Abstract: The 1981 Australian Financial System Inquiry, known as the Campbell Committee, is widely seen as the start of the reform movement of the 1980s and 1990s. Accounts of its origins have been dominated by a debate about which policy actor can take credit. This paper utilises cabinet and Reserve Bank archives to reassess the origins of the Campbell Committee. The inquiry had its origins in an earlier attempt by the Whitlam government to take federal control of the regulation for non-bank financial institutions and the building society crisis of the mid-1970s. In its response to these political and economic challenges we can identify the moment in which the Fraser cabinet turned towards market-based reform. The political decisions made in the context of crisis set the path for regulatory change in subsequent decades, particularly in the area of prudential regulation, where we have seen regulatory consolidation and expansion rather than ‘deregulation’.

Introduction

The Australian Financial System Inquiry, which reported to the Commonwealth government in 1981, has assumed an almost mythical status in the history of Australian political economy. Known colloquially as the ‘Campbell Committee’ after its chair, Keith Campbell, it is usually marked as the beginning of the era of market-oriented economic reform in Australia, such as the canonical account in Kelly (1992). The Campbell Committee recommended wholesale reform of the Australian financial system. Its recommendations were adopted almost in their entirety by the Hawke government and led to the floating of the dollar in 1983 and the introduction of foreign banks into Australia in 1985. These changes precipitated further reforms to industrial relations, trade and public ownership over the course of the next decade.

It is hard not to pick up a newspaper today without reading pleas to recapture the political determination of that ‘reform era’. But how did the last reform era begin? Accounts of the Campbell Committee’s establishment have been dominated by a contest for who can take credit, and who ought to take the blame for the lack of action on its recommendations under the Fraser government. These accounts fall broadly into a few categories. The first tell a story of a treasurer, John Howard, trying to push a reluctant prime minister towards microeconomic reform (Howard 2010: 112–18; Love 2001: 63–64; Wallace 1993: 119–28).

The second defend Malcolm Fraser and suggest that slow progress on establishing and implementing the Campbell Committee was due to lifelessness in the treasurer’s office (Ayres 1987: 409–13; Fraser and Simons 2010: 523–54). A further strand in the literature focuses on bureaucratic advisors, particularly John Hewson, who later became leader of the Liberal Party (Bell 2004: 21–25; Buckley 1991: 104; Kelly 1992: 78).

These ‘hero stories’ of the Campbell Committee are of little analytic value. Lost in the wash are the political and economic contexts in which the decisions to hold an inquiry were made. Economic scholarship has focused on the policy pressures that led to the inquiry’s establishment, such as the growth of non-bank financial intermediaries (NBFIs) at the expense of the banks, financial globalisation, problems borrowing through the Loan Council, and regulatory inconsistencies leading to lower quality services (Harper 1985; Kasper and Stevens 1991; Merrett 2002).

However, while pressures on the financial system explain the need for reform, they do not explain the shape of the inquiry, nor the Fraser government’s portentous direction that the inquiry offer recommendations in the light of ‘the government’s free enterprise objectives’. Prasser (2003: 275–80) and Hyde (2002) argue that the Campbell Committee’s ideological bent was a strategic decision by certain ministers and advisors intended to drive the government in a free enterprise direction. The Campbell Committee was ‘not intended to get the government off a political hook but to create one’ (Hyde 2002: 115). Other accounts focus on the economic and bureaucratic interests behind the inquiry’s establishment. Whitwell (1986: 246–51) and Pauly (1987) identify the bureaucratic politics that saw both ministers and their departments view the Campbell Committee with attitudes between supportive and openly hostile. Fitzgibbons (2006) finds that Australian banks were deeply ambivalent about financial deregulation, rejecting claims that the Campbell Committee reflected regulatory capture by the banks. Nevile (2002) urges an accommodation between the economic and ideological explanations for the Campbell Committee, arguing that the two were mutually interdependent.

Malcolm Fraser described his prime ministership as a ‘transitional’ one in the history of Australian public policy, as a bridge between the interventionism of the post-war years and the market-orientated reforms of the 1980s and 1990s (Kemp 2015). This paper exploits cabinet documents from the Fraser government to pinpoint with reasonable exactness that transition moment. The Campbell Committee is particularly interesting because the cabinet records show exactly how the Fraser government chose to apply the principles of ‘free enterprise’ to the financial sector. This is not the first time cabinet documents have been scrutinised for a guide to the formation of the Campbell Committee, but a preoccupation with personalities has led previous works to underplay the significance of the policy choices facing the Fraser government, obscuring or overlooking this historically crucial moment of ideological pivot.

