Australia’s Experience of the Crisis and key Lessons

Professor Deborah Ralston

POLICY RESPONSES TO UNFETTERED FINANCE IN THE GLOBAL ECONOMYInternational Roundtable on Reducing Vulnerability to Financial Meltdown: Assessing Alternatives

Ottawa, June 8-9th, 2010

Outline

«Australia’s regulatory system and response to the Global Financial Crisis (GFC)«Impact of the GFC on banking«Impact of the GFC on the economy«Looking to the future«Lessons from the low impact GFC

Australian regulatory system

Source: Ian Harper (2009) Navigating reform: Australia and the Global Financial Crisis, Finsia, Sydney.

Regulatory Response to GFC

Restore liquidity RBA expanded range of repo securities to include private sector securities such as RMBS. Term for repurchase agreements extended up to 12 mths. Sept. ’08, establish the Australian Office of Financial Management for objective of purchasing RMBS - “restarting” the frozen RMBS market.

Build confidence October ‘08 blanket guarantee of all bank deposits and debt. Fee based, opt-in guarantee scheme (for debt and deposits above $1 million) together with 100% guarantee for deposits <$1 m introduced November ‘08 for three years.

Reduce further instability

Ban on short-selling on the ASX Sept. ‘08 on all stocks until November 19th, and to financial stocks until May 25, ‘09. Tougher regulation of margin lending also foreshadowed.

Apply stimulus October ‘08 fiscal stimulus package announced and official interest rate reductions to offset economic slowdown. Federal guarantee scheme for borrowings by the State and Territory Governments for debt funding of infrastructure.

Bail outs No action

Source: C Brown and K Davis (2010) Australia’s Experience in the Global Financial Crisis, Australian Economic Review.

Money market interest rates

Source: RBA Monetary Policy Statement May 2010

Pricing the Bank GuaranteeLong-term Debt Guarantee Fees for

AA-rated Issuers*BpsBps Original Mid 2009

50

75

100

125

150

50

75

100

125

150Canada

Australia

South Korea

Denmark

US

Sweden

UK**

NZ***

NetherlandsSpain

Dispersion along horizontal axis is for presentation purposes only* Schemes where banks issue in their own name** RBA estimate based on CDS premiums*** NZ$ fee (subtract 20 basis points for foreign currency fee)Sources: BIS; RBA; central banks, debt management offices and guarantee

administrators; treasury departmentsSource: S Black and C Schwartz (2010) Banks Use of the Wholesale Guarantee, RBA, MCFS Melbourne Money and Finance Conference.

Impact on banking system

Changes in bank funding

Source: RBA Monetary Policy Statement May 2010

Securitisation

Source: Gary Sly Director, Debt Capital Markets, 2010, ANZ The Future of Securitisation ~ Banking Update

Impact on the economy

Australian Economy in 2010

« Economic conditions continue to improve (RBA May 2010).« Consumer and business confidence are high.« Household saving rate is higher than before GFC « Businesses’ investment plans subdued But minig investment at

record levels« Business credit outstanding has fallen but credit conditions have

begun to ease.« Housing market buoyant, prices – double digit growth rate over

past year.« Unemployment rate declined by around ½% from peak of 5¾%.« Exchange rate appreciation.

Business investment & exports

Source: RBA Monetary Policy Statement May 2010, p. 27

Housing demand and supply

Source: RBA Monetary Policy Statement May 2010, p. 31

Federal budget outlook

2009-10 2010-11 2011-12 2012-13 2013-14

Real GDP 2 3 1/4 4 3 3

Employment 2 1/2 2 1/4 2 1 1/2 1 3/4

Unemployment rate 5 1/4 5 4 3/4 5 5

CPI 3 1/4 2 1/2 2 1/2 2 1/2 2 1/2

Nominal GDP 2 3/4 8 1/2 5 3/4 5 1/2 5 1/2

Source: Australian Federal Budget 2010, STATEMENT 1: BUDGET OVERVIEW, page 1-1.

Budget balances of Australia and the G7, 2009-2015

Source: Australian Federal Budget 2010, STATEMENT 1: BUDGET OVERVIEW, page 1-8.

Government net debt for Australia and the G7

Source: Australian Federal Budget 2010, STATEMENT 1: BUDGET OVERVIEW, page 1-11.

Factors behind low impact of GFC

« Fiscal and monetary discipline - budget surpluses and high interest rate regimes prior to GFC accommodated fiscal and monetary stimulus

« Regulation - Single and effective prudential regulator, regulatory review and earlier testing

« Nature of Australian banking system - focussed on liabilities rather than complex assets such as CDOs, prudent lending, strong housing assets

« Luck - Strong economy at on-set of GFC, new government, keen to act swiftly and apply timely intervention