by James Eyers
A Senate committee will examine concerns raised by fringe political party the Citizens Electoral Council of Australia that a bill expanding the Australian Prudential Regulation Authority’s financial crisis powers may allow it to commandeer customer deposits.
The Senate economics legislation committee said last week it would look into the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2007 and take submissions until December 18. This came after the Citizens Electoral Council, which has been campaigning for many years on protecting depositors from regulatory “bail-in”, began contacting MPs in recent weeks to express concerns about whether the bill could compromise depositors’ rights.
“Before MPs vote on this bill they must demand to know if its broad language empowers APRA to bail-in deposits,” said Robert Barwick, the research director of the Citizens Electoral Council, which has around 2000 members and is influenced by the ideas of US political activist Lyndon LaRouche.
“Australians would revolt against any resolution regime that confiscates their savings to prop up failing banks, so MPs must ensure that this bill doesn’t legislate such powers under the radar.”
However, legal sources indicate it may be incorrect to interpret the provisions of the bill as giving APRA powers to declare that a particular instrument is capable of conversion or write-off. Rather, instruments will have to have contractual provisions within them that provide for their conversion or write-off before that occurs, one reading of the bill suggests.
The Senate committee wants to understand exactly what capital instruments are covered by the bill, APRA’s consultation process before it makes determinations, and the precise power the executive and parliament is ceding to APRA.
It expects to receive submissions or hear evidence from APRA, the Reserve Bank of Australia, the Australian Securities and Investments Commission and the banking sector.
Labor committee member Senator Katy Gallagher told a Citizens Electoral Council member last week that “Labor understands the significance of the changes that such a bill would make in terms of providing powers to APRA. We are consulting with stakeholders and will carefully consider the implications of the bill.”
As part of its supervisory functions, APRA works with banks on ‘resolution plans’ which set out how APRA will manage the failure of that institution.
Treasurer Scott Morrison said in August the new crisis resolution powers bill will “overhaul the powers of APRA during times of financial crisis” by providing APRA with “powerful, flexible and timely tools to resolve financial institutions in distress”.
The draft legislation (introduced on the same day as the Banking Executive Accountability Regime) will give APRA “an expanded set of crisis resolution powers that equip APRA to act decisively to facilitate the orderly resolution of a distressed bank or insurer”, the government added.
Yet the bill is not purporting to change the Financial Claims Scheme, which guarantees deposits up to $250,000. Australian banking law also has a system of “depositor preference”, meaning in the event of a bank failure APRA must direct the first distributions to depositors under the FSC, followed by all deposits in excess of the $250,000 limit. These will be repaid in preference to all other bank creditors, including bond holders or the Reserve Bank.
Mr Barwick said if the government “thinks APRA should have powers to bail-in deposits, they should be open about it, so we can have a public debate about bail-in versus the alternative approach of Glass-Steagall, which would ensure financial stability and protect deposits by separating ADIs from investment banking and all other financial services”.
The government’s bill follows a recommendation of the 2014 financial system inquiry, which called for more powers to be put into APRA’s “toolkit” to manage a crisis.
The FSI said this would ensure APRA could achieve an “orderly resolution” of a failing bank. The government has not proposed to create a statutory “bail-in” regime like the ones introduced in parts of Europe.
Global ratings agency Standard & Poor’s noted this month that Australia’s progress so far toward a European-style framework for statutory bail-in of senior debt “has been minimal”.
Among the Citizens Electoral Council policies is to create a Glass-Steagall-type law in Australia to ensure commercial banks are not able to take any significant risks with deposit funding. Glass-Steagall was a US law that separated investment and commercial banking activities in the 1930s; the key provisions were repealed in 1999.
The CEC also supports a national bank to boost the financing of rural Australia. It also believes the “risk weighting” system as applied by APRA has been a key reason for some farmers being denied finance from banks more interested in lending to mortgages, which has inflated a property bubble. It is also sceptical about the global Basel banking rules providing too much power to bureaucrats at the expense of the Parliament.