FINANCE: by John BallantyneNews Weekly
Leading banker calls for Development Bank
, June 18, 2005
A new government-backed bank is needed to offer low-interest, long-term finance for infrastructure, families, small business owners and farmers, says Will Bailey, former managing director of the ANZ Banking Group.A new government-backed bank is needed to offer cheap, long-term finance to families, small business owners and farmers hurt by financial deregulation, a senior banking figure has urged.
Mr Will Bailey, former managing director of ANZ Banking (1984-92) and deputy chairman of Coles Myer (1992-95), was addressing a meeting of the Society for Australian Industry and Employment in Melbourne on May 31.
He said that a community-owned, government-guaranteed development bank could address major gaps in Australia's financial system. However, he warned that, before any move to create a new institution was undertaken, an inquiry to identify the winners and losers following financial deregulation would be instructive.
According to Mr Bailey, the financial deregulation, inaugurated 22 years ago by Labor's Bob Hawke and Paul Keating, had benefited most Australians, but had left behind perhaps up to 20 per cent of the population.
Mr Bailey called for the establishment of a community-owned development bank which could lend money on reasonable terms for:
- New small and medium enterprises that may have good commercial prospects but only limited assets.
- Farmers whose cash flows can vary according to seasons, pests, diseases, drought and commodity market prices.
- Government infrastructure development, spreading the cost of large infrastructure works across the generations that benefit from such projects.
According to Mr Bailey, and with the benefit of hindsight, the former Federal Labor Government under Hawke and Keating was a little naïve in the way it introduced financial deregulation after 1983.
It opened the doors selectively to foreign-owned banks, eager to make profits from Australia's huge investment opportunities; but did not require them to provide compelling evidence that they would contribute something of value to Australia in return. These newcomers ended up collectively losing billions.
Some of Australia's highly valuable specialist institutions, such as state-owned savings banks, felt compelled in this deregu-lated environment to launch themselves into markets in which they had no expertise, and ended up being badly damaged.
Mr Bailey said that while the free market in banking eventually provided Australians in general with greater access to finance, it unfortunately also eliminated some institutions which had provided real value to sections of the community.Development bank
A new community-owned development bank would address this gap in Australia's financial system, he said.
- It would best be operated as a statutory authority, at arm's length from government, but accountable to parliament.
- It would cost the Commonwealth Government (or the Commonwealth and State governments) up to about $100 million progressively over two-to-three years to provide seed capital to set up such a bank.
- Being government-guaranteed, like the Reserve Bank, with an AAA-rating, a development bank could raise capital on the wholesale markets at lower rates than commercial banks.
- Unlike private banks, it would not be under a constant obligation to generate high profits to keep shareholders happy. Profits would be used to build the bank's capital base.
- In addition, funds could potentially be raised from the huge pool of Australia's superannuation funds, of which about $100 billion is currently invested offshore.
Australia has succeeded in doing something like this before, according to Mr Bailey.
The former government-owned Commonwealth Bank of Australia, through its subsidiary, the Commonwealth Development Bank (CDB), and the Primary Industry Bank (owned by a consortium including banks and farmer organisations), provided long-term loans at very favourable interest rates to small and medium businesses and farmers. It did this, said Mr Bailey, "through keeping administration under tight control whilst being able to operate without the need to service capital at market rates". During its 30-year history, the CDB was able to help establish over 400,000 small and medium enterprises.
To achieve a similar purpose, the Federal Republic of Germany in 1948 established a development bank called the Kreditanstalt für Weideraufbau
(KfW). It supports smaller firms with low-interest, long-term credit, with repayment-free periods.
The KfW has also invested heavily in research and development, helping smaller German firms to gain a competitive edge over foreign rivals.
The KfW's investment strategy has paid off handsomely, according to Mr Bailey. In 2001, the KfW boasted a balance sheet of A$413 billion, making it one of Germany's biggest banks.
Long-term credit on reasonable terms, said Mr Bailey, is essential not only for smaller businesses, but also for small farmers, who otherwise are often forced to pay interest rates significantly higher than advertised market rates, owing to the risk factor in farming.