| House of Representatives Standing Committee on Economics
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Chapter 2 Monetary policy and other issues
Since the committee’s previous public hearing in February 2012, global
conditions have varied, with a general tendency towards weaker growth. The
problems of the European economy remain unresolved, so growth throughout the
Eurozone has been constrained, while the economy of the United States has grown
at a modest pace. Growth in China also eased to a more sustainable rate.
The IMF forecasts world GDP to grow at a rate of about 3½ per cent in
2012, before increasing slightly next year. The Governor advised that this
forecast seemed reasonable at this stage, ‘though the risks still seem weighted
to the downside’.
There have also been episodes of anxiety within global financial
markets. There was a general increase in aversion to risk, which saw bond
yields on some European government debt rise, while yields for German, US and
UK sovereign debt declined to record lows. Australia received a portion of the
capital flight to safety and market yields on Australian sovereign debt
declined to their lowest levels since Federation.
The Governor summed up the global situation by saying that:
It is worth noting that we have still not seen thus far the
sort of collapse in production and trade across a wide range of countries that
was observed in 2008. The global slowing we have seen has so far at least been
of the more ordinary variety. That is not to make light of these developments;
only to keep them in some sort of perspective.
The Governor advised that Australia continued to experience reasonable
overall growth, relatively low unemployment and low inflation. The governor
explained that the Reserve Bank board had reduced the cash rate in May and June
2012, by a total of 75 basis points. As a result, borrowing rates are a now a
little below their medium-term average. Australian growth rates remain close to
trend and the rate of inflation is consistent with the bank’s target.
The Governor stated:
Looking ahead, the peak of the resource investment boom as a
share of GDP, the highest such peak in at least a century, will occur within
the next year or two. After that the rate of resource investment is likely to
decline while the export shipments of the resources themselves will pick up. By
then we might expect that some other sectors that have been weak of late, like
residential and non-residential construction, might be starting to pick up.
Overall growth is forecast still to be close to trend, albeit with a different
composition from that seen in the past year or two, and inflation consistent
with the target.
When questioned by the committee about how current Australian conditions
compared to the past, the Governor summed up the nation’s present situation as
...we have an unemployment rate of a bit over five per cent;
core inflation is two per cent; our government is AAA rated...our banks are
strong; and we have been given, by the global economy, a huge gift, really, by
the terms of trade rise...that is a very respectable position.
Following the re-emergence of anxieties about both the sustainability of
government budgets and the stability of the banking sector in the Eurozone,
global growth slowed in 2012. This slow-down was especially marked in the
Eurozone in the June quarter.
Following this development in the June quarter, forecasters have revised
down their forecasts for global growth. The IMF’s most recent forecast (in
April) cut global growth by 0.1-0.2 per cent. The IMF now forecasts global
growth of 3.5 per cent in 2012 and 3.9 per cent in 2013.
Australia’s key trading partners are forecast to grow a full percentage
point above the global rate in 2012 and 2013. Falling global growth has led to
falling global demand, with a consequent fall in commodity prices.
The Chinese economy has continued to grow at a marginally slower, but
more sustainable, rate than previously. Overall export growth has slowed, in
particular exports to Europe, but exports to the United States and emerging
markets outside of Asia continue to grow. Domestic demand within China
continues to grow. There has been a moderation in investment levels in
trade-exposed industries, accompanied by an increase in investment in
industries that cater for domestic needs alone.
In Japan domestic demand has grown, with motor vehicle sales staying at
a high level and construction growth increasing. The latter is an effect of
reconstruction spending. In India, GDP growth slowed to 5½ per cent over the
year to the March quarter, which is well below the average of the past decade,
with investment continuing to shrink and household consumption growth easing.
This was brought about by relatively tight monetary policy aimed at reducing
inflation. Rupee depreciation added to cost pressures and prices for food are
expected to rise, following a disappointing monsoon.
The outlook for Australia has barely changed since the May Statement. Real GDP
growth is expected to slow over the second half of 2012, as growth in domestic
demand in the first half of the year moderates. The forecast for growth in the
second half of 2012 is similar to that in the May Statement, a surge in growth in the first
half of 2012 has lifted the forecasted GDP growth over 2012 to 3½ per cent.
This is expected to moderate a little in 2012, when the economy is expected to
grow at around 3 per cent over 2013 and 2014.
