Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2016-2017-2018
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Banking System Reform (Separation of Banks) Bill 2018
EXPLANATORY MEMORANDUM
and
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Circulated by authority of
Hon Bob Katter MP
Banking System Reform (Separation of Banks) Bill 2018
Table of Contents
Contents Page
General Outline ... ... ... . ... ... ... ... ... ... ... ... ... ... ... ... ... ...
Background to Bill's provisions ... ... ... ... ... ... ... ... ... ... ... .
Regulatory impact statement ... ... ... ... ... ... ... ... ... ... ... ... ..
Financial impact statement ... ... ... ... ... ... ... ... ... ... ... ... ... .
Summary of key provisions of the Bill ... ... ... ... ... ... ... ... ..
1. GENERAL OUTLINE
This Bill will separate retail commercial banking activities involving the holding of deposits, from
wholesale and investment banking involving risky activities. The Bill provides for such a separation
to:-
protect deposits;
end vertical integration, to protect depositors from banks trying to lure them into buying
services from the banks' other business;
ensure deposits are only used for normal lending, which will keep more money in the real
economy and available for banks to lend to productive enterprises;
stop banks from securitising mortgages--meaning on-selling them to other banks to be
bundled into risky derivatives--which will put a brake on mortgage fraud and excessive
mortgage lending to risky borrowers.
The effect of the Banking System Reform (Separation of Banks) Bill 2018 will be:-
1. to re-establish public confidence in the banking system;
2. to reduce risks to the Australian financial system by limiting the ability of banks to engage in
activities other than socially valuable core banking activities;
3. to limit conflicts of interest that arise from banks engaging in activities from which their profits
are earned at the expense of their customers and the national interest;
4. to remove explicit and implicit government guarantees for high-risk activities outside of the
core business of banking;
5. to regulate Australian Banks;
6. to strengthen Parliamentary oversight of the activities of APRA as the banking regulator;
7. to separate retail commercial banking activities involving the holding of deposits, from
wholesale and investment banking involving risky activities.
2. Background to Bill's provisions
The Australian and international media have featured repeated warnings from present and former
officials of the Bank for International Settlements, the International Monetary Fund, the
Organisation for European Cooperation and Development, and the U.S. Federal Reserve System, as
well as former leading bankers and other prominent commentators, that the world is headed towards
a far greater financial crash than that of 2007-2008.
This prospect has followed the progressive deregulation of the financial system since the breakup of
the fixed-exchange-rate Bretton Woods system in 1971. Deregulation led to the financialisation of
the economy, a sharp increase in national and household debt, manipulations of fluctuations in
currency exchange rates, and the creation of over $US1 quadrillion in speculative instruments
known as derivatives, such as those based on the mortgage-backed securities that provoked the
2007-2008 crash and are once again soaring in number.
A report from the Australian Securities and Investments Commission (ASIC) released 24 January
2018 confirmed the vertically integrated structure of Australia's banks, normal banking being
combined with financial advice, wealth management, stockbroking and insurance; the Financial
Services Royal Commission hearings have further established the extent of that vertical integration.
The conflict of interest inherent in vertical integration is evidenced by the fact, noted by ASIC, that
nearly 70 per cent of the funds that banks advised their customers to invest went into in-house
products sold by the same bank, despite the fact that nearly 80 per cent of the investment products
that bank staff were authorised to sell were from other institutions. Bank staff had a clear bias in
pushing their bank's products.
For more than a decade, Australia's banks have had a huge incentive to starve small businesses and
family farms of credit, and to foreclose on thousands of those enterprises even when they weren't in
default. APRA provided this incentive through its prudential rules, which lowered the "risk-
weighting" of mortgages compared with other types of loans, making home loan mortgages far
more profitable for banks than loans to productive business enterprises. It also motivated the banks
to commit outright mortgage fraud in their pursuit of increasingly risky borrowers, including over-
extended investors and "sub-prime" borrowers who couldn't afford repayments. Housing loans now
make up over 60% of Australian banks' lending, which, in the words of one financial researcher,
has turned the housing market into a $1.7 trillion dollar "house of cards".
The funds for such lending are increasingly sourced from overseas, resulting in Australia's banks
being heavily indebted to overseas interests and markets. Since deregulation, Australia's banking
system has become highly concentrated, dominated by four, too-big-to-fail banks, and vulnerable
to more than $37 trillion in little understood derivatives and hundreds of billions of dollars of short-
term debt.