The Campbell Committee was instigated in response to a political crisis created by an economic crisis. This paper begins with the driving forces behind the introduction of the Financial Corporations Act 1974 and the decision by the Whitlam government not to proclaim Part IV of that Act, which would have imposed a federal takeover of the regulation of NBFIs and imposed on NBFIs the same regulatory burden that had applied to banks since the end of the Second World War. The unproclaimed Part IV became a political issue for the Fraser government when a building society crisis coincided with the 1977 federal election. That confluence led the Fraser government to follow through a 1975 election promise to establish a capital market inquiry. The existence of the unproclaimed Part IV was used by those inside and outside the government as a political and rhetorical tool to pressure the government to act on building society regulation and the promised inquiry. While the cabinet quickly shifted to a more expansive understanding of what a capital markets inquiry would look like, one remnant of its origins in the building society crisis remained: a proposed building society deposit insurance scheme. This account helps us understand some of the Campbell Committee’s intellectual inconsistencies and the emphasis on prudential regulation that developed during the ‘deregulation’ era.

The Financial Corporations Act

The 1945 Banking Act imposed a wide range of regulatory controls on the Australian banks for monetary and consumer protection purposes. Banks were required to hold funds at the Commonwealth Bank (as of 1959 the Reserve Bank of Australia (RBA)) as an instrument of monetary control, and had to abide by maximum interest rate controls. Entry into the banking market was strictly controlled by the requirement to get a licence from the Commonwealth treasurer. However, these controls only applied to institutions titled ‘banks’ – a formal definition of which was not offered in the Banking Act – and reflected the division of responsibility embodied in Section 51 (xiii) of the Australian Constitution.

The financial repression of the Banking Act encouraged the growth of alternative institutions of credit provision. The most prominent NBFIs were building societies, which experienced a boom during the 1950s–70s, and hire-purchase firms. Both were regulated under state rather than Commonwealth legislation. Deposit interest rates offered by building societies were consistently above that offered by the trading banks. Furthermore, building societies were starting to offer products that made them nearly indistinguishable from banks, for instance, by offering passbook accounts (Harper 1985: 25). Likewise, hirepurchase firms filled the gap in the market for medium-term credit. Dubbed the ‘poor man’s overdraft’, hire-purchase was available to many borrowers unable to secure bank loans, and grew rapidly in the post-war decades (McKee 1960; Runcie 1969: 17–27). Taken together with other institutions like co-operative societies, merchant banks, pastoral finance companies and money market dealers, the non-bank financial sector was carving away a larger and larger proportion of the credit market from traditional banks (Coombs 1958).

By the 1960s, pressure to extend Commonwealth control onto NBFIs came from two sources. The first was the Labor Party. Labor voters tended to use hire purchase more than conservative voters (Murphy 2000: 188). The Labor Party favoured low, regulated interest rates in the interests of their non-rentier members, reflecting both the post-war Keynesianism of the Chifley government’s White Paper on Full Employment and a prewar populism in favour of cheap money. Some trade union officials opposed hire purchase finance as they believed that heavily indebted workers would be less likely to risk their wages by going on strike (Myers 1961: 413). By the 1970s, Labor’s desire to regulate consumer interest rates converged with rising economic nationalism, and a further concern expressed was that NBFIs were predominately foreign owned (Crean 1974: 218; Pokarier 2000; Whitlam 1985).

The second push for regulating NBFIs came from theorists and practitioners of monetary policy. The declining significance of banks in the financial sector meant that monetary instruments that operated through the direct regulation of banks were increasingly ineffective. A school of economic literature represented in large part with Gurley and Shaw (1960) argued NBFIs frustrate monetary control by making the velocity of money more volatile (see also Gurley and Shaw 1955; Hogan 1960). H.C. Coombs, the RBA governor, worried that Australian monetary policy was ‘operating in a steadily contracting field’ (Coombs 1958).

For supporters of hire-purchase regulation, Gough Whitlam’s 1972 election victory came at a fortunate time. An opportunity to regulate NBFIs had opened up the year before by a High Court case, Strickland v Rocla Concrete Pipes Ltd.¹ In Concrete Pipes, the High Court reversed its 60-year-old reading of s51(xx) of the Australian constitution that construed the Commonwealth’s power to make laws about corporations as only those corporations that traded outside a state boundary, and forcefully affirmed the end of the reserved state powers doctrine. Concrete Pipes seemed to open the door for the Commonwealth to control NBFIs that had always been governed by the states (Hansard 1972).

