Financial Stability

Maintaining the stability of the financial system is a longstanding responsibility of the Reserve Bank. A stable financial system is one in which financial institutions, markets and market infrastructures facilitate the smooth flow of funds between savers and investors. This helps to promote growth in economic activity.

Transcript

Luci Ellis, Head of Financial Stability

Financial stability matters because if we don’t have it, the economic and social cost can be huge. The human cost of financial crises is enormous, as we've seen in a whole lot of countries over recent years. People lose their jobs, businesses fail, people lose their life savings – it’s a real economic cost, not just about the financial sector.

There are a lot of ways we can help promote financial stability. There are things we can do in terms warning about risks. There are things we can do working with the other regulators in Australia to push against the kind of risk-taking that could cause a problem later on. We can advise government about possible policies across the regulatory and tax and all the other areas that the government can respond to. We can work with international regulators to help build global rules for banks, for insurance companies and other parts of the financial sector to make the financial system resilient to things that could happen to it from outside the financial system and also to work against the financial system creating risks within themselves that could hurt the real economy.

The Reserve Bank isn’t the regulator of the banks or insurance companies or the other parts of the financial system. We have some specific powers to regulate certain kinds of financial infrastructure, the platforms that people use to trade money amongst themselves and to settle their debts, but we’re not the regulator of the banks, that’s APRA. What we can do though is work closely with APRA. I like to see the team in Financial Stability Department as being the economists on tap for APRA. We’re there to analyse the risks, to surveil everything that’s happening in the financial system and also in the customers of the financial system, the households and businesses – whose financial activity could expose them to risks that they perhaps might not fully understand or appreciate or for which they might be accepting quite low compensation. And all of those things are things we would be looking for and working with APRA in terms of formulating policies that might be helpful in leaning against those risks.

We also do a lot of communication. I like to say that we have a telephone and a microphone, the telephone’s for calling APRA or calling ASIC, the microphone is for speaking to the general public and to the banks and to other people who need to be informed about the risks that might be building up and that perhaps they may want to do something about and respond to.

The Bank also has an important role in crisis management. We have to respond if financial instability does occur. Again all of the regulators in Australia get involved in their various responsibilities, in terms of responding and mitigating some of the consequences. Among the Bank's responsibilities would be to provide liquidity to the financial system. The Reserve Bank is the provider of cash and liquid assets and so if there are institutions that have good assets but they just would not get a good price if they had to sell them today, they can instead present them to the Reserve Bank and get cash, get money in their account with the Reserve Bank and be made liquid again. That’s a very important role of central banks and has been for many centuries.

The Bank has to work very closely with regulators, other regulators both in Australia and overseas. In Australia there is the Council of Financial Regulators, which includes ASIC and APRA as well as Treasury, and the Governor of the Reserve Bank chairs that group. And that's where the Australian regulators work together to formulate crisis management policy, to help advise government about issues to do with financial stability and financial regulation. And it’s where we can nut out our joint position so that all the policies that are implemented in the Australian financial sector are well thought through and take all of the different sectors in the financial system into account.

Internationally we also do a lot of engagement, a lot of meetings, we spend a lot of time in planes going to those meetings and there’s an array of different international organisations that the Reserve Bank participates in. These are all international agencies where various countries come together and formulate common rules because things that go wrong in one country, as we’ve seen in recent years, can really harm the economies and the financial systems of other countries that are in many ways innocent bystanders. So we all have to work together to ensure high standards of regulation and supervision in the financial system. We all have to work together to detect the risk that might be building up that could affect each other.

It really matters to the Australian people if something goes wrong abroad because of what that can do to the world economy and therefore affect Australia.