Australia has never had a formal Glass-Steagall-style separation of investment banking from
commercial deposit-taking banking, but the Australian domestic banking system was not always
exposed to the level of risk it is today, as a structural separation effectively existed until the 1980s
due to a system of regulatory controls.
The United States introduced bank separation in 1933 through the Glass-Steagall Act, ending
vertical integration by separating commercial banks with deposits, from investment banks,
insurance companies, and all other financial services. The law was in force for 66 years, until Wall
Street banks succeeded in having it repealed in 1999. While Glass-Steagall was in effect, there were
no systemic banking crises in the USA; its repeal allowed banks to use deposits to underwrite the
massive expansion of financial speculation which caused the global financial crisis just nine years
later.
Australia needs Glass-Steagall type legislation to separate retail commercial banking activities
involving the holding of deposits, from wholesale and investment banking involving risky
activities.
3. Regulatory Impact Statement
The Bill will have a moderate impact as the regulatory authority and powers already exist in respect
of the existing regime of regulation of ADIs.
4. Financial Impact Statement
The bill has no significant impact on Commonwealth expenditure or revenue.
The Bill is intended to operate within the existing regulatory framework subject to Parliamentary
oversight of the Regulator, the Australian Prudential Regulatory Authority.
There will be a transitional cost for banks in the separation of the elements of their businesses and
as they adjust to the operation of the new regime as provided for in the Bill.
The compliance cost in relation to the new regime will be minimal as the regulatory authority and
powers already exist in respect of the existing regime of regulation of ADIs.
5. Summary Of Key Provisions Of The Bill
The Bill:
1. Prohibits banks from any affiliation with an entity that is not a bank. (Sections 7. 8, 9)
2. Prohibits any entity that is not a bank to engage in the business of receiving deposits. (Section
10(1))
3. Prohibits banks from investing in structured or synthetic products and products such as
derivatives and speculative ventures. (Section 10(4))
4. Limits the business of banking to retail banking and associated loans and activities. (Section
11)
5. Brings the Australian Prudential Regulation Authority ("APRA"), as the licensing and
regulatory Authority, and its prudential standards and actions and decisions generally, under the
oversight of Parliament. (Section 14)
6. Limits the Financial Claims Scheme to deposits with banks whose activities do not include any
prohibited activities. (Section 13)
Explanation of Provisions of the Bill
Purposes
1.01 Section 2 of the Bill sets out the purposes of the Bill.
1.02 The intention of the Bill is to reduce risks to the financial system and to protect deposits and the
interests of depositors by limiting the activities of banks and prohibiting the vertical integration of
banks with other businesses.
1.03 It further intends that the Commonwealth should regulate the financial system and ensure an orderly
flow of credit and currency to the Australian economy.
1.04 It further intends that the regulator, the Australian Prudential Regulation Authority, and its
determinations be brought under the direct oversight of Parliament.
Application to the Crown
1.05 The Bill is expressed to bind the Crown.
Regulation
1.06 The Bill provides in Section 6 that the Australian Government shall not implement any policy nor
propose any legislation which is incompatible with the purposes and provisions of the Bill.
Prohibition of Affiliation by banks with non-bank entities
1.07 Section 7 of the Bill prohibits a bank from being or becoming an affiliate of an entity which is not a
bank or being in common ownership or control of an entity which is not a bank.
1.08 The intention of the Bill is that a bank should not be associated in any way with an entity which is
not a bank. A "Bank" is defined by the Bill as an authorised deposit-taking institution in respect of
which an authority under Section 9(3) of the Banking Act 1959 is in force. Limitations on banking
activities are contained in Section 10, dealt with below.
1.09 The Bill by Section 7 also provides that a bank shall not issue bonds or securities with attached
voting rights the intention being that the creation of such rights should not allow external influences
to control the activities of a bank.
Eligibility to serve on boards of banks
1.10 The Bill by Section 8 prohibits an officer, director, partner or employee of any entity with which a
bank is prohibited from being affiliated, from holding such a position with a bank.
1.11 The Section provides that the Minister with the consent of the Parliamentary Committee can
determine that the restriction on bank directors shall not apply to a particular individual.
Termination of existing affiliations and activities
1.12 It is acknowledged that banks currently have affiliations which are prohibited by the Bill. Section 9
provides that such affiliations shall be terminated as soon as possible and in any event no later than
24 months after the date of commencement of the Bill.
1.13 Subsection (2) gives the Australian Prudential Regulation Authority authority to order such
termination prior to the expiration of the 24 month period if required to prevent undue concentration
of resources, decreased or unfair competition, or conflicts of interest and is in the public interest.