The outlook for inflation is expected to remain around its average over
the inflation-targeting period. Inflation in the prices of tradable items is
expected to rise as a long-term effect from the earlier appreciation of the
exchange rate wanes. Together with the increase in the price level arising from
the introduction of the carbon price in July, this is expected to push
underlying inflation into the top half of the inflation target range over the
year to mid 2013, easing to the middle of the target range thereafter. CPI
inflation is expected to rise to 3 per cent over the coming year (as a result
of previous volatility in fruit and vegetable prices and the carbon price)
before also returning to the middle of the target range over the remainder of
the forecast period.
Table 1 RBA Output growth and inflation forecasts
Non-farm GDP growth
assumptions include A$ at US$1.06, TWI at 79 and Brent crude oil price at
US$108 per barrel.
Bank of Australia, Statement on Monetary Policy, August 2012.
Australia faces an important risk from developments with the exchange
rate, which has been high for some time. There is a possibility that the
persistently high exchange rate may exert a more contractionary influence on
the economy than historical relationships would suggest.
The bank acknowledged the limitations of forecasting. In his opening
address, the Governor admitted that:
At a time of significant global uncertainty and of important
structural changes in the Australian economy the degree of confidence we can
attach to particular forecast is unavoidably reduced.
The committee sought the Governor’s advice on the precision of the
bank’s forecasts. The governor responded by stating that ‘we cannot have great
confidence in anybody’s individual forecasts’, but we should, instead, approach
forecasts as ‘prudent estimates’.
The committee explored the resilience of the Australian economy and the
likely impact of possible shocks. The Governor stated:
We are still fairly well equipped to handle some of the
things that could go wrong—some of the things to do with, say, the need for
foreign funding of the banks. I think our reliance on that is now lower than it
was four years ago when, under what you would have to say was an extreme stress
scenario globally, we coped. Because of the way the banks have changed their
funding structure since then, we are probably in a better condition than we
The Governor noted that the household sector was managing its debts very
well. The Governor explained that scenarios to test the resilience of the
banking system are routinely carried out by APRA. Such scenarios might involve
a recession, a major downturn in house prices or rise in unemployment. The
Governor insisted, however, that there was no reason why we should not remain
quietly confident that the Australian economy would be able to manage such
stresses and reassured the committee that the system here ‘remains well and
Inflation targeting and monetary policy
The committee sought the bank’s advice on the possibility that the
current intervention of the European Central Bank (ECB) to counter the ongoing
financial/monetary crisis in Europe might set off inflationary pressures. The
Governor responded to this by saying:
That is a very important question because, in anything
approaching normal times, for the central bank to be contemplating large-scale
purchases of government debt in the market and so on, and putting the amount of
liquidity into the system that they already have—let alone what they do in the
future—every textbook I ever read said that in the long run and even in the
not-so-long run that would be inflationary....the thing is
that we are not in anything like normal times...it has to be extraordinary
times for them to think about this and, even within the system, it is probably
not without its controversy. I think analytically the thing there is a
potential downside scenario that would be deflationary. I think that is the
idea, and that must be headed off, if at all possible, because that is very
damaging. So what they are doing is certainly inflationary compared with that
real deflationary possibility, and if they get it right they will keep
inflation just positive but not high. 
The RBA advised that governments could not solve the European economic
problems by themselves; neither could the ECB do so alone. Together, however,
they could. The RBA noted that the Europeans were making progress and that the
support of the ECB was probably critical to the success of the whole process.
The size of the intervention is significant with the ECB (as well as the
central banks of Japan, the UK and the US) increasing its balance sheet by up
to 20 or 30 per cent. Under normal conditions, this would be inflationary, but
the bulk of the money in these swelling balance sheets was not doing anything
but was sitting idle, and, hence, was not contributing any inflationary
pressure on prices. So the intervention was ‘not really doing very much to the
global economy, other than forestalling a serious crisis’.
The committee noted that the BIS Shrapnel annual report for 2012 found
that Australian banks were the most profitable in the developed world for the
second consecutive year and wondered to what extent Australians might need a
greater degree of banking competition. The committee was interested in finding
out if this profitability was merely a function of other banks in other parts
of the world doing poorly, rather than Australian banks gaining unwarranted
profits. The Governor stated:
As far as I know, it would still be the case that the return
on equity to bank shareholders is good, but there are various other parts of the
listed sector where it would be similar. So, on that test, I am not sure it
would be obvious that profits are excessive...
