Critical Influences Shaping

Australias Financial Future

Banking Regulations Forum
November 2014

Finance sector: a major contributor to the

economy
Financing where we live, what we buy, where we work
$129 bn value add for financial services
150,000 jobs in banking
$23 bn in wages
$19 bn paid to suppliers, $84 bn paid to depositors, $21 bn paid
to shareholders
$12 bn state and federal taxes
Over $500 mn to community organisations

Five key influences

Prudential regulation
Tax
Technology
International competition
Corporate culture and ethics
This is a wider scope than just prudential regulation but all these
influences have regulatory elements.

1. Prudential regulation
What are we trying to achieve?
Safety and integrity, where consumers trust their money is safe
and the industry has their best interests at heart
A stable and resilient financial system

Efficiency, innovation and international competitiveness so the

industry can support investment, economic growth, jobs and
prosperity
The challenge is to strike the right balance
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Need for regulatory balance is explicitly

recognised
APRA under its founding legislation is required to meet multiple
objectives of - financial safety and efficiency, competition,
contestability and competitive neutrality.
APRA Chairman recently said - the financial intermediation
provided by banks is critical to the efficient functioning of the
economy.
ASIC is required to - facilitate and improve the performance of the
financial system and entities in it.

FSI will herald next phase of regulation

issue of bank capital
FSI health check ensure system is fit for purpose
FSI will address the issue of bank capital:
Current debate around bank capital levels
FSI Interim Report concluded Australian banks capital was
around middle of range relative to other countries
PwC study showed Australian banks capital was at or above
75th percentile relative to comparable banks
In any debate about capital there is a need for agreement on the
starting point
Arguments for higher capital must make clear the public policy
benefits

FSI and bank capital

Arguments for higher capital must acknowledge the potential costs
in terms of:
Higher borrowing rates for home and small business borrowers

Lower deposit returns for mum and dad depositors

Lower dividends for retirees who invest in bank shares, and
Reduced lending for a given amount of capital
We need to be mindful of the effect different capital requirements
for different banks can have on competition.

2. Tax reform
The tax system must promote economic growth by maximising
access to finance, facilitating competitive funding, supporting small
and medium businesses, encouraging saving and borrowing and
promoting investment and innovation.
Five criteria for a good tax system:
Growing revenue base to fund government
Internationally competitive to attract investment
Efficient, with low collection costs and difficult to avoid
Fairness, with tax paid reflecting economic benefit
Non-distorting and neutral for allocation of funds to different
sectors
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Tax reform cont

Proposals for tax reform must recognise political constraint.
New government spending measures must be more than offset by
reductions in spending.
We expect:

Issues paper by end year

Green Paper by mid 2015

White Paper by end 2015

Funding the economy

An issue for both the FSI and Tax White Paper.

Australia has a funding gap between domestic savings and

investment and spending - last year the gap was $47 bn.
Banks have reduced their reliance on offshore capital but still need
unfettered access to offshore capital markets.

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Funding the economy cont

We need a coherent funding strategy comprising:

Removal of impediments to facilitate free flow of capital across

borders

Removal of arrangements which favour one type of investment

or savings over another

Ready access to intermediated and non-intermediated capital

markets

Access to all forms of domestic savings on an equal basis

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3. Technological change
Internet and mobile technology is transforming the way we live and
work.
Opportunities for greater efficiency and emergence of new delivery
channels and products, increased choice, lower cost and greater
convenience for consumers.
Challenges from disruptive innovations, new business models, new
players, new products which can erode activities of established
business models.
Regulators must adapt to more rapid change.
Technological change is progress and must be embraced.

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4. Australia as a global financial centre

Sydney and Melbourne are slipping in their global rankings as
desirable financial locations and have dropped out of the top 20
most attractive financial centres (source Global Financial Centres Index, March
2014, Z/Yen Group).
Ranked well behind Shanghai, Shenzhen, Seoul, Tokyo, Singapore
and Hong Kong.

Building blocks are sound, with high quality legal and regulatory
infrastructure, political stability, excellent human capital, deregulated
markets, large funds management industry.
There is strong political support for Sydney as a regional finance
centre.
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Australia as a global financial centre

cont
Recent news is very promising:

Asia region funds passport pilot scheme to start in January 2016

Reviewed activities for OBUs from July 2015
Establishment of official RMB clearing bank in Australia
RMB Qualified Foreign Institutional Investor (RQFII) allocation
of RMB $50 bn for Australia
Australia/China FTA with preferential access for financial
services into China
Global infrastructure hub in Sydney
Big opportunities ahead!
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5. Culture, corporate governance, ethics

Increased regulatory focus on behaviour and culture, governance
and ethics.
Regulatory action to date includes:
Dozens of fines imposed in the US for misconduct linked to the
GFC
US$4.3 bn in fines in Switzerland, UK and USA for manipulation
of foreign exchange pricing
16 bn payout to customers in the UK for mis-selling of personal
protection insurance
In Australia, ASIC and ACCC are investigating an alleged
manipulation of the Bank Bill Swaps market

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Culture, corporate governance, ethics

cont
The regulatory response in Australia could include tougher
sanctions and increased penalties, and intervention into
commercial operations.
ASIC Chairman warns harsher jail terms and bigger penalties!
Industry needs to get out in front:
Need strong culture of high integrity and sound ethics
Need better systems to monitor behaviour and to deal with poor
conduct
Need incentive schemes which reward ethical behaviour
We want a reputation for integrity and professionalism
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The future looks good

More change is coming

It will bring more excitement and opportunities
With your hard work the financial industry will continue to
be a key driver of Australian prosperity

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