Study of Financial System Guarantees

Review chair
Kevin Davis

On 12 September 2003, the Federal Treasurer, the Hon Peter Costello, MP announced the Government’s response to the HIH Royal Commission report.

A key recommendation of that report was that "the Commonwealth Government introduce a systematic scheme to support the policyholders of insurance companies in the event of the failure of any such company" (Recommendation 61).

The Government considered that the appropriateness of such arrangements needed to be considered in terms of their possible financial system–wide impacts and consequences for the design of the regulatory framework. Moreover, the precise design of any guarantee, its incentive properties and its associated financial costs warrant close consideration.

The Government decided to commission a technical study to consider the merits of introducing an explicit guarantee of part or parts of the Australian financial system and the merits of possible coverage and design options.

The Government engaged Professor Kevin Davis, Professor of Finance, University of Melbourne to lead the technical study. Professor Davis was supported by a team of officials drawn from the Australian Treasury, the Australian Prudential Regulation Authority and the Reserve Bank of Australia. Professor Davis provided his report to the Government on 26 March 2004.

Consistent with the terms of reference, Professor Davis’ Report does not make recommendations but concludes that the costs and benefits of adopting a guarantee scheme in Australia appear finely balanced. His Report also catalogues the broad range of issues that would need to be considered in designing any such scheme to suit Australia’s circumstances.

As foreshadowed at the time of commissioning the Davis Report, the Government proposes conducting a broader consultation process before making a final decision on this matter.

To help facilitate the consultation process, the Government has released a discussion paper outlining the key issues and questions on which public comment is sought.