The Governor warned that people appeared to have a preference for
exploring this issue through ‘the prism of mortgage finance’ alone.
While this is an important issue, there are other considerations that need to
be taken into view as well, such as the interest of depositors. The Governor
noted that for many years depositors received limited returns by today’s
standards, while at the moment there is considerable competition between banks
to secure deposits. In the Governor’s words, ‘the depositors, with a bit of
shopping around, enjoy quite considerable competition for their money. That is
not something to be ignored or sneezed at.’
The Governor summed up his position by stating that to gauge the true
nature of competition in the banking sector we need to look at both the
provision of mortgages and business finance and at the receipt of deposits.
This holistic perspective is best.
The committee sought the Governor’s advice on the nation's contingent
liabilities in relation to the bank guarantee deposits, their value and the
charge the banks pay for that service. The Governor advised
that there were a number of guarantees in place: a guarantee for wholesale
funding (which attracts a charge), a guarantee under the Financial Claims
Scheme of ordinary deposits up to $250,000 (which attracts no charge) and
possibly a price guarantee, as well. The Governor was not able to say whether
any of those are still outstanding. The Governor estimated (from memory) that
the total amount of the guaranteed wholesale obligations peaked at around $173
billion and is about $90 billion now. The RBA noted that the total value of the
deposits which have been underpinned by the financial claims scheme is now
around $620 billion. This is down from $780 billion because the cap on the
Financial Claims Scheme came down from one million to $250,000 and there are
still outstanding around $32 billion of state government debt, which has been
guaranteed. To date the government has collected nearly $4 billion in revenue
in guarantee fees.
The committee asked the bank about the relationship of these sums to
national GDP. The RBA noted that if all the various liabilities were added up,
you would get a number that is close to $980 billion, which is the equivalent
of about 75 per cent of GDP.
The committee asked if there has ever been a period in Australia's
history when contingent liability was at 70 per cent of GDP. The Governor
advised that public debt liabilities of public debt were in excess of 100 per
cent of GDP, during wartime. The Governor went on to explain that the critical
factor at issue is the similarity between the guarantee scheme and an insurance
scheme: it is the expected amount of pay outs, not the gross volume of
guarantees, which is important. Furthermore, the Financial
Claims Scheme works so that if an institution is wound up, its assets would
repay the depositors first, or they actually repay the scheme first because the
scheme is paid out to the depositor. If there were not enough assets to cover
obligations, then a levy can be put on the rest of the industry. Thus, there is
a funding mechanism there to assist the government to pay. Finally, it is unlikely
that any government could stand by and allow financial institutions to fail at
the expense of their depositors. In the Governor’s words: ‘...even if you did
not have an explicit guarantee, you cannot just assume that there would never
be any possibility of the taxpayers being on the hook in a big enough crisis.’ 
The committee sought the Governor’s advice on progress with an
International Monetary Fund (IMF) review of the Australian banking system.
The Governor responded by stating that the bank has met with them, various
processes were undertaken and that ‘I do not think there are serious concerns
arising from that work’. One of the staple questions raised by such a review is
the foreign funding for the banks coupled with the housing story. The review
process is not yet complete, so the Governor was not able to elaborate in any
great detail, but he did reassure the committee that ‘I do not anticipate there
being serious concerns arising from that when it is finalised’.
The committee referred to the current debate in the press about the
merits of intervention in the exchange rate and sought the Governor’s views on
whether or not Australia should pursue a similar policy to that of the Swiss.
The Governor advised that overseas demand for Australian sovereign debt has
been strong; foreigners now hold nearly 80 per cent of the stock of Australian
government debt. By global standards, the volume of that debt is not large, but
it is rated AAA standard and offers a yield which is quite attractive to the
alternative on offer in much of Europe, which is now zero or negative. Furthermore, the flow of overseas investment into Australia is
now greater than it once was because ‘generally rates of return overall in this
country are attractive’.
The Governor advised that the Swiss case is very different to ours.