In April 1974 the Whitlam government introduced the Financial Corporations Bill 1974 to the House of Representatives.² The bill represented a federal takeover of NBFI regulation, covering hire-purchase finance companies, merchant banks, authorised money market dealers, permanent building societies and pastoral finance companies. Under this legislation, the RBA was to establish a register of NBFIs, and registered firms were required to furnish statistics to the central bank. But the real significance in the bill was Part IV, which imposed the controls that until then had been restricted to banks under the Banking Act. First, it gave the RBA power to impose minimum asset ratios on individual firms or classes of firms. Second, it gave the RBA the same power to control lending policies of NBFIs that it exercised over banks. Third, it gave the RBA power to control the interest rates charged and offered by NBFIs.

The bill passed parliament with the support of the Liberal-Country Party Coalition in August 1974. Part IV, however, was not proclaimed by the Whitlam government. This was partly due to lingering doubts about its constitutionality. It was also due to the RBA’s scepticism of Part IV. Schedvin (1992: 499) writes that while the RBA cooperated with the government in drafting the legislation it did so ‘with a total lack of conviction’. While Coombs had been concerned about the effect of NBFI growth on monetary policy, and was eager to regulate accordingly, his successors were more satisfied to rely on open market operations. The RBA consequently saw Part IV more as a suite of ‘reserve powers’ to be enacted if an NBFI did not cooperate voluntarily with RBA directions. ‘If successful, part IV may never have to be proclaimed’, said one RBA manager (Taylor 1975: 75). However, the existence of the unproclaimed Part IV created a political problem for the Fraser government when it faced the largest building society crisis in 80 years.

The building society crisis

After the relative inflationary calm of the 1950s and 1960s, the first years of the Whitlam government coincided with a sharp increase in consumer price inflation. Between late 1971 and 1973 monetary policy was relatively expansionary. In the second half of 1973, however, this was sharply reversed, and the Australian economy experienced six straight quarters of restraint in monetary policy. The handbrake-like swing in monetary policy was also combined with a number of other substantive economic policy changes, including the Whitlam government’s 25 per cent tariff cut in the third quarter of 1973 (Rowan 1980: 174).

The housing and construction sector bore the full brunt of the monetary shift. The first wave of crisis in the building society sector struck in late 1974. In July that year, as parliament was considering the Financial Corporations Act, Home Units Australia collapsed, followed by Mainline Australia, and, in October 1974, the Cambridge Credit Corporation. Cambridge was the largest property firm in Australia and its failure sparked an immediate run on building societies in Victoria, Queensland and South Australia. This has been described as ‘the blackest day on Australian stock exchanges of the twentieth century’ (Sykes 1988: 467). A second wave of crisis occurred in March 1976, when the Queensland government was forced to suspend six building societies after another run.

Of all the building societies affected by the property bust of the mid-1970s, one society had an unheralded long-term significance. The Queensland Permanent Building Society (QPBS), founded in 1957, was the second-largest building society in that state. It was severely affected by the October 1974 crisis. This came at a terrible time for the QPBS as it had only two weeks earlier finished installing a new computer system and consequently struggled with the flood of withdrawals during the panic. The QPBS had not adequately trained its staff in the system and had installed inadequate backup (Touche Ross & Co. 1978). The QPBS recovered from the 1974 run but the chaos of the run combined with poor record management and accounting procedures meant its accounts were never reconciled. Nevertheless, it survived the panic of 1976, and rather than consolidating its operations, took over a number of other struggling building societies without properly auditing their books.

On 30 August 1977 the Labor State opposition spokesperson for housing, Kevin Hooper, launched a furious attack on the management of the QPBS in parliament, describing it as a ‘cancer’ on the building society industry, its management as ‘hopelessly incompetent’, and its public reporting as ‘meaningless nonsense’ (Hansard (Queensland) 1977). This sparked an initially severe run on the society. While that run subsided, over the next month, $18 million flowed out of the doors of the QPBS. At 5:30am on 28 September 1977 the board of the QPBS released a statement that a liquidator had been appointed.

Fraser’s cabinet considers part IV

These building society crises directed political attention towards the Financial Corporations Act and the still unproclaimed Part IV. Cabinet records from 1977 and 1978 reveal a debate within the senior levels of the Fraser government not only over the proclamation of Part IV but about the direction of Australian political economy in general. If the Campbell Committee set the course of financial regulation for the next two decades, then it was these cabinet meetings that were the turning point. The records show a government deeply divided about the economic philosophy that ought to be adopted into the future.

