House of Representatives

Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006

Second Reading Speech

Mr Dutton (Minister for Revenue and Assistant Treasurer)

I present the explanatory memorandum to the Financial Sector Legislation Amendment (Trans-Tasman Banking Supervision) Bill 2006, and I move:

That this bill be now read a second time.

The government is committed to building on the CER (Closer Economic Relations) agreement between Australia and New Zealand to develop a single economic market based on common regulatory frameworks. This bill represents a significant step towards this commitment in the area of banking supervision.

The Australian and New Zealand banking markets are among the most highly integrated in the world. Australian banks have a combined market share of more than 85 per cent of the New Zealand banking market and New Zealand assets comprise around 15 per cent of Australian banks' total assets. Moreover, the same four banks are the major banks in both countries.

Given the high level of commercial integration, there is benefit in moving towards seamless regulation of banks to minimise compliance costs and promote efficiency. It is also important that the banking supervisors are able to more closely cooperate with respect to promoting financial system stability in each country given the interdependence of both financial systems.

In 2005, the Trans-Tasman Council on Banking Supervision was established by the Treasurer and the New Zealand Minister of Finance. The council is to promote a joint approach to trans-Tasman banking supervision that delivers a seamless regulatory environment for banking services as the first step towards a single economic market in banking.

Both the Australian and New Zealand governments agreed to implement legislative changes recommended by the council. They did this to ensure that the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of New Zealand (RBNZ) can support each other in meeting their statutory responsibilities.

This bill implements the council's recommendations. It also contains some small complementary proposals relating to secondments and financial system stability, to ensure that the council's recommendations work effectively.

New Zealand is progressing reciprocal legislative amendments through its parliament.

In Australia, the amendments will require APRA to do a number of things. First, APRA will be obliged to support the RBNZ in performing its statutory responsibilities relating to prudential regulation and financial system stability. Second, APRA must consider the implications of its actions for financial system stability in New Zealand. And, lastly, APRA must consult the RBNZ on these matters.

An administrator or statutory manager-which may be appointed by APRA to a bank in severe financial distress-is also required to consider the implications of a proposed action on financial system stability in New Zealand. In addition, the bill includes specific amendments aimed at ameliorating the risk that APRA could be required to interfere with the provision of outsourced services from an APRA regulated entity to a New Zealand bank.

As a result of these amendments, banks should be allowed greater flexibility with respect to the trans-Tasman location of their systems and functions than can be afforded under the current regulatory regimes of both countries. Importantly, this can be achieved without compromising the ability of regulators to meet their existing statutory objectives. This will bring compliance cost and efficiency benefits to banks with trans-Tasman operations, which should have flow-on benefits for customers (including depositors) and shareholders.

In developing these proposals it was taken into account that Australian banks operate across borders and need to be competitive in an increasingly global financial system. Many large international banks are able to centralise systems and functions to secure cost savings that contribute to their competitiveness. These amendments should create a regulatory environment under which impediments are reduced to banks choosing the location of systems and functions within the trans-Tasman market.

To complement these proposals, this bill amends the legislation to clarify that APRA can second staff from the RBNZ. This will contribute to cooperation between APRA and the RBNZ by simplifying the arrangements for such secondments.

In addition, this bill clarifies that one of APRA's objectives is to promote financial system stability in Australia. This has always been one of APRA's roles, but has not been explicitly noted in legislation. Inserting this objective into legislation now will assist in the implementation of reciprocal legislative amendments in New Zealand legislation. These amendments will also mean that Australia's legislation is more consistent in the way it refers to financial system stability in Australia and New Zealand.

The amendments in this bill promote a joint approach to trans-Tasman banking supervision and a seamless regulatory environment for banking services. This is consistent with the high level of commercial integration of the Australian and New Zealand banking markets and the interdependence of both countries' financial systems.

They enhance the framework for ensuring that trans-Tasman banks and financial systems remain sound while providing benefits to business.

The government considers that these proposals are not only imperative in making progress towards the Australia-New Zealand single economic market objective but also path-breaking internationally in the regulation of business with cross-border operations and activities. I commend the bill to the House.