Switzerland is in Europe and they have a very open economy, so a very large
share of their GDP is in the traded sector. They are experiencing consumer
price deflation and their interest rates are at nothing. The Swiss National
Bank's reserves are now approximately the equivalent of 70 per cent of
Switzerland's annual GDP; Australia’s reserves are $45-odd billion, a tiny
fraction of Australia's GDP.
The Governor warned that the risks involved in currency intervention are
not inconsiderable. While such a policy may be plausible, in extremis, ‘it is a
big call and it is not a call that we have felt should be made to this point in
The committee sought the Governor’s views on whether the value of the
Australian dollar is distorted. The Governor insisted that the current value of
the dollar is not necessarily a distorted one and that the underlying rationale
for the present condition was that global markets found in Australia an
attractive place to invest: ‘I think there is more tendency now for some
official flows seeking high-quality assets.’
The Governor went on to note that in his opinion, the Australian dollar
‘...trading a bit above where I would have thought it would
be... I would say it is probably a little on the high side, but in terms of the
statistical relationships you can fit you cannot actually say that error is all
that significant. It is just my instinct that suggests that it is a bit on the
The Governor also advised that one’s perspective of the value of the
dollar depended in large part on our understanding of the wider economic
context, the situation with global relative prices. In the Governor’s view:
If you really think the whole thing is going to go away imminently—the
mining boom is going to completely crash, the relative price shift is not
there, the whole thing is not going to persist—then the Aussie dollar in that
scenario presumably would need to be much lower than it is. It probably will go
there if that scenario unfolds—that would be my guess. But in the interim, if
that was your view, you would probably be worried that it is too high.
The committee was interested in the bank’s views on the valuation of the
capital expenditure pipeline and forecasting for capital expenditure (CAPEX) in
general. The Governor stated that there were no recent developments that might
cause the RBA to revise its expected profile. The RBA noted that CAPEX will
peak at a bit over nine per cent of GDP, which is equivalent to about $145
billion per annum over the next two or so years. The Bank warned that we need to
distinguish between different types of projects and how we come up with these
sorts of numbers. There are two types: those which big resource companies have
made a very strong commitment to and those without a firm commitment.
The committee asked the Governor to comment on the recent statement by
the Treasurer, to the effect that this is the first time that Australia has had
a AAA credit rating from all three major credit agencies. The Governor advised
that he did not know – he had not checked the number of agencies involved in
the past and insisted that:
I do not want to comment on things that the Treasurer said...for
most of its history, apart from a period from somewhere in the mid-nineties
through to about 10 years ago—I cannot remember when the upgrade
happened—Australia has been known as a AAA country, and so it should have been.
The committee also asked the Governor to clarify matters regarding
inflation. The committee was puzzled by the apparent disparity between the
bank’s public statements and public expectations, noting that while the statement
on monetary policy notes about a two per cent on tradeable prices underlying
inflation to its lowest level in the late 1990s, the public debate is about the
rising costs of living and the rapid increases in prices. The Governor
I have not seen evidence of late to
suggest that there is a dislodging of inflation expectations. On everything we
can measure they look like they are fine... There is always prominence given in
the media to the things that have gone up...People are invited to focus on the
news that is bad. That is the nature of things. We can lament that, but I am
not sure we have much hope of that changing. But I do not think that at this
point we have a significant problem with inflation expectations being
excessive, as best I can judge.
The committee referred to a recent RBA publication that claimed that
there are signs that productivity growth has picked up over the past year.
The committee asked the Governor to what extent he thought that this is
within-sector productivity growth and what were his views on the productivity
The Governor advised caution, on the grounds that it is premature to
become preoccupied with this, because productivity is notoriously difficult to
measure. Furthermore, in order to comment with any confidence one would have to
have low-frequency data. Thus we cannot be really sure at this stage if we have
had a slowdown in productivity yet. This will be obvious several years after it
has actually begun.
The Governor stated:
Personally I think it is to be expected that we will see
higher productivity growth performance in this period, because I think that is
really what structural change is. It is almost the definition of it. So I think
it is happening...So my judgment would be that I believe it is likely to be happening.
