Transcript of Question & Answer Session The Impact of Payments System and Prudential Reforms on the RBA's Provision of Liquidity

Kevin Stevenson, AMP Bank. You said the Reserve Bank will set the market value of the security at the time of the repo. In times of severe stress and there’s not really trading in securities and for instance in RMBS, it’s difficult to know what is the market value and we could have a very different thought on market value than your thought, and we could get a surprise when it comes time to repo it. Any way for us to have an expectation of what your market value is going to be?

So, well what our market value won’t be will be the fire sale value of the security. What from the beginning of 2015 when we’ve got the data warehouses in place and we’re able to look at the detail of the security itself, we’ll have a valuation capacity to do our … We will be doing our own valuation of those securities. You guys will be providing us with updated information on that on a monthly basis, so we’ll be able to provide assessment of that valuation on a high frequency basis. So, there shouldn’t be …

But the market value of a security during a stress period like an RMBS will change drastically …

no, no that’s right, but what I’m … But what I’m saying is it’s our assessment of the value of the security not, sorry, I may have misspoken, I said it’s not going to be the fire sale value of the security, it’s going to be our assessment of the fair value of the security based on the information that you guys have provided to us. It’s not going to be orthogonal to the market price, it will still be an input, but as I said, if there’s no obvious pricing point out there we will … I mean we will have the capacity to be able to assess the value of that. So I don’t see that there should be large surprises.

I suppose the main point to say is it’s not going to be the value that it was on the 1^st of January 2015, necessarily, mostly because as the market moves but also because the characteristics of the security itself have potentially evolved since then too.

Any other questions, yeah? One here and then there.

I just wanted to ask you about the … I mean the reliance … This is a broader question involving the BASEL III requirements as well as, implemented in Australia, the reliance on government securities which you are attempting to address with this scheme, it does seem that there’s still some potential for fire sales if you’ve got all of the world’s financial institutions sort of herded into holding large amounts of government securities, 40 per cent of the semi market, for instance.

Well I think you have to distinguish between idiosyncratic and a systemic event. So when the … If there’s a systemic liquidity event going on there then the central bank’s in the business of providing liquidity to the system as a whole. In an idiosyncratic event, where only one institution is in trouble then that’s depending on the size of that institution, it doesn’t necessarily need to be a fire sale, right. Where if the system as a whole, that’s the situation where you don’t want everyone trying to self-liquidate, and that’s when the central bank’s in there providing the system with liquidity as a whole. So then you have to distinguish, the BASEL standard is effectively, Nick can correct me if I get this wrong, even though he doesn’t want to say anything, but basically it’s designed for an idiosyncratic event, the liquidity standard. It’s not … A systemic event is a slightly different situation than that. So in that world you’re not going to have, I mean to put it another way if the whole of the system is under liquidity stress then there’s not going to be anyone on the other side that’s willing to buy, right. So you’ve just taken a whole, most of the market is on the sell side there’s not probably going to be anyone out there on the other side as the buyer. So in that environment, where it is a systemic liquidity event, as indeed has occurred at various stages over the last few years, then the central bank provides the liquidity to the system as a whole. Another question there.

In the daily ES balances are you still going to be publishing the balance net of the repos, so we can sort of see the gauge of them?

Good question. Yes is … So what … So we look slightly different from what we publish at the moment, so you’ll be able to – actually I’ll get you to answer, that’s right, right? Yes. We had this conversation yesterday, so I just wanted to make sure. Yes.

We will change what’s up there at the moment so you will be able to see what is the sort of trading part of the cash market and what’s the … As well as what is the sum of ES balances, which will be the … So effectively if you want to put it this way you will be able to see the total ES balances are say $31 billion of which one billion is effectively the, for want of a better term, surplus ES balances or effectively the functioning part of the cash market, you can put it that way. And we’ll also continue to report what the trading volume is in the cash market, as you guys currently report to us. As well as what rate that trade’s at, obviously. Any other questions?

No, I should not have … Hopefully, as I said most people should have found, beyond understanding what the hell I was saying but it’s the information we basically provided to everyone over the last few months. So as I said hopefully it should be reasonably clear. Anything else?

With 20 billion entries in your balance sheet, do you see that sort of becoming just lazy money that’s now just uneffective, or ineffective in the economy?

No.

Or because of the operations you describe …

It’s actually very effective because they’re settling all the DE payments, so that’s … It’s actually …

It’s still just as … It becomes the no net effect, but I’m just …

… But I mean, it’s not a lot, so at the moment open repos … Our balance sheet fluctuates plus or minus 15 [billion], well up 15 [billion] and then down $15 billion every day, which is achieving exactly the same thing, which is facilitating the payments flows through the economy. So it’s actually relative to some other … It’s actually extremely … It’s a long way away from lazy, let me put it that way, because it’s actually allowing institutions to settle those payments flows out of hours, so there’s actually stuff going on there. So … And then the collateral that the banks are going to be holding under those open repos I would say is not going to be collateral that is going to be doing anything else either. So it’s actually putting that lazy collateral, otherwise lazy collateral to work to generate these payment flows effectively.

In terms of the second round OMOs, would you envisage a period when you said not necessarily being overnight repos for terms of say a week and what sort of time and publication of the results and that sort of wait for the [inaudible] in the morning …

You can answer this question because it’s a good question, and I mean it’s actually a good way to get this out to everyone at the same time.

Okay I mean probably it will be a number greater than one, anywhere from two to say seven days, yes. The precise announcement time we’re yet to work out. We’ll probably liaise with the AFMA Cash Committee before formalising it, but probably quarter past five or something like that.

And the results will be published the same way as we do our morning operations.

Exactly, it will look the same on Reuters and then the results will come out 15 minutes later or whenever.

Right, okay so no more questions. Thanks all for coming along, as I said if you’ve got further questions we’re certainly happy to hear from you. I mean or either raise them at the Cash Committee or just get directly in touch with Pete if it’s more on the payments side or Matt if it’s on the cash market side.

Okay well thanks very much everyone, hope that was at least of some use.