Speech Summary The Transformation in Maturity Transformation
Speech to Thomson Reuters' 3rd Australian Regulatory Summit
The speech looks at how the financial system undertakes maturity transformation. It explains the importance for the sound working of the economy of the transformation of claims over illiquid assets into highly liquid claims.
The speech looks at various types of maturity transformation and the difference between bank deposits and collective investment vehicles is outlined (namely that whilst banks promise to pay back the deposit in full, in investment vehicles the value of the investment moves according to the performance of the underlying assets). Consideration is given to the risks that could result from the banking industry's traditional (and important) combination of maturity transformation and the promise to redeem at par. Reference is made to how such risks were managed in the global financial crisis. It notes that, whilst Australia did not experience the financial problems encountered overseas, there was a general increase in depositors' nervousness (that led to public policy intervention).
Discussion then focuses on efforts to implement stronger and more resilient arrangements for maturity transformation, such as strengthening bank balance sheets by increasing the amount and quality of capital in the banking system. Initiatives focusing on liquidity management are highlighted and reference is made to the Bank's role in providing a Committed Liquidity Facility for commercial banks to support the introduction of a Liquidity Coverage Ratio. Measures introduced are recognised as having made the system more resilient, but the importance of avoiding the creation of a new set of risks (when trying to address the risks associated with maturity transformation) is emphasised. The speech observes that these measures do not guarantee stability and the long standing role of the central bank as the lender of last resort is discussed.
The speech then looks at structural and cyclical factors related to maturity transformation in the asset management industry, in the context of its now significant size. It explains that the underlying concern is not so much that collective investment vehicles may in some circumstances be unable to meet obligations to their investors but rather that their actions could potentially spread distress across the broader financial system. The speech then reflects on experiences and current international discussions and makes some observations on the topic.
The speech closes by noting that work is being done to understand the risks in the asset management industry and, relatedly, the role that regulation and the central bank might play in addressing the various risks.