Transcript No. 3

Hon Peter Costello MP

Friday, 3 April 1998

12.00 pm

SUBJECTS: Interest rates, bank mergers, Japan, Gareth Evans, Wik, High Court

….welcome the announcement by the Commonwealth Bank today that it will be reducing business loan interest rates by a full 100 points, by a full 1 per cent. This means that their overdraft rates at 7.2 per cent match the overdraft rates which were offered by Westpac earlier in the year, in the week I’m sorry, and it means that the rates that are now available to business for lending are as low as they have been since we’ve been taking records. Since the early part of the 1970s. Now these are fabulous opportunities for business and it’s part of the Government’s bonus for good economic management, for increasing competition in the financial sector, that you’ve now got rates as low as 7.2 per cent for overdrafts. You can get term business rates even lower. And as a result of the Commonwealth Bank’s announcement today, for business, indicator rates have come down by a full 1 per cent. Great news for business, terrific opportunities, and evidence that the Government’s economic policy is starting to lock in low interest rates.

Can the rates go any lower?

Well, we’ve always said that if the Government does its part by getting the Budget right, and if official interest rates come down and stay down, and secondly if the Government does its part by promoting a competitive banking environment where margins come down, this is the important thing, margins are now starting to fall. A margin is the difference between what the bank pays to get the money and what the bank charges to put the money out. You’re seeing historical lows. These are the best business rates since we’ve been recording, since the early part of the 1970s. The best business rates in 25 years. And if we continue to do our part as a Government and promote competition, we can lock these sorts of rates in and we can produce a very competitive outcome for business.

Treasurer, you said that greater competition will be needed to allow a merger of the four major banks. Are you thinking in any way of relaxing that policy to allow the major banks to merge because of this increased competition? And if not, what would you be needing to see?

Well, the policy which I announced in relation to the financial sector inquiry still stands. That policy was that we would not allow any of the big four banks to merge with each other unless we were satisfied that there was sufficient competition, it would be a competitive outcome, and particularly, that there would be more competitive outcomes in the business lending area. Now we are beginning to see some more competitive outcomes in the business lending area with two of the banks. But I believe that we’ve still got to assess progress in relation to the business area and the financial system generally, so the policy stands. And we will be pushing ahead with the legislation to implement the new prudential system which I introduced into the Parliament in the last week or two.

Mr Costello are you concerned about the comments by the head of Sony that Japan is about to head into recession and pull down the global economy into a recession?

Oh, well, look, we have our own assessment of Japan. And as I think I’ve said on numbers of occasions the Japanese economy has now been flat for probably 6 or 7 years. Growth could be under 1 per cent. And we think that it’s important that stimulatory action is taken in Japan. I welcome the stimulatory action which was taken by the government last week. I think that the government’s obviously going to follow through on that. But it’s also going to be important for an opening up of the Japanese economy to give it better opportunity to recover. Make no mistake about this, we want to see a stronger Japan and we welcome moves by the Japanese government which can do that. But has our assessment changed in any respect in the last week? Probably not. This has been the situation in Japan now for 5 or 6 years.

What does the ratings decision in Japan mean for the Australian economy?

Look, Japan is an important export destination for us. It’s our number one export market and a strong Japan is good for Australia, make no mistake about that. But a subdued Japan, where it is now, is a continuation of the position that we’ve experienced for 5 or 6 years. So not much has really changed. The only thing you could say is that a pick up would have a positive effect. I don’t know that it can get much flatter in Japan.

Are you concerned about the falling tourism arrivals? New figures today show it fell 14 per cent in February.

Look, we always like to see high tourism arrivals. Make no mistake about that. And look there will be an impact in some Asian markets, particularly the Korean market – been a very big impact. But we’re also seeing some offsetting opportunities, particularly with North American tourism. I think the exchange rate has helped that. And we’ll just keep working harder for those tourism markets.

Treasurer, just with banking interest rate margins, do you think the banks can do better with margins on credit cards? Are they holding off there?

Well, there’s been some improvement. But I think in relation to credit cards part of the trick here is going to be getting increased financial competition against the banks. Let nobody be in any misapprehension about what we are trying to do. We are now engaged in the biggest shake up of financial regulation in Australian history. We are setting up a new body called the Australian Prudential Regulation Authority which is going to supervise banks and non-bank deposit taking institutions. We now have legislation in the Parliament to allow credit unions to issue cheques. We are going to open up the payments system to institutions which are outside banks. We are going to form a new regulator, the Australian Securities and Investment Commission, which will be responsible for consumer protection of financial products. These are the biggest shake-ups in the regulatory system, in the regulatory operation of the financial system, we’ve seen in Australia. Now if you get new institutions coming in, we issued a licence to the AMP to become a bank in the last two weeks – that’s never been done before. You’re starting to get new institutions coming in and get banking licence, non-banks starting to come into banks’ traditional areas, you will get improved competition. We’ve seen it in relation to the home mortgage market. We are seeing it in relation to the business market, and I believe we can see it in relation to credit cards as well. It’s all about getting new entrants, encouraging new competition, getting a more efficient regulatory environment and getting the benefits out to consumers. Look, have no doubt about this, why we want increased competition in the Australian financial sector is to get benefits for consumers. The benefits are there for the homebuyers, the benefits are now starting to come for business and other areas can profit from increased competition as well.

