John Laker, Chairman - Senate Standing Committee on Economics, Canberra
I will be brief! At the time of our last appearance in May, global financial markets were experiencing yet another bout of severe turbulence in response mostly to concerns about the public finances and banking systems of some peripheral euro countries. The roller coaster ride was continuing.
In more recent months, however, sentiment in global financial markets improved significantly. Strong rhetoric from the President of the European Central Bank (ECB), backed up by the ECB’s plans to intervene in European sovereign debt markets to help protect the euro, gave markets some comfort as did the September announcement by the European Commission of its plans to establish a banking union in the euro area, under a single supervisory mechanism involving the ECB. Additional monetary policy measures in major advanced economies have also boosted confidence. Despite these positive developments, market sentiment remains fragile. A pattern has emerged where markets rally on announcements by European authorities but then lose confidence as the scale of the task facing Europe reasserts itself and tangible progress is slow to materalise.
Beyond Europe, concerns about the looming US ‘fiscal cliff’ and about the trajectory of the US and Chinese economies continue to weigh on global economic prospects. In its just-released World Economic Outlook, the IMF has concluded that downside risks to global economic forecasts have increased and are considerable. In its view, a key reason for recent setbacks to global recovery is that ‘… policies in the major advanced economies have not rebuilt confidence in medium-term prospects.’
Notwithstanding this difficult global environment, the industries regulated by APRA remain in sound financial condition. You will be able to read this judgment, and the reasons supporting it, when APRA’s Annual Report is tabled in Parliament over the coming period. It is the judgment, as well, of the IMF after two recent reviews of Australia — the regular Article IV Consultation and the five-yearly Financial Sector Assessment Program (FSAP) review, which evaluates the strengths and potential vulnerabilities of a country’s financial system and regulatory architecture. The two IMF reviews are still being finalised but the preliminary finding is that the Australian financial system is ‘sound, resilient and well-managed’. Of particular relevance to APRA, the IMF recommends that the authorities continue to emphasise intensive bank supervision. That has been the hallmark of our supervisory approach to date and we intend to maintain it.
Since we last appeared before the Committee, we have made good progress on the prudential policy front. Firstly, APRA has released final prudential and reporting standards that give effect to major elements of the Basel III capital reforms. The remaining elements will be in place by 1 January 2013, when the flag drops on the global implementation timetable. Australia was one of seven Basel Committee members to have published its final Basel III capital requirements by the end of September.
Secondly, APRA has finalised its reforms to capital standards for the general and life insurance industries, intended to make the standards more risk-sensitive and improve their alignment across regulated industries. Prudential standards have been released and new reporting standards will follow shortly.
Thirdly, APRA has released its proposed final MySuper package that gives effect to this element of the Government’s Stronger Super reforms. Although the legislation is yet to be finalised, release of the package is intended to give industry as much certainty as possible about the process for authorisation of MySuper products. APRA has also been consulting on its draft prudential standards for the superannuation industry and will be releasing final standards within the next few weeks. In addition, we are currently consulting on the new reporting framework for superannuation, which is also an element of the Government’s Stronger Super reforms.
We are now happy to take the Committee’s questions.