The day after Queensland suspended the five building societies in March 1976, Whitlam had asked the Treasurer Phillip Lynch:

How soon will he be able to reassure investors in permanent building societies by action available to his Government, namely to proclaim the part of the Financial Corporations Act 1974 which covers the regulation and control of business and financial corporations, and make regulations specifying the asset ratios, lending policies and interest rates of permanent building societies? (Hansard 1976a)

To which Lynch responded that the Financial Corporations Act ‘was designed for purposes of overall economic management and not the financial stability of particular institutions. This, as the honourable gentleman ought well to understand, is clearly reflected in the provisions contained in the Act’ (Hansard 1976b). When the QPBS collapsed 18 months later, Whitlafm again pressed the government on why Part IV had not been proclaimed (Hansard 1977).

There were two prevailing views about the purpose and significance of Part IV. Whitlam argued that Part IV was a form of prudential regulation. In his view, with the powers enumerated in Part IV, the RBA would be able to manage, scrutinise and ultimately regulate the affairs of NBFIs. Had such regulation been enacted, it would have prevented the afflicted building societies from acting imprudently. Whitlam was protesting parliament’s failure to proclaim Part IV well into the 1990s (Martin 1999: 99; Whitlam 1992: 30–31). Lynch, by contrast, argued that even if Part IV was proclaimed, the Act was primarily a mechanism for macroeconomic management rather than prudential control. However, the difference between these two positions ought not to be overstated. When Lynch supported the bill in parliament in 1974, he had done so in part because it could ‘be used to protect investors where the financial security of their investments might be jeopardised’ (Hansard 1974).

Whether to proclaim Part IV in the wake of the QPBS collapse was a live question within the Fraser government. While the RBA had pledged to provide liquidity support to QPBS if necessary (National Archives of Australia (NAA) A12909 1719), the Fraser government felt the need for more direct action. Six days after the QPBS closed its doors, an ad hoc cabinet committee commissioned a report from the Treasury and the RBA ‘as to the reason the Government had so little warning of the matter and why the relevant section of the Financial Corporations Act has not been proclaimed’ (NAA A13075 3984/AD HOC). Lynch brought a joint submission from the Treasury and the RBA to a full cabinet meeting on 11 October (NAA A12909 1719). That submission declared the Financial Corporations Act ‘was intentionally not formulated with the object of providing a means for protecting investors or the financial stability of individual societies’. In the view of the Treasury and the RBA, Part IV was designed ‘primarily to enhance the scope of monetary policy’, and that, as was suggested by the RBA at the time of passage, ‘the requirements of monetary policy have not been such as to require Part IV to be proclaimed’. The submission also noted that the Queensland government might be expected to be jealous of any federal encroachment on what was a long-standing area of state constitutional jurisdiction.

Nevertheless, the cabinet requested the Treasurer bring forward bring submissions concerning both the possible proclamation of Part IV ‘in support of the Government’s monetary policy’ (NAA A13075 4037) and a further submission ‘containing definite proposals for ensuring the financial viability and stability of permanent building societies and similar institutions’ (NAA A12909 1719). What was originally a crisis meeting of an ad hoc cabinet committee was evolving into something more general, investigating the mechanics of monetary policy and addressing broader questions about financial stability.

Some in cabinet were not convinced by the Treasury and RBA submission. In his memoirs Howard (2010), who took over the Treasury portfolio a month later, names Malcolm Fraser as one of those eager to proclaim Part IV. The government’s equivocation spilled out into the media. The Sydney Morning Herald (1977) and The Age (1977) cited ‘government sources’ claiming that the Treasurer was either considering or intending to proclaim the controversial section in order to prevent future financial collapses. Yet Lynch had privately informed the NBFI sector that Part IV ‘would not be used for financial stability purposes’ (NAA A12909 1719). Treasury and the RBA were skittish about even signalling the possible proclamation of Part IV because of the harmful effect doing so could have on capital markets (NAA A12909 1770). Lynch brought the two interim submissions requested in October to the full Cabinet on 3 and 4 November (NAA A12909 1771; NAA A12909 1770). To protect the financial stability of building societies, four options were raised for Commonwealth involvement: the status quo (in which federal action was limited to RBA liquidity provision), a National Building Societies Act, the proclamation of Part IV, or the introduction of a deposit insurance scheme for building societies.