In relation to unemployment, the committee questioned the Governor about
variation by region. The Governor advised that the bank tracks the dispersion
of the rate of unemployment. There are quite a large number of regions where
you can get this. On the basis of the figures available at the hearing, about
half the regions have unemployment at five per cent or less; 90 per cent of
them have unemployment less than seven per cent as measured. There are very few
regions, if any, with double digits. This confirms that the situation is indeed
In addition, the committee wanted to know if the decline in the terms of
trade would reduce the extent of the patchwork nature of the economy. The
Governor replied that:
Yes, I think it is fair to say that, to the extent that the
impetus for growth shifts away a bit from where it has been to be more broadly
focused, that is probably right: you might get some reduction in the so-called
patchwork. In saying that, I think it is important to say as well that it is
always a patchwork. It is not and never has been a seamless garment. There is
always a patchwork nature. 'Patchwork' is a new word we have coined and it is a
reasonable description, but it has always been there.
The payments system
The committee noted that the Payments System Board had recently made
some comments in a release with respect to multifunctional cards and
multi-network debit cards and that the Board appeared to have concerns about
whether or not EFTPOS is able to take advantage of R&D that four-party
schemes have undertaken with respect to contactless payment systems. 
The committee asked the Governor for his advice in particular what his general
view was concerning the IP that is being developed by the four-party schemes
and whether or not EFTPOS should be able to piggyback on developments in
contactless payments systems.
The Governor responded that he did not have a strong view about the IP
issue and that the Board's starting point is an acknowledgement that the
ability of a card to function in more than one way is a good thing. Ideally, the
Board would prefer the industry to co-operate together to find a way so that
this could happen. The Governor was disinclined to support regulatory
According to the Governor, the key issue with contactless cards is the
ability for some of the schemes to reduce the ability of the merchant to help
steer the consumer by networks. The board’s position has been that, while the
four-party schemes have got fine products, a legitimate business model and so
on, we must ensure that both the consumer and the merchant are suitably
empowered with choice as well. This is a potential issue with contactless cards
because they are pre-programmed to go through one network. 
The Governor characterised the state of discussion about these issues as
follows: much of the debates come down to the piece of plastic per se.
Who owns it? Whose logo can be placed upon it? Every party seems to claim that
they own it: the schemes, EFTPOS and the issuing bank alike.
In the Governor’s view, the optimal outcome would be for consumers to
have a card which could function through more than one network, where no
particular provider is in any way unfairly advantaged by the location of their
logo for example. The Governor insisted that those who invest in developing
such facilities have a right to earn a return on their investment. Equally,
people who have a valid contribution to make of their own should not be put in
a position of being artificially excluded from the card.
Australia’s economic performance remains exceptionally strong, by global
standards. Together with economic powers like the United States, Japan and the
United Kingdom, Australia is an attractive destination for highly global mobile
capital in uncertain times. The strength of our economy is now such that the
international credit ratings agencies are unanimous in awarding Australia the
much-coveted AAA standard.
The fundamentals of the Australian economy are strong. Public debt and
unemployment are low, underlying inflation is at the midpoint of the inflation
target range, and we have a significant pipeline of business investment remains
to flow, particularly in the resources sector.
Over the medium-term monetary policy is expected to meet the goals of
its long-standing inflation target, with inflation remaining within the 2 to 3
per cent band for most of the forecasting period.
Note Printing Australia and Securency
Public hearing – 24 August 2012
The Governor reported on Note Printing Australia (NPA) and Securency
International. The Governor stated that it was desirable
for him to offer a coherent and complete narrative of developments.
The Governor explained that in 2006, following developments at the Australian
Wheat Board, the Board had asked questions about the policies for the use of
overseas agents by the two companies.
These questions prompted NPA to begin a process of developing stronger
policies. RBA management sought an update on progress with this in early 2007.
To brief the bank, the NPA board requested a paper from their management on
dealings with sales agents. After considering that paper, the NPA board
resolved to audit past practices and compliance. That audit identified concerns
and recommended that the NPA should discontinue the use of agents and
investigate the role of management and staff in dealing with agents to ensure
compliance with Australian law. On receiving this report, the NPA board took
the decision to cease using agents. Acting though a subcommittee of the board,
they also commissioned Freehills to assess questions of standards and
At the same time, the RBA Board asked Securency for its policies on
agents. Consequently, the company adopted additional and stronger policies and
procedures. Following the audit at NPA in 2007, the Securency board requested a
similar audit which led to the termination of one of the agents which it shared
with NPA. That audit found that Securency had a ‘good and robust process’ in
place in relation to overseas agent contracts and payments. A follow-up audit
was conducted in 2008. This audit made the same finding.
