Congratulations to Cameron Clyne of NAB for last night’s Lowy Lecture, in which he called for a Son of Wallis Inquiry specifically aimed at addressing Australia’s addiction to offshore wholesale funding. In a strangely blunt and at times in-eloquent speech, Clyne nonetheless made perfect sense:
Australian banks have significantly reduced exposure in recent years and we have sat out of the offshore markets for extended periods when spreads were wide and credit demand was low. But our banks still regularly feature in the top 10 of global issuance which is disproportionate given we represent only two per cent of global GDP. We are reluctant to further increase that position but we do need to move towards more stable balance sheet settings required by regulators.
Some in the market may argue that currently we have no wholesale funding issues and that there are mechanisms in place to correct for any future contractions of global wholesale markets.
There is merit in that argument and today we have ready access.
But I believe there is also merit in taking a “no regrets” approach. Generating greater funding flexibility is a sensible response.
We should look at all our future funding needs and how we can protect the Australian economy and Australian jobs from any future international shock.
Maybe it won’t be a problem and next time we face a crisis the wholesale markets will remain open and accessible.
Maybe next time a Government guarantee will be enough for Australian banks to secure the required funding.
And maybe next time Australia sails through it.
But why wouldn’t we ensure we have “no regrets” about the actions we take now?
If we can take action now to ensure that Australia’s future growth is less exposed to the vagaries of the international markets then we should do it.
We can look at profit levels. We can look at the relationship between banks and the RBA cash rate. We can look at the amount of available credit.
But the first thing we must look at is our reliance on foreign wholesale funding.
There is no one single solution to this issue. We need to examine all options in all areas including:
Changes to the taxation system recognising that tight fiscal settings are unlikely to provide much flexibility to provide net tax relief. Some thought should be put into aligning the tax treatment of debt and savings.Reviewing how investment mandates may change given an ageing population which will require a greater need for diversification and more fixed income options. As OECD data shows, Australian Pension Fund allocations to Fixed Income are only 9% compared to an average of 53%.
Expansion of the domestic corporate bond market is currently receiving attention and that should continue. The advantages of a deeper corporate bond market include a lower risk funding model for the banking system, with less reliance on offshore funding, resulting in a system that would be less susceptible to offshore market closures and improved stability of economic growth. An important ingredient to assist the growth in corporate bond issuance is to take a more considered approach to the current levels of required prospectus disclosure requirements. Transparency is vital for retail customers to make informed decisions but a streamlined approach is something that
should be closely considered.Further development of the securitisation market and the treatment and role of prime residential lending on balance sheets remains an area of opportunity, particularly given models that operate offshore.
I acknowledge that addressing Australia’s overseas funding reliance is a very complicated issue as it has been for over 200 years. There is no simple, one-step solution that we can pull off the menu of change. It is more a degustation – bringing in all of the required changes across the system that will leave Australia better placed to deal with future crises. If we are to have a Son of Wallis inquiry or Grandson of Campbell or great-grandson of Martin then let’s ensure that it is far more targeted and focussed than the five inquries we have had since 2008. Let’s ensure that it leaves us well-positioned not only in dealing with our domestic funding issues but in supporting our growth into and with Asia
Unfortunately, the AFR’s Chanticleer column this morning argues that Clyne has in mind replicating the Canadian government-backed RMBS market, which has been championed here by Chris Joye and others. This is the mother of all bad ideas of course and if that is the likely outcome of an inquiry then let’s not have one at all.
Full speech below.