All but the status quo would have represented Commonwealth intervention into the NBFI sector. Fraser was particularly attracted to the deposit insurance scheme. Since the 1974 building society panic, the Australian Association of Permanent Building Societies had been lobbying the government for a government sponsored deposit insurance scheme (RBA Archives RD-NS-179). Sometime between the collapse of QPBS and 3 November 1977, the former Liberal prime minister William McMahon suggested to Fraser that the government facilitate the creation of such a scheme (NAA A12909 1770). Cabinet considered an interim submission from the Prime Minister briefly outlining the case for this scheme, which would allow the Commonwealth to ‘impose some minimum supervisory, financial management requirements on the building society movement’ while minimising the burden on the budget (NAA A12909 1823).

Three days later an ad hoc cabinet committee considered a follow up submission (NAA A12933 195). The proposal on the table was a Commonwealth government-run deposit insurance scheme to prevent runs. Participation would be voluntary and the scheme would be supported by an initial repayable capital contribution from the Commonwealth. The submission raised some potential problems with this proposal. Apart from the possible cost and negotiation difficulties with the states, Commonwealth-sponsored deposit insurance would give a competitive advantage to building societies over other NBFIs and banks. Furthermore, such a scheme might necessitate the extension of financial controls to building societies. The Reserve Bank particularly saw the possibility of establishing a ‘quid pro quo’ in which government participation in a deposits insurance scheme would be traded for greater control over liquidity and management (RBA Archives BM-Pe-202). The ad hoc committee resolved that Fraser should announce that the government was examining the possibility of a deposits insurance scheme.

One of the major concerns raised in these cabinet submissions was how intervention for building societies could destabilise the financial system more generally. The political problem was that the government could not simply act on building society stability without facing demands that it protect other NBFIs, such as credit unions. The economic problem was that new interventions, such as the proclamation of Part IV:

could mean fundamental changes in the working of financial markets and for the operation of monetary policy. It could involve, by way of new direct interventions, substantial changes to the pattern of financing – both in terms of funds flows and costs. These changes would not necessarily be smooth even with the most careful attention to the preparation and introduction of the regulations. Moreover, as with all controls, those subject to them are well aware that they open the way to arbitrariness and consequent inefficiencies. (NAA A12909 1770)

These criticisms focused on the pace of change and its effect on markets. Nevertheless, here we see the first pressures to expand the government’s attention to the financial system more broadly. Treasury and the RBA, through Lynch, were using the internal debate over Part IV to agitate for broader concerns about financial efficiency and the regulatory framework governing the financial sector as a whole. In 1977 this was hardly a drumbeat for radical deregulation. But the political pressure created by the collapse of QPBS set in train a course of events that would, eight years later, lead to the Hawke government’s introduction of foreign banks into the Australian market.

Establishing the Campbell Committee

An inquiry into Australia’s capital markets had been on the political drawing board for many years. During the 1975 election, Malcolm Fraser pledged ‘a comprehensive examination of ways in which the efficiency of the Australian capital market can be improved with special reference to the availability of finance for the expansion of small business investment’ (Fraser 1975). No action was taken in his first term. He reiterated this promise a month before the 1977 election, in a question and answer session after a speech to the Securities Institute of Australia, adding that the inquiry would commence in 1978.

What motivated Fraser’s initial promise in 1975 for an inquiry? In his memoirs, Fraser writes that his overriding concern was ‘the ability of small business to borrow’ (Fraser and Simons 2010: 531). The view that Fraser’s interest in a capital market inquiry was driven by a narrow interest in small business finance was shared by the RBA’s Austin Holmes (Harper 1985: 14). This motivation, rather than general concern about the efficiency of the financial sector, fits the historical record. As the 1977 Cabinet discussions make clear, Fraser was open to proclaiming Part IV. This could have eliminated the regulatory advantage NBFIs had over banks by giving the Reserve Bank the ability to manage the sector accordingly. Nevertheless the inquiry was not a government priority. It is unusual for a government to announce an inquiry without immediately establishing one (Prasser 2003: 275). But the Fraser government ran an entire term without following up its 1975 promise.

The Financial Corporations Act and the building society crisis were not the only political drivers of the Campbell Committee. Fraser and Howard have cited as a key factor the limits on interest rates set by the Loan Council, which, in an era of high inflation, were limiting the market for government securities (Fraser and Simons 2010: 535–38; Harper 1985: 14–15). However, while a cabinet submission in mid-February 1978 stated that while the inquiry would tackle some aspects of Loan Council operation and finance operations by statutory authorities, it also noted that the inquiry would not ‘cover detailed aspects of public finance’ (NAA A12933 236). Nor did the inquiry have any significant influence on policy change in this area. Treasury note tenders were launched in December 1979 – nine months before the government received the Campbell Committee’s interim report.