Because of the findings of this audit, neither the Securency board nor
the Bank discontinued the use of agents, as had occurred at NPA. However, the
Reserve Bank was taken by surprise by the allegations published in mid 2009. It
is now clear, however, from a KPMG report conducted for the Securency board
later in 2009, that information regarding agents was withheld from the audit
teams and the Securency board in 2007 and 2008.
At the same time that the audit of NPA was under way a member of NPA's
management expressed his concerns over the company's conduct to an RBA
assistant governor who sat on NPA's board. The NPA manager was asked by the
then Deputy Governor to make a written statement, which in turn was provided to
Freehills. This document was held in strict confidence at the request of its
In the bank's view, it was imperative to investigate the issues
identified by the audit and to ascertain the facts regarding the NPA manager's
concerns. The board believed that neither the bank nor the NPA board should
make such an assessment. This decision ensured a proper, independent and
rigorous process, and that was the intention.
The Freehills report was highly critical of NPA's practices but it
concluded that there was no evidence of a breach of Australian law.
Consequently, there were no grounds for approaching the police. When the
Australian Federal Police were called in 2009 by the Chairman of Securency
regarding the allegations made about that organisation, the 2007 NPA matters
were all disclosed to the AFP. The Freehills report and audit reports were
provided to the AFP when requested.
In relation to the statement made by an NPA manager, the Governor
It has been claimed by some
that the written statement by the NPA manager contained clear evidence of
corrupt behaviour. In 2007, two senior legal practitioners from a leading law
firm who received this material directly from the author as part of their
review, and who interviewed the author and others, did not view it that way in
coming to their conclusion that there was no evidence of a breach of the law.
The Governor was emphatic that though it is possible that a different
conclusion might be drawn in future, it should be clear by now that there was
no attempt to cover anything up by anyone in the Reserve Bank.
The Governor explained that there are a number of court orders in place
that place restrictions on the documents that the bank is permitted to
disclose. The non-publication orders have been made as a result of applications
by the individuals facing criminal charges. These applications are designed to
protect their right to a fair trial before an impartial jury. In addition,
non-publication orders have been sought and obtained by the Department of
Foreign Affairs and Trade and the Australian Federal Police. Among the material
subject to such orders is the statement of the NPA manager. The Governor
received legal advice in relation to whether he could table the statement. That
advice was that he could not.
The Governor insisted that the Bank is committed to transparency with
this committee and with the community. The Bank indicated that it was available
at any time to appear before the committee.
The committee sought advice from the Governor regarding reports by the
Australian Broadcasting Commission (ABC). The Governor teased out the essential
question, which was ‘when did I first learn about the allegations about
Securency?’ The Governor stated:
...when the papers published it. That was true. That has
actually been misconstrued by many people as denying knowing anything about the
events of NPA in 2007, but that is not what I was saying at all. I think we
have been quite open with the committee about the 2007 matters.
The committee was also interested in pursuing issues arising from the
sequence of disclosures and the priorities and reasons relating to the
disclosure of specific documents during successive hearings of the committee.
The Governor summed up his position as follows:
What I am saying today, given that there is so much
controversy over these documents, is to this point what the Reserve Bank has
done on these matters is cooperate with the police and keep our mouth shut
because there are people on trial accused of crimes. It is, I think, therefore
not appropriate for me to weigh in on these things and I know you all agree
with that. So we have not thrown about documents and comments and so on. But if
there is a feeling that the committee wishes to have these materials that we
have, if I can possibly supply them I will because I think that is the
situation we are at...
Public hearing – 8 October 2012
The Governor acknowledged the legal sensitivity of discussing matters
that have led to criminal prosecutions currently before the courts, stating
that: ‘It is very important that the bank does not say or do anything which
would improperly impinge on any of those processes, particularly not in a
The Governor discussed the detailed history of the two companies, the
sequence of events that followed the Reserve Bank board asking about the use of
overseas sales agents in April 2006 and an account of how the bank, NPA and
Securency reacted to the succession of allegations.
