Aust, to allow more banks in next year

Press, 12 September 1984, Page 36

Aust, to allow more banks in next year

PA Canberra New foreign banks may begin operating in Australia from early next year under a bank deregulation package announced by the Federal Treasurer (Mr Keating): _ ....

Mr Keating called for expressions of interest by foreign and Australian Sin an unspecified r of new banking licences to be granted in a “one-off’ tender early next year. He also announced that:

• A limited licence would be granted to the Bank of China; © Foreign investment policy guidelines for the merchant banking sector will be waived for 12 months to allow rationalisation of the merchant banks operating in Australia, and; • Abolition of the 30-20 rule, which requires life insurance offices and superannuation funds to hold at least 30 per cent of their assets in public securities and 20 per cent in Commonwealth securities in return for tax concessions.

Mr Keating told journalists that the granting of new licences to .foreign banks would dramatically change the Australian financial system and Australians no longer would have to feel like mendicants when they approached banks for finance. The Government wanted to create the most competitive environment possible, so it would not specify in advance how many licences it would grant, and would not set standards to be met by the applicants. “We’re not interested in a clutch of applications meeting minimum acceptable standards,” he said. “We want the banks and the other institutions who will submit applications to tell us what their strengths are and what they think they can do for the Australian economy.”

Mr Keating also announced that the Banks (Shareholdings) Act would be amended as soon as practicable to increase the individual shareholding

limit in banks from 10 per cent to 15 per cent, and to allow exemptions from the higher limit in the national interest.

“The Government intends to approve such exemptions to facilitate the entry of new banks,” Mr Keating said. It would seek to achieve a minimum of 50 per cent Australian equity in new

banking ventures, but would be prepared to consider proposals with less than 50 per cent local ownership where significant benefits would be brought to Australia. New banks would need to be “of sufficient size and expertise to offer substantial banking services in effective competition with existing institutions”. Applicants will need to have a minimum paid-up capital of sAust2s million (5NZ41.2 million); proven prudential history and competency, and all substantial shareholders will have to give a commitment that their involvement in a new bank will be more than temporary and that they will be able to contribute extra capital if required in the bank’s formative years. Mr Keating said applicants would be able to propose more than one ownership structure in their proposals for new banks. “If foreign applicants believe they have a strong case to support an equity structure at variance with the desired level of Austra-

lian equity (50 per cent) they may submit an application on that basis, together with supporting reasons,” he said. The Bank of China will be treated as a special case, with the terms of the limited licence to be negotiated between the Australian and Chinese Governments.

The bank’s authority to operate in Australia was revoked in 1972, but will now to be restored to authorities in mainland China after a request from the Communist Government in Beijing. Mr Keating did not indicate how soon the banking authority would be restored.

Mr Keating said that applicants for new licences would be given about 10 weeks to submit their proposals. Approval to the successful applicants would be given by the Federal Cabinet in the New Year.

The applicants would propose to the Government the size and type of branch networks they planned. The Treasurer said he doubted that many would want to replicate the suburban branch structure of the domestic banks but he expected most would operate at least in the major capital and provincial cities. . “There will be no limitation by the Government on that.”

“It will be a matter of what the banks believe will be their commercial limitation — their need for access to deposits,” he said, adding that the Government would like to see new banks offer a wide range of services.

The Government wanted institutions which were strong financially, and this meant there would be few Australian institutions with this capacity. “By and large the industrial companies have not wanted to participate in banking,” he said. “The ones which have been financially strong have not wanted to participate in banking because they are serviced by so many banks themselves. “The large mutual societies, (such as life

offices) have expressed an interest but have never been accomodated by former governments and on this occasion these guidelines would accomodate such institutions.

“There is a very severe limitation on the number of Australian institutions of financial strength who could mount effective competition in the Australian banking system. New banks with foreign ownership will have to be Australian subsidiaries, not branches, of foreign banks. This means the banks will be subject to prudential supervision by the Reserve Bank of Australia and local shareholders and depositors will be protected from any exposure of the parent banks to Third World debt and other risks in the international banking scene. “If there happened to be some pressure upon shareholders’ funds in respect of sovereign debt in some parts of the world we would be insulated from that by virtue of the fact that the capital would be subscribed here from day one under a local subsidiary,” Mr Keating said. In the merchant banking sector, Mr Keating said the Government had decided to set aside its foreign investment guidelines for 12 months to allow this section of the financial community to restructure.

Parts of the guidelines to be waived are:

© The “Australian opportunities test”, which requires that Australians be given an opportunity to bid for interests for sale in merchant banks; ® The substantial economic benefits test; • Requirement for some merchant banks to establish an "effective partnership” with Australian interests under foreign investment policy, and; • All existing conditions requiring the introduction of Australian equity into existing merchant banks. Mr Keating said any proposals to estabish new merchant banks generally also would be freed from present policy requirements in the next 12 months.

Restructuring of the banking industry had led to market pressure for restructuring of the merchant bank sector.