Nor did the banks produce significant external pressure on the government to bring about an inquiry into the financial system. As Fitzgibbons (2006) shows, banks were deeply divided on reform. Banking was a protected industry that did not give up its protection lightly. While keenly aware that they were losing market share to NBFIs, a group of older conservative bankers preferred that controls be extended to their competitors, rather than removed from the banks, as some of the younger bankers suggested. Sensing the movement within the government for reform, the Australian Bankers Association (ABA) produced a paper in early 1978 that proposed both approaches without favouring either (Pauly 1987: 34–35). While the ABA committed to supporting deregulation after the Campbell Committee’s establishment, ambivalence about the desirability of change remained evident (Fitzgibbons 2006: 374–83).

The Monetary Policy Committee (MPC) of the Federal Cabinet first directly considered Fraser’s election recommitment to a capital market inquiry on 9 February 1978 (NAA M2218 3), and instructed the new Treasurer, John Howard, to propose the form of inquiry and terms of reference. In July Howard brought the MPC two forms the inquiry might take (NAA A12933 542). The first model addressed the government’s previous commitments in a minimal way. It would be a ‘fairly narrow inquiry confined to the efficiency of the capital market per se’, would only examine financial institutions that were directly involved in capital markets, and would ‘ignore most of the operations of the banking system, money markets and the Reserve Bank’. Such a model would not have addressed the politically salient question of stability in the NBFI sector. The second model was to be a ‘broader inquiry into the functioning of the financial system’, and was to include an examination of the RBA, NBFIs, money markets, and the banking sector. The MPC resolved to pursue the broad model.

The terms of reference for the Campbell Committee were finalised in late July 1978 (NAA M2218 7). These placed the government’s ideological predilections right up front. ‘In view of the importance of the efficiency of the financial system for the Government’s free enterprise objectives and broad goals for national economic prosperity’, the committee was asked to make recommendations for the improvement of the regulation of the financial system including banks and NBFIs, the securities industry, the money market, development finance institutions, and the RBA, as well as any other recommendations it deemed relevant. The terms were a ‘virtual blank cheque’ (Wilson 1979). On 18 January 1979, Howard announced the inquiry and the membership of the committee, explicitly stating that ‘the objective of the inquiry was not more regulation by the Government. Indeed, one of the important issues to be canvassed by the Inquiry would be whether present levels of regulation and Government involvement were appropriate’ (Howard 1979).

It was only after the terms of reference and the make-up of the Campbell Committee had been agreed to that Cabinet’s MPC received the two submissions it had requested from the Treasurer back in the panicked days of late 1977: one which considered proclaiming Part IV of the Financial Corporations Act (NAA A12933 733), and another which considered the regulation of the banking sector (NAA M2218 11). These two submissions illustrate the rapid changes in approach that had occurred within the government since the capital market inquiry had first been discussed.

The first submission firmly rejected proclaiming Part IV. While both Lynch and Howard had originally cautioned against such an action, this submission made the strongest case yet. The paper rejected the use of Part IV as a mechanism for prudential and stability regulation, noting that the ongoing investigation into building society deposit insurance would in part cover such questions. But the submission made it clear that the government was driven by a political philosophy to reject interventionism and favour, whenever possible, market-based solutions. The submission stated that:

An excellent case would seem required to support an interventionist approach toward nonbank financial institutions for monetary management reasons. Frankly, there isn’t such a case at present. It would be contrary to our philosophy and to the trend to lessening of direct controls which has accompanied the maturing of Australian capital markets. (NAA A12933 733; emphasis added)

The second submission was even more forthright in its desire for market reform. Surveying the banking sector in general, it argued that the government’s priority ought to be to level the playing field between the regulatory framework faced by the banks and that faced by the NBFI sector and ‘endorse the view that this general objective can best be advanced by moves towards ‘deregulation’ of banks, by reliance on broad ‘market oriented’ monetary measures, and by the application of suasion techniques to bank and non-bank intermediaries where appropriate’ (NAA M2218 11). A supportive note presented to the MPC by the Department of Prime Minister and Cabinet also expressed interest in broader questions of economic efficiency:

Over time direct, detailed controls are increasingly evaded. As long as such controls are effective they impair the ability of the capital market to work properly, and thus reduce national output. They also require large numbers of bureaucrats to operate and are costly to supervise and enforce. (NAA M2218 11)

In the event, Howard withdrew both submissions from consideration, pending the Campbell Committee’s deliberations.