In order to clarify developments since April 2006, the committee posed a
series of questions relating to specific events and the decisions made in
response to these. These questions related to the pace of decisions, the
provision of information to various parties, internal processes within the bank
and mechanisms for transparency and accountability. For example, the committee
sought an explanation as to why the board had requested that Freehills, rather
than the Federal Police, inquire into the issues. The Governor responded:
I would view the decision that the NPA board made to
commission Freehills as, in the circumstance of the time, a reasonable
decision...I would think it quite a normal thing to do for any commercial
organisation, even one that is publicly owned but operating in a commercial
space, having heard concerns, to seek to have serious people. There was a
measure of independence in the subcommittee, because we had a person of
unimpeachable integrity, an independent member of the RBA's audit committee—not
on our payroll, not on NPA's payroll and no great admirer, one would have to
say, of NPA's record in the audit space—to chair that. There were very
independent, serious people on that committee. They engaged two senior
practitioners with experience in the area from one of the country's leading
firms. I think that would be quite a reasonable response in the eyes of most
people who are experienced in these matters. I think that was a reasonable
thing for them to do and to find out: 'Do we have evidence? What is it we
have?' Then, of course, had they concluded something like, 'There is evidence of
a breach of the law,' or, 'We think there are very strong suspicions that there
may have been,' then I think there would have been a process where the NPA
board would have felt, inevitably, 'We must now take this issue to the police,'
but that was not the conclusion...I did not feel at the time, nor actually
looking back, that part of the process itself was deficient.
The committee also asked why the bank used agents at all. The Governor
explained that the use of agents was a common business model.
The bank elaborated his explanation by explaining that the use of agents was
understood as a legitimate practice at the time the company (NPA) had begun to
enter new markets in the western Pacific.
The committee asked the Governor if he believed that he had been
derelict in his duties. The Governor responded:
Let's get right to it. No, I do not. I think my
responsibilities as the chief executive of the organisation is always to
satisfy myself that issues that come up are being dealt with properly by the
relevant people. At each point in this very, very long process, which has taken
me the best part of half an hour to read, I felt that the people who reported
to me or were my colleagues were actioning appropriately the information that
came to their attention and escalating the steps as needed. In fact, in some
respects, they certainly did more than the minimum they might be expected to
The committee put the same question to the recently retired deputy
governor, he responded in a similar vein, noting that on a number of occasions
where he had intervened directly into NPA matters to escalate matters and that
he was satisfied that the NPA board could not have done any more than they
The committee wished to know if the Governor had any regrets or could
identify any lesson learnt from the issues under investigation. The Governor
If pressed on this, I would have to say that there should
have been more scepticism and more questioning of the managements of both
companies earlier than there was. I think it is hard to avoid that conclusion.
It is with that viewpoint I would say that this is why, in thinking about the
future, we want Note Printing Australia to have a much more narrowly defined
role and a closer link to the degree of risk tolerance that the Reserve Bank
has. We really in the medium term have no business being an owner of Securency.
That is a successful company, but it no longer needs us. We have already said
that we will be looking to exit that shareholding.
The committee, at six consecutive public hearings, has examined the
Reserve Bank of Australia about the Bank’s knowledge of and response to
allegations of corrupt activity at Note Printing Australia and Securency
International. On 8 October 2012 the
committee’s examination of these matters continued for almost seven hours. In
addition, a retired Deputy Governor was called to appear. This public
examination was in the context of ongoing criminal proceedings relating to the
alleged activity at Note Printing Australia and Securency. The committee,
therefore, in conducting the public hearing was conscious of the need to apply
the sub judice convention and ensure that matters were not discussed which
could interfere with those legal proceedings.
The committee notes that while the criminal proceedings are in progress,
the Bank is subject to certain court orders preventing it from releasing
information. Notwithstanding this limitation the committee’s scrutiny provided
an opportunity to examine the effectiveness of the Bank’s corporate governance.
In particular, while the Governor argues that he was not derelict in his duties
he acknowledged that, in hindsight ‘there should have been more scepticism and
more questioning of the managements of both companies earlier than there was.’
The committee, at future hearings, will continue to scrutinise the RBA
over these issues. At the same time, it is expected that once the criminal
proceedings are finalised the RBA will be able to release relevant documents
which are currently subject to court orders. This will then provide further
opportunity for detailed scrutiny by this committee.
Julie Owens MP
31 October 2012