glenn stevens : inquiry into competition in the australian banking sector opening statement by mr glenn stevens, governor of the reserve bank of australia, to the senate economics references committee inquiry into competition in the australian banking sector, sydney, 13 december 2010. * * * the reserve bank has provided a submission to the committee that details trends in lending, costs, margins, fees and other factual material the committee may find of use. we of course will seek to answer any questions on that submission. perhaps i should note a few general points. first, risk has been re - priced since early 2007. all of us are still adjusting to this change and its implications. it is widely held that risk was under - priced for some years before then. that is to say, investors demanded very little risk compensation in their expected returns – perhaps in some cases because they didn ’ t understand the risks. so financial institutions of all types could get ample funding cheaply, and this could be passed on to their borrowers. business models that took particular advantage of low - cost wholesale funding and / or securitisation were able to provide a very competitive edge to certain markets, particularly ( though not only ) to markets for mortgage lending. but investors around the world changed their attitude to risk in 2007 and 2008. the compensation they require for taking on risk has increased. wholesale funding and securitisation are now more expensive. in the case of securitisation, costs have also risen in part because some investors have left the market altogether. the increase in costs has affected all financial institutions, but to varying degrees. as such, it has also affected the competitive landscape. some business models that did well in the earlier state of the world find it harder going now. part of the competitive advantage they had has been eroded by market developments. the current relationship between variable mortgage rates and market funding costs is making it more difficult than it used to be for the lenders relying on securitisation to compete with the major banks. this changed attitude to risk has affected the locus of competitive forces. whereas four years ago the environment was one in which the competition among financial institutions to lend money was intense, more recently it has been the competition to raise money that has been intense. various other things have happened that also have a bearing on the competitive landscape, but this is a very fundamental change in the state of the world. that said, the market remains a good deal more competitive than it was in the mid 1990s and borrowers have

##20 and financial stability board ( fsb ) fisher ( 2009 ) emphasizes the importance of incentives as the principle lesson from the current crisis. see goodhart ( 2009 ) for an assessment of the anglo - saxon model of banking and financial regulation and supervision in light of the current crisis. have correctly proposed to review the capital adequacy standards, with a reservation of implementing most of the new rules once recovery is assured. 10 such a policy direction seems relevant in light of the amount of risk actually taken by internationally active financial institutions in recent years. in implementing the policy, however, we also need to pay attention to the endogenous changes in financial institutions ’ risk - taking stemming from strengthened capital regulation. finally, coordination between central banks is required in the area of money market operations, and, more generally, banking policy. a crisis is likely to be amplified by concern over funding liquidity. that underscores the importance of the efforts to transfer liquidity smoothly on a global basis. u. s. dollar funds - supplying operations, carried out under coordination between major central banks, have been highly effective under such conditions. in that case, other central banks than the fed have an incentive to implement operations to secure the stability of domestic financial markets and domestic financial institutions. the fed also has a natural incentive to secure the stability in u. s. dollar denominated financial markets. as a result, u. s. dollar funds - supplying operations are mutually beneficial for both the fed and other central banks. that point is markedly different from “ international policy coordination ” in monetary policy, easily placing strain on bilateral relations in key variables, such as foreign exchange rates and the balance of payments. through the current crisis, we have reconfirmed that it is important to make currency swap, repo, and other collateralized markets more robust, and that central banks need to promote private initiatives in that direction. from that perspective, central banks need to make further coordination in providing liquidity, accepting cross - border collateral, and extending operating hours for the payment and settlement systems provided by central banks. concluding remarks in closing, i emphasize the importance of promoting human interaction in further developing coordination between central banks. since the summer of 2007, central banks have communicated with each other intensively at various levels, from top central bankers to mid - class staffers using various tools, such as emails, conference calls, and face - to - face conversations. such efforts have contributed to preventing the crisis from worsening further.