Prudential regulation and the Campbell Committee

The recommendations of the final report of the Campbell Committee, which was received by the government in November 1981, are often depicted as uncompromising deregulation. Kelly (1992: 78), for example, writes that the report was ‘comprehensive and coherent in its recommendations of financial deregulation and its view that market-related mechanisms would maintain economic stability’. However, the report was not uniformly deregulatory. In several crucial areas it pulled its punches, recommending less reform than ultimately occurred, favouring regulatory consolidation over deregulation, and seeking to accommodate the self-interested concerns of the private sector.

The inquiry’s recommendations can broadly be described under four categories. First were changes to macroeconomic management, which included the floating of the exchange rate and monetary targeting. The second was the deregulation of price controls on financial products. Conceptually these followed from its monetary recommendations. The Campbell Committee argued that as interest rate controls, maturity controls, and absolute and relative lending controls had been primarily mechanisms for the transmission of monetary policy, they ought to be abolished. The third was the relaxation of restrictions on foreign entry into the banking sector. The fourth area of recommendation concerned the prudential regulation of banks and NBFIs.

Prudential regulation presented the clearest example of the Campbell Committee’s deregulatory reluctance. The committee recommended that banks be subject to a range of controls in order to protect depositors and investors and ensure the stability of the banking system. Banks were to be subject to transparent capital adequacy requirements, and possibly a two-tiered capital adequacy ratio. Banks would have to adhere to regulated liquidity ratios for prudential (not monetary) purposes. The inquiry recommended that loans to controlling shareholders and directors be subject to limits, and consideration be given to regulating certain classes of speculative or developmental property and foreign exchange dealing with special risk asset limits.

John Howard complained to the cabinet that the section on prudential regulation was ‘among the most unsatisfactory and difficult to understand parts of the Report’ (NAA A12909 5656). Too many of the key decisions about the appropriate regulatory mechanisms had been left for the government to resolve. This view was shared by outside observers who noted that the Campbell Committee’s approach to prudential regulation was strikingly different from the rest of the report, in that it recommended greater regulatory intervention rather than deregulation. Importantly, the report’s characterisation of the alternative approaches to prudential regulation – including the United States’ Federal Deposit Insurance Corporation – were inadequate and missed the conceptual relationship between capital adequacy requirements and deposit insurance (Hogan and Sharpe 1983: 144; Perkins 1982: 77–81).

The weakness of the Campbell Committee’s prudential considerations was a consequence of the political context in which the committee was instigated. As the Campbell Committee was being debated and formed, a parallel investigation into the operation of a deposit insurance scheme was underway. Fraser’s 1977 public promise to hold a capital markets inquiry was given the same day that Cabinet considered William McMahon’s proposed deposit insurance scheme for building societies. In early 1978 a working party of officials from Treasury, Prime Minister and Cabinet, and the Reserve Bank was formed to investigate ‘such matters as the causes of the instability experienced by building societies and other deposit-taking non-bank institutions and the various mechanisms available to contain or mitigate the effects of such instability, including deposits insurance in particular’ (NAA A12909 2655). Presenting the working party report to the full Cabinet in February 1979, Howard outlined the government’s political bind. The working party had suggested that deposit insurance should be put off until the Campbell Committee had reported. However, Howard told cabinet, he was ‘unable to recommend this option in view of the Government’s commitment to a deposits insurance scheme for building societies’ (NAA A12909 2875).

There was strong opposition to Commonwealth involvement in a deposit insurance scheme from banks and finance bodies, who argued that consideration of the issue ought to be delayed. The compromise position, suggested by the working party, was to encourage the development of a private deposit insurance scheme among the building societies with possible state government involvement. In February 1980 Cabinet signed off on a private deposit scheme that would be funded by the building societies themselves.

The scheme was to be voluntary but state governments could make participation mandatory in their respective jurisdictions. Commonwealth involvement would be limited to a co-ordinating, facilitating, and technical advisory role and would amend legislation if necessary. This way the Fraser government would be able to take credit for achieving an election campaign promise without unduly compromising the eventual Campbell recommendations (NAA A12909 3781).

However, the Campbell Committee was unable to resolve the policy bind created by the Fraser government’s proposed building society deposit insurance plans. Core to the Campbell Committee’s philosophy of regulation was the idea of competitive neutrality – services that competed against each other, such as banks and NBFIs, should face similar if not the same regulatory burdens. For banks, the committee’s final report strongly opposed the establishment of a government guarantee for deposits. It also suggested that requiring banks to establish a private deposit insurance scheme would have ‘serious drawbacks’ (Committee of Inquiry into the Australian Financial System 1981: 310), including acting as a barrier to entry. It supported the existing depositor protection arrangements in the Banking Act, which required the Commonwealth Bank to take over banks which were unable to meet their obligations. It recommended the promised building society deposit scheme should involve ‘the minimum of government participation’ and should encompass all NBFIs in order to maximise competitive neutrality (Committee of Inquiry into the Australian Financial System 1981: 325). However, even the minimalist scheme approved by the Fraser cabinet enjoyed substantial involvement from both Commonwealth and state governments. For instance, the RBA would have the discretion to provide liquidity support to the insurance corporation.

