4 August 2016
Transcript - #2016095, 2016

Interview with Tom Elliott, 3AW

SUBJECTS: Banks to face Parliament

TOM ELLIOTT:

Scott Morrison good afternoon.

TREASURER:

G'day Tom.

ELLIOTT:

Had the banks done the wrong thing here?

TREASURER:

Well we believe they should pass it on but if they choose not to do that well it is entirely reasonable that they would explain that and what we have announced today would enable them to do just that.

ELLIOTT:

Why should they pass it on?

TREASURER:

Because the whole point of the Reserve Bank seeking to reduce the case rate was to see the impact of that flow through to the rest of the economy through the other rates that sit within the banks. That is the whole reason for doing it. Now it is not intended as a bank profit subsidy, it is intended to ensure you get movements on rates across the economy to support investment.

ELLIOTT:

Ok but you know as well as I do that the Reserve Bank does not lend money to the banks in fact that cash rate is the interest that the banks receive from the Reserve Bank for the cash they have on deposits therefore when it is cut the banks actually lose money out of it.

TREASURER:

The way it works is it acts as a price setter right across the market.

ELLIOTT:

Ok. Do you think that the banks' overall cost of capital has now been reduced as a result of what the Reserve Bank did?

TREASURER:

Well I certainly know and the advice I have from the Reserve Bank is that there are no external cost pressures for the banks that would justify them not passing this on.

ELLIOTT:

Do you want the banks to cut rates on deposits by a full 25 basis points?

TREASURER:

No I don't.

ELLIOTT:

Well why not? If we are going to cut the rates on which they lend money why wouldn't they cut the rates at which they pay on deposits?

TREASURER:

Well Tom if your argument is that by increasing the rates for term deposits they have and not for the general deposit rate and the cut to the mortgage and investor rates they have done is equal to the advantage, the cost advantage, they have had from the rate cut then I would say no I don't think it is. But the problem is there is no transparency on that and I think it's a really simple question that in the forum we have proposed the banks can answer that question honestly. Now if the banks are deciding they are going to absorb some of that to support their profits well that is a commercial decision for the banks but it is a decision that this process will enable them to explain.

ELLIOTT:

Why do banks have to appear in front of an economics committee? Why pick on banks?

TREASURER:

Well it is not about picking on banks Tom, what it is about is banks hold what is an effective, implicit guarantee on deposits through the financial contributions scheme. That would mean the Federal Government would have to take certain actions to support depositors. Now they are not like Woolies or Coles or any other private company that's out there. They have what the Prime Minister and others refer to as a social licence which they operate. They are a highly regulated sector and they play a central role in our financial system and indeed in cases like this when you have movements in rates as an action of monetary policy which is designed to actually support actions in the economy then you want to see that work. So all this does Tom – it doesn't make them do anything or not do anything but it certainly I think ups the ante on the requirement for an explanation.

ELLIOTT:

If the Reserve Bank put up interest rates as they have done plenty of times in the past, would you be urging the banks to increase their rates quickly and by the same amount?

TREASURER:

Again I would be urging them to explain whatever decision they took. See it is not for me to defend or explain the banks' decision any more than it is yours. I don't run the bank and neither do you. They do.

ELLIOTT:

I don't run it but for example my super fund I earn shares in the ANZ Bank and what I am interested with the ANZ Bank is them maximising the dividend they pay and by the way most superannuants in Australia and there are a lot of them as you know, they actually rely on bank dividends which is something else to think about here.

TREASURER:

Well of course it is. If you are sitting there as a bank shareholder – I assume through your super fund you are or you may be a bank shareholder yourself, I don't know it is none of my business. But if the bank appeared before the committee and says we took this decision so we could ensure this return on capital and ensure we would be able to pay this dividend or support this arrangement for our shareholders well you would say good on you. But if you are a mortgage holder or a depositor or someone else like that you may form a different view but you know and you can form your own view.

ELLIOTT:

Alright. Bill Shorten and the Labor party are saying let's have a Royal Commission, this proves we need one. Is there any chance of that actually happening?

TREASURER:

Well I would like someone to explain why that action proves we need one. Bill Shorten doesn't even know what his Royal Commission is into. One day it is on bank executive salaries, another day apparently it is on interest rates and their decisions on that – how they get a Royal Commission into that I don't know. Another day it is pursuing their financial advice models. I mean Bill Shorten doesn't have a clue what he wants his royal commission enquiry to be, he just wants to run around beating his chest talking about a royal commission into something he can't define.

ELLIOTT:

Do you think the threat of a royal commission might make the banks do what you want them to do?

TREASURER:

That is not the point of why you would have one I would have understood. I would have thought there would be some malfeasance you would be enquiring into. That is what a royal commission would do. We addressed that issue back in April with ASIC which has more than the powers of a standing royal commission and we beefed up its resources and powers so it could actually directly go and address those matters. See what we have been trying to do Tom is just deal with the problem and put specific responses in. So with ASIC we gave them the power and resources. With the Financial System Inquiry we dealt with the systemic-wide issues on regulation and David Murray did that report and we have responded to that report and we are implementing those recommendations. So now we believe there are issues around the transparency of the decisions that banks take as part of this overall system. The Reserve Bank Governor goes along to the House of Representatives' Economics Committee twice a year and twice in private. The APRA chairman goes along so I don't think it is an unreasonable thing and neither do the banks think it is an unreasonable thing to go along and provide an explanation.

ELLIOTT:

I know you are obviously very busy and have to go but just so I am absolutely clear what you want the banks to do is appear at least once a year, possibly twice a year in front of the Parliamentary Economics Committee and simply explain what they are doing – talk about funding rates, talk about deposit rates, talk about interest rates, that sort of thing?

TREASURER:

Yes and the prudential controls that sit across the system, to get their perspective on what is happening in the economy. Our banking system is critical to the strength of our economy particularly at a very difficult time like this. So we want a stronger banking system. We want a profitable baking system, we want a transparent banking system and we want one that has all of those things protected for the shareholders, the customers, for mortgage holders alike to ensure it continues to play the positive role that it does.

ELLIOTT:

Scott Morrison, thank you so much for your time.

TREASURER:

Thanks Tom.