ric battellino : inquiry into competition in the banking and non - banking sectors opening comments by mr ric battelino, deputy governor of the reserve bank of australia, to the house of representatives standing committee on economics, sydney, 14 august 2008. * * * mr thomson, other members of the committee, thank you for the opportunity to appear here today. we have provided a written submission to the committee which looks at various aspects of competition in the financial sector. i won ’ t take up the committee ’ s time by going through that submission in detail, but it might be worth highlighting some of the key points and the conclusion. one way to analyse the competitiveness of the financial sector is to look for any signs that we would expect to see if the sector was not competitive. for example : 1. if the overall provision of financing to the economy was inadequate ; 2. or if the costs paid by households and businesses for financial services was high by international standards ; 3. or if the availability of new financial products in australia was less than overseas ; 4. or if the profitability of financial intermediaries was unreasonably high. when we look at the evidence in these key areas, we think it is quite reassuring : • financial intermediation in australia has been growing at a fast rate – on average about twice as fast as the growth of nominal gdp. this is among the highest in the developed world. there is no suggestion therefore that the australian financial sector has been unable to provide adequate access to finance for households and businesses. • in the case of interest spreads charged by intermediaries, we find that they have declined substantially over the past 15 years, and as far as we can tell are in line with international norms. • in the case of financial innovation, we have seen a marked increase in the availability of financial products over the past 15 years, and the range of products compares favourably with the experience overseas. • when we look at bank profitability, we find that australian banks are around the top of the international range. on the surface, this could indicate a lesser degree of competition than elsewhere. but when we look a bit deeper it seems that an important reason for the high profitability of australian banks is their unusually low bad debt experience. over the past decade or so, bad debts of australian banks have been about half the long run average, and also around half the experience of overseas banks. this has been the result of the very strong domestic economy.

first changes, as well as expectations for the date of that change. as can be seen, balance sheet normalization started slightly earlier than expected, both in rate terms – it began with the federal funds rate at 1. 16 percent – and, more notably, in terms of the absolute date. but at the same time, earlier in the year, many market participants had seen decent odds that the federal reserve would reduce its balance sheet more quickly with a full - stop end to reinvestment. panel 7 shows the decline in expectations for both no change in treasury reinvestments and a hard - stop in them. it seems likely that these shifts in expectations came as the fomc ’ s communications became increasingly granular, particularly after the june meeting at which the fomc provided detail on its balance sheet normalization plan. on net, it seems likely that expectations for the federal reserve ’ s overall stock of asset holdings were fairly stable over this time, despite variation in expectations for the timing and pace of eventual declines. under the “ stock view, ” this stability in expected future asset holdings should result in limited changes in asset prices, as has been observed. of course, as the balance sheet shrinks, some upward pressure on rates should be realized. market participants ’ estimate of this effect over two years is shown in panel 8. 11 / 15 bis central bankers'speeches one last possible explanation for the stability of longer - term interest rates amid the movement toward balance sheet normalization has been the fomc ’ s clear message that it would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate. panel 9 shows the average of survey respondents ’ probability distributions for the balance sheet ; the left side shows this for the scenario where overnight rates remain away from zero, and the right side shows the adverse scenario in which they do return to zero. the right side shows a significant expansion in the balance sheet. as shown in panel 10, market participants assign about one chance in four to such a scenario unfolding, so communications about how the fomc might respond to such an outcome in the future might have the effect of bolstering confidence even today. 12 / 15 bis central bankers'speeches returning to panel 9, it is notable how much uncertainty there is about the size of the balance sheet, even