1.14 Subsection (3) gives the Australian Prudential Regulation Authority authority to extend the period of
24 months if the Australian Prudential Regulation Authority if in the Authority's opinion such
extension would promote the public interest and would not pose a significant threat to the stability of
the banking system or financial markets in Australia and is approved by the Committee created by
Section 14 referred to below.
1.15 Any extensions referred to in Subsection (3) shall not be for not more than 3 months at a time and in
any event shall not be for more than 12 months.
Limitation on banking activities
1.16 The intention of the Bill is to restrict to banks the business of receiving money on deposit subject to
repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon
request of a depositor.
1.17 Subsection (1)(i) of Section 10 provides that no person or corporation engaged in any business
prohibited to banks shall receive money on deposit in the circumstances referred to in clause 1.16
above.
1.18 Subsection (1)(ii) of Section 10 provides that no person or corporation other than a bank shall
receive money on deposit in the circumstances referred to in clause 1.16 above.
1.19 The intention of the Bill is to prohibit banks from being engaged in risky and speculative activities
and transactions such as derivatives. Subsection (3) of Section 190 accordingly prohibits banks from
investing in synthetic products and financial instruments in which a return is calculated based on the
value of, or by reference to the performance of, a security, commodity, swap, other asset, or an
entity, or any index or basket composed of securities, commodities, swaps, other assets, or entities,
other than customarily determined interest rates. The Subsection also prohibits banks from engaging
in the business of receiving deposits or extending credit for transactions involving structured or
synthetic products.
1.20 Section 10(4) sets out prohibited activities of a bank or bank holding company, the intention being to
limit the activities of banks to their socially valuable core banking activities and the prohibitions are
structured accordingly.
1.21 Subsection (i) prohibits banks from engaging in the business of a 'securities entity' or a 'swaps
entity', including dealing or making markets in securities, repurchase agreements, exchange traded
and over-the-counter swaps, or structured or synthetic products, or any other over-the-counter
securities, swaps, contracts, or any other agreement that derives its value from, or takes on the form
of, such securities, derivatives, or contracts.
1.22 Subsection (ii) prohibits banks from engaging in proprietary trading.
1.23 Subsection (iii) prohibits banks from owning sponsor, or investing in hedge funds, or private equity
fund, or any other fund that exhibits the characteristics of a fund that takes on proprietary trading
activities or positions.
1.24 Subsection (iv) prohibits banks from holding ineligible securities or derivatives.
1.25 Subsection (v) prohibits banks from engaging in market-making.
1.26 Subsection (vi) prohibits banks from engaging in prime brokerage activities.
1.27 Subsection (vii) prohibits banks from promoting or engaging directly or indirectly in any managed
investment scheme, including but not limited to the making of loans or granting of credit to, or in
any way supporting, either the trustee or manager of any scheme or the members of any scheme.
1.28 Subsection (ii) prohibits banks from making any loan or granting any credit to, or in any way
supporting, any person or corporation, where such support or loan or credit is intended to be
employed in the undertaking of any investment or activity prohibited to the bank by this Act.
1.29 Section 10(5) prohibits banks from acting as the medium or agent of any non-banking corporation,
partnership, association, business trust, or individual in making loans on the security of stocks,
bonds, or other investment securities to brokers or dealers in stocks, bonds, and other investment
securities or in any dealings whatsoever in respect of stocks, bonds, or other investment securities.
1.30 Section (10)(6) prohibits banks from underwriting any issue of stocks, bonds, or other investment
securities.
Permitted activities of banks
1.31 Consistently with the intention of the Bill to limit the activities of banks to their socially valuable
core banking activities Section 11 sets out the permitted activities of banks and is structured
accordingly.
1.32 Subsection (1) sets out the permitted core banking services as the business of receiving deposits, the
extension of credit to individuals, businesses, not for profit organisations, and other entities, the
discount and negotiation of promissory notes, drafts, bills of exchange, and other evidences of debt,
and the loan of money on personal security.
1.33 Subsection (2) permits banks to participate in payment systems, defined as instruments, banking
procedures, and interbank funds transfer systems that ensure the circulation of money.
1.34 Subsection (3) permits banks to buy, sell, and exchange coin and bullion.
1.35 Subsection (4) permits banks to invest in defined investment securities on the order of customers
subject to limitations on volumes which may be held. The Subsection further permits banks to invest
on their own behalf in securities under such limitations as the Australian Prudential Regulation
Authority with the approval of the Committee may prescribe, by regulation.
