39 Paper by Reserve Bank of Australia

Canberra, October 1979

CONFIDENTIAL

Australia- New Zealand Economic Co-operation

Scope for Co-operation in Monetary and Banking Areas

The focus of the current exercise on closer economic relations between the two countries has been largely trade-oriented and thus runs mainly in terms of the possibilities of a full free-trade area, a customs union etc. The question might be asked whether this closer integration on the trade front might be accompanied by closer co-operation in monetary and financial matters.

Monetary Union

At one extreme, closer monetary co-operation could be interpreted as involving complete monetary union, ie the establishment of a common currency. Such a step requires a major political decision by both countries. It would have far reaching implications and would call for harmonisation over a broad range of monetary, fiscal and wages policies.

Moves along these fronts would not seem to warrant serious attention given that they pre-suppose a degree of commitment to political integration well beyond that envisaged in the current exercise. It is perhaps worth observing that the most notable example of espousal of the case for monetary integration has been the EEC, which has had this objective over a decade or more: progress in practice has been limited. The recently launched European Monetary System is an attempt to introduce greater stability in exchange rates between the participants but does not involve any major loss of autonomy on the part of individual countries in regard to their monetary and fiscal policies. The new system is in its early stages.

Co-operation in Financial Matters

In his meeting with the Prime Minister in Lusaka, Mr Muldoon mentioned banking as one area that would need to be considered. This suggests a need to consider whether there are any initiatives that might be taken in the financial area-less radical than monetary union-that would help the cause of closer economic relationships.

At present, three Australian banks undertake trading and savings bank business in New Zealand. Between them these three banks-ANZ Banking Group, Bank of NSW and Commercial Bank of Australia-operate about 470 branches and agencies in New Zealand. In terms of trading bank business they account for about 45 per cent of total deposits in New Zealand.

The remainder of the trading bank sector in New Zealand is accounted for by the National Bank of New Zealand (a member of the Lloyds Group) and the Bank of New Zealand which is owned by the New Zealand Government.

The Bank of New Zealand holds unconditional authority under the Banking Act to conduct banking business in Australia and at present operates five branches here. Its trading bank deposits in Australia amount to approximately $70 million or 0.3 per cent of aggregate trading bank deposits in Australia. The authority held by the Bank of New Zealand Savings Bank (BNZSB) is conditional in that it specifies the points at which it can carry on banking business in Australia. BNZSB holds deposits in Australia totalling $4 million. This represents about.02% of aggregate savings bank deposits.

In the area of non-bank financing there are a number of intermediaries whose operations extend across the Tasman. Four of the Australian banks have interests in hire purchase, general finance and merchant banking companies operating in New Zealand. There are also several Australian non-bank intermediaries with share holdings in New Zealand financial institutions. Major Australian life assurance and general insurance companies also have extensive operations in New Zealand.

A number of New Zealand insurance companies and other financiers carry on activities in Australia but their presence here is in total less significant than in the case of Australian intermediaries operating in New Zealand.

The spread of activities of Australian financial institutions to New Zealand (and the reverse process) has reflected commercial judgments made by the institutions concerned. More recently the scope for the process to be taken further has been subject to policies relating to foreign investment in each country. The Government's policy on foreign investment in the bank and non-bank sectors of financial markets is set out on pages 4 and 5 of the publication 'Foreign Investment in Australia'.

[NAA: A1838, 37011119118, ANNEX 6]