The building society deposit scheme, named the Australian Building Societies Share and Deposit Insurance Corporation (ABSSDIC), was formally created in May 1984. The Martin Group Report – the Hawke government’s 1984 inquiry into the financial system which largely replicated and endorsed the recommendations of the Campbell Committee but presented them through a more Labor-friendly lens – welcomed the ABSSDIC as a ‘market-based liquidity support arrangement’ (Australian Financial System Review Group 1984: 169). The Martin Group differed from the Campbell Committee by rejecting the suggestion that the RBA offer liquidity to the ABSSDIC as ‘unnecessary and unwise’ as doing so might create the perception that the Commonwealth guaranteed building societies. The ABSSDIC went into voluntary administration in 1993.

The establishment of the ABSSDIC was not merely a sideshow. It is a window into the weaknesses of the Campbell Committee process and an indication of the future development of financial regulation. In the Diamond and Dybvig (1983) model of banking instability, deposit insurance is necessary to prevent bank runs. However, deposit insurance can create moral hazard as financial institutions are encouraged to take unnecessary risks (Bhattacharya et al. 1998: 755–60; Demirgüç-Kunt and Detragiache 2002; Pennacchi 2006). One mechanism to reduce these moral hazard problems is to require financial institutions to hold certain levels of capital, thereby constraining excessive risk-taking (Allen and Gale 2003; Benston 2000: 196–97). Yet the Campbell Committee saw deposit insurance and capital adequacy regulations as substitutes, rather than viewing the latter providing the prudential basis for the former (Hogan and Sharpe 1983: 146–47; Valentine 1983: 212). Capital adequacy was to become the centrepiece of banking regulation after the introduction of foreign banks to Australia in 1985, culminating with Australia’s adoption of the international Basel Capital Accords three years later. Given the Campbell Committee’s origins in a financial crisis, the fact that new prudential regulation was the result should not be unsurprising, but it is counter to the established narrative that the inquiry’s recommendations – and subsequent financial reform more generally – were unambiguously deregulatory.

Conclusion

The Campbell Committee process both drove policy change and restrained it. The Fraser government’s MPC discussed introducing foreign banks to Australia as early as October 1978 (NAA M2218 11), but a decision on this was put off until the committee produced its final report. When it did report three years later, the number and breadth of recommendations provided, along with the committee’s argument that it ‘may be counter-productive if the Government were to implement certain recommendations while indefinitely deferring others’ (Committee of Inquiry into the Australian Financial System 1981: xxx) were a constraint on change. Political divisions within the government as to the desirability of interest rate deregulation were a further constraint (Davis 1981). Other financial reforms were enacted in tandem with the inquiry, rather than driven by the Campbell process, and the bulk of its recommendations had to wait a change of government and another government inquiry.

Yet the Campbell Committee both laid the framework for the subsequent decade of financial reform, and was a spark that set off a wider program of microeconomic reform that included industrial relations reform, privatisation, changes to public sector management, tariff reductions, and a host of changes to the regulatory frameworks governing telecommunications, agriculture, aviation, and competition policy. The deliberations of the Campbell Committee reflect a shift from Keynesian modes of economic thinking to neoclassical modes with long-run consequences for Australian policymaking. This paper has sought to identify with a high degree of precision the moment of that shift from economic interventionism to market reform, and identify the historical context in which it was made – a now-largely forgotten economic crisis in the building society industry and demands to proclaim an unproclaimed part of Whitlam government legislation.

This close empirical analysis also helps casts some light on the trajectory of economic reform in recent decades. Scholars of the ‘regulatory state’ emphasise the growth in regulation in Western democracies during a period where it is popularly believed that regulation was being reduced (Berg 2008: 8–19; Braithwaite 2005; Majone 2010). If we look in fine-grained detail how political demands drove and constrained regulatory change, the early history of financial reform in Australia helps illuminate how apparently deregulatory efforts laid the groundwork for later regulatory growth.

Notes

1. Strickland v Rocla Concrete Pipes Ltd (1971) 124 CLR 468.

2. A previous bill, the Financial Corporations Bill 1973, had been introduced December the year earlier but withdrawn. The differences between the two were not significant.

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