Treasurer, does that mean that fees will rise as margins start to fall and that bank profits will also, won’t be as high as they have been previously, and is that inconsistent with the Government’s desire to have the greatest level of share ownership?

Well, look, I’m not going to comment on anybody’s profits because as you know there are laws against that kind of thing and I always try and obey the law. But in relation to fees, no it doesn’t necessarily mean that because I think we can have increased competition in relation to fees as well. You see, let’s take credit unions: if credit unions can come into prudential regulation from the Australian Prudential Regulatory Authority, as I want to do, you would then have a credit union which is regulated by the national prudential regulator. There would be no second tier franchise for the credit union, as they currently have, a second tier franchise below the banks which have the Reserve Bank doing their prudential regulation. That’s got to be worth something to the credit unions. That’s got to be worth a benefit which they can pass on either by getting more competition on fees or on margins.

If you want some proof just think back to the home mortgage market, the home mortgage market used to be basically run by the banks, the big banks. You have got mortgage originators coming in, RAMS, Aussie Home Loans, cutting margins, increasing competition: banks follow. This is an important point, since our Government was elected, the standard variable mortgage interest rate has come down 4 per cent but official rates have fallen 2 . The remainder of the benefit was the shaving of margin as a result of increased competition. So you’re getting one good economic policy getting official interest rates down, fixing Beazley’s black hole, fixing the Budget, entering into the monetary agreement with the Reserve but, two, the increased competition shaving the margin. Both ways you look at it, it’s benefits for borrowers.

Mr Costello do you welcome Mr Beazley saying that Gareth Evans could have chosen his words better yesterday when he made comments about the Prime Minister?

Look it’s not a matter of brushing it off as a few ill chosen words. They were a disgraceful slur. What is the world thinking today when this slur has been put on the Australian Prime Minister by a person who used to be our Foreign Affairs Minister. That’s what’s happened here, the former Foreign Affairs Minister has put one of the worst slurs imaginable on the Prime Minister of Australia. And you want to talk about our image in Asia, what do you think that message is going to be. Now it’s not enough for Mr Evans to say well they were ill chosen words, they were wrong and disgraceful and the best words he could choose now is: I withdraw and I apologise unreservedly. And if he can’t choose those words then Kim Beazley better choose them for him. Mr Beazley wants to say he is interested in Australia’s reputation. If he wants to say that he is a leader who can discipline his frontbench he must immediately make Gareth Evans withdraw and apologise. That is what a leader would do.

Mr Costello has the Government calculated how much it will cost the Commonwealth to mount a legal challenge to the Wik legislation?

Well we have got an idea of ball park figures but it depends, of course, on how long the case runs and how many lawyers you’ve got on the case.

Well can you give us a ball park figure?

No I won’t.

Are you happy with the Prime Minister’s offer today?

Of course I am, he discussed it with me before he announced it.

It’s not money wasted?

Look it’s not money wasted because it’s going to happen anyway. The moment the legislation passes we have been told there will be a legal challenge. So why not get the legal challenge on and out of the way early rather than late, that’s the point and get the certainty of the High Court judgment. Otherwise you get the legislation through and everybody conducts their transactions under that legislation for a year or two and then they say well take it to the High Court. You’ve got a year or two’s uncertainty as a result.

…challenge to the amended legislation?

Well this is a proposal to allow the challenge to go ahead in relation to the Government’s legislation, to allow the High Court to actually pass judgement on it.

But will it be the same process with the amended legislation, wouldn’t it, and probably easier to achieve?

It’s going to be a challenge to the Government’s legislation to ask the High Court to actually determine its legality. Now you can’t ask in advance. The High Court won’t give an advisory opinion, it will only give a judgment when it affects real rights and real obligations, that’s a very long standing legal doctrine in relation to Australia.

But if you think the amendments that the Senate has made are so bad, why not put them to the legal test?

Because we are going to ask the Senate to reconsider those amendments, we’ve drawn the legislation, we are trying to get it through the Senate. We are not going to sort of walk out of here and say well we’ll accept Labor’s bill. Labor’s bill is the problem, that’s what we’re trying to fix.

Are you more optimistic about the passage of the bill since the negotiations over the last week or two?

Well I’m not sure that it’s right to say there have been negotiations. The Government wants to achieve certain policy objectives. Obviously the key person in relation to this is Senator Harradine. I’ve heard Senator Harradine say that he’s interested in looking at whether or not the objectives can be accomplished in another way, well that’s really a matter for Senator Harradine. Look we are going ahead with our legislation to try and accomplish our policy goals and that is our position, it still is our position. We are going to put it into the Senate.

Mr Costello, if you’re offering to….fund a High Court challenge against your own legislation, and you know a ball park figure, why won’t you tell us what it is?

Look it’s a couple of barristers for a couple of days. You know it depends on how much the barristers charge and whether it’s a couple of days or four days or five days. I tell you this, it is not going to blow a $10 billion deficit hole in my Budget.

It will have a bloody impact though, won’t it?

Well you know you’re talking very low sums here compared to…..

(inaudible)….double dissolutions cost?

What do double dissolutions cost $50 million. I mean I just, I don’t put a figure on it because I don’t know. It’s the cost of a solicitor or two, a barrister or two and a hearing for a couple of days, maybe a week for all I know, in the court. They charge a lot of money but they hardly bleed the revenue like some other things that we pay for. Thanks.