. It is a more difficult task.”

Asked whether the Treasurer could easily change APRA’s mandate, Professor Harper said he could.

“APRA is not an independent body, it answers to the Treasurer. He could legally instruct it to look for different things and ask different questions.”

But Professor Harper said such a “reconfiguration” would take time and would require more staff.

“A quicker way might be for the Commonwealth to borrow the money itself through the Office of Financial Management, and then lend the money to the banks. The AOFM is already used to examining creditworthiness.”