1.36 Subsection (5) provides that in considering the matters referred to in Clause 1.35 above Australian
Prudential Regulation Authority and the Committee shall give primary consideration the purposes of
this Act as set out in Section 2 of the Act and shall not approve any investment security which may
directly or indirectly enable any investment or activity prohibited to the bank by this Act.
Evasion of Provisions
1.37 Section 12 declares void and imposes penalties for attempts to evade the provisions of the Bill by the
structuring of transactions.
Financial Claims Scheme
1.38 Section 13 provides that the Financial Claims Scheme as created by the Financial System Legislation
Amendment (Financial Claims Scheme and Other Measures) Act 2008 shall extend to all accounts
held with any Australian bank whose banking business does not include any prohibited activities and
that the Scheme shall not extend to any accounts held with any Australian bank whose banking
business includes any prohibited activities in breach of the provisions of this Bill.
Australian Prudential Regulation Authority
1.39 The intention of the Bill is that the banks' regulatory authority should not be independent of the
direct oversight and control of the Parliament. Section 14 of the Bill accordingly contains provisions
to create a Parliamentary Committee to oversee the authority, and review and limit its decisions and
actions.
1.40 Subsections (1) to (6) create a joint Parliamentary Committee a joint committee of members of the
Parliament, to be known as the Parliamentary Joint Committee on Prudential Regulation, which shall
consist of 10 members, of whom 5 shall be senators appointed by the Senate and 5 shall be members
of the House of Representatives appointed by that House.
1.41 The appointment and eligibility for membership of the Committee and ceasing to hold office and the
Committee's powers and proceedings are provided for in Subsections (3) to (6).
1.42 Subsection (7) provides that the Committee shall hold public enquiries and report to the Parliament
on the activities of the Australian Prudential Regulation Authority and the operation of any law
relating to the Authority. The Committee will examine each annual report of the Authority and
report to the Parliament on matters arising from such report which the Committee considers should
be brought to the attention of the Parliament.
1.43 The Australian Prudential Regulation Authority has issued a series of Prudential Standards created
by the Authority pursuant to the Australian Prudential Regulations Authority Act 1998. Subsection
8(i) provides that copies of such Prudential Standards together with any explanatory documents
issued in respect of each shall be lodged with the Parliament within 30 days of the passage of the
Bill.
1.44 Subsection 8(ii) provides for the Minister to give the Authority guidelines in relation to the
performance of the Authority's functions.
1.45 Subsection 8(iii) provides that any Prudential Standard proposed by APRA after the commencement
of the Bill shall be subject to the approval of the Parliament and shall be void in the absence of such
approval.
1.46 Subsection 9 provides that either House of the Parliament may pass a resolution disallowing any
Prudential Standard and such Standard shall cease to have effect from the time of such resolution.
1.47 Subsection (10) is intended to remove any undue influence which may be exerted on the decisions of
the Authority by foreign banks or foreign authorities. The Subsection provides that the Authority to
APRA shall not consult with nor accept nor implement the recommendations or decisions of any
foreign bank or foreign authority including, without the consent of the Committee. It requires the
Authority to provide the Committee with full details of any request from such foreign authority or
bank or the basis upon which APRA seeks to undertake any contact with such institution or bank or
to consider any recommendation or decision of such bank or authority and to provide the Committee
with a copy of all communications with such bodies and a written transcript of any discussions.
1.48 Subsection (11) provides for co-operation between the Authority and State and Federal Police by the
provision of information and documents.
1.49 Subsection (12) provides for penalties for the evasion or attempted evasion of the provisions of
Subsection (11).
1.50 Subsection (13) provides that in making any determination pursuant to the Bill, the Authority and the
Committee shall give primary consideration to the purposes of the Bill as set
STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Banking System Reform (Separation of Banks) Bill 2018
This bill is compatible with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act
2011.
Overview of the bill
The Bill will:-
re-establish public confidence in the banking system;
reduce risks to the Australian financial system by limiting the ability of banks to engage in activities
other than socially valuable core banking activities;
limit conflicts of interest that arise from banks engaging in activities from which their profits are earned
at the expense of their customers and the national interest;
remove explicit and implicit government guarantees for high-risk activities outside of the core business
of banking; to regulate Australian Banks;
provide Parliamentary oversight of the activities of the Australian Prudential Regulation Authority
(APRA) as the banking regulator;
separate retail commercial banking activities involving the holding of deposits, from wholesale and
investment banking involving risky activities.
Human rights implications
This bill does not engage any of the applicable rights or freedoms.
Conclusion
This bill does not raise any human rights issues.
Hon Bob Katter MP