Transcript of Question & Answer Session Bagehot and the Lender of Last Resort – 150 Years On

Thank you very much. So you can see it’s not easy to pull together such a comprehensive review but also policy-related issues that the financial market and everyone else is facing. Thank you for a very polished work. Any comments or questions? For those of you who are not coming from Australia, we can also reflect on your own central bank, if you’ve done some studies of that [inaudible ]. Yes, please.

Thanks for the lecture; it was a very excellent presentation. I have two questions, actually, and I don’t want to exhaust the time for that is as well. What’s your thoughts about the existence of electronic banks that are appearing right now in different countries? The second question relates to: since the inception of Basel-III rules – it’s been some time; like, maybe the last 10 years – do you think they are as effective as the rules that are imposed by central banks in each country? Thanks.

Thank you for the question. Your first question was on the rise of electronic banks; is that right? Yeah. The way that regulators would typically respond to this is: institutions that are conducting the same activities and have the same risks should be regulated in the same way. I think what your question – I think, actually, the link between your first and second question pertains to: how is innovation in the financial system and the banking system – have we got the right regulatory guardrails in place? The way that countries internationally have thought about this is twofold. As I said, if it’s conducting similar sorts of activities, it should be regulated firmly within the existing regulatory perimeter for the conventional banking industry, and what we’ve seen there is a very significant uplift, both in terms of capital and liquidity requirements and governance in general. On the Basel-III requirements, those apply to the largest institutions. What we’ve seen is different countries approach differently the question of whether those Basel-III requirements are effectively a cap or a flaw for their own large banks. In Australia, the approach that APRA has taken is to conduct or build a regulatory regime that is super-equivalent to Basel III. So we take Basel III almost as a minima and add layers of protections on top of that, in terms of capital and liquidity. There’s also, I think, a big question at the moment globally about what sort of regulatory regime is appropriate for banks not captured by Basel III – the smaller institutions – and there you’ve seen a wide variety of approaches. I think, for instance, we’ve seen, in the United States, that a lot of the banks that recently – in fact, all the banks that recently got into trouble, they weren’t captured by the Basel-III requirements, and that is prompting a lot of introspection and reflection about how we should be thinking about systemically important thresholds. I don’t think there’s a clear answer yet, but I can certainly tell you, at all the international meetings I attend, this question of what is a systemically important institution is very much in play.

Thank you. I’m happy to get your thoughts on the cooperation between the central banks and the government Treasury, the interplay between the monetary and physical policy. Say, in Australia, currently, the rate hike is probably not as effective as what we would expect, given the rental market shortage and immigration policy.

I don’t want to be drawn into commenting on fiscal policy here. If I could maybe just reframe your question slightly into the context of this discussion, which is: one thing that we’ve learnt – we certainly observed in March – was the importance of having all the key regulators and key public stakeholders, including the government, acting in a powerful, coordinated, clear way; hence my remarks at the end there about the importance of very clear frameworks, very clear public communication by all the important agencies, which in a crisis inevitably is going to involve the Treasury as well. I think that lesson was learnt during the Global Financial Crisis and we relearnt it in March again.

I just have a question with regard to the cryptocurrency markets. There has been a rise in the investment in cryptocurrency. In your opinion, does the cryptocurrency market pose any threat to the role that the central banks play in any economy? Thank you.

So the IMF, the BIS and individual central banks have looked at this issue. The consensus, internationally and here in Australia, is that the crypto market is not of sufficient scale and doesn’t have sufficient interconnections with the traditional banking industry to pose systemic risks. If that market were to develop very, very rapidly and interconnections with traditional finance were to take hold, then I think you would see a much more vigorous response. Where you are seeing a very vigorous response, that’s true domestically and also particularly, actually, internationally, is to ensure that whatever activities are going on in the financial system, that they are consistent with the law and regulatory requirements. And our colleagues, for instance, at ASIC have been very strong and very clear about how they view those risks and activities and the obligations of all participants in the financial system to be operating within the law and within the regulations, the regulatory guardrails, that have been set.

Actually, I was quite curious about the concentrated sector, banking sector, in Australia and to what extent this concentrated banking sector is able to create an environment where innovation is going to find its way through, for example, Challenger Banks or more efficient fintech innovations, for example.

One thing we’ve observed in the last decade or so is actually that the market share for credit for the so-called ‘big four’ has fallen about 10 percentage points over the last decade or so. So you’re opening proposition is absolutely true: we do buy assets and Australia does have quite a concentrated banking system. But the degree of that concentration has actually diminished somewhat from a very high level to a slightly less-high level over the last 10 years, and that suggests to us that we’re seeing some competition at work. There’s a couple of banks in particular that have made very significant inroads into market share. More generally, we are seeing innovation in the financial system in Australia. The key, from a public policy perspective, is to ensure that we’ve got the policy settings that encourage competition, innovation, but not in a way that threatens financial stability. That’s the constant trade-off we wrestle with every day at the Bank, including in our work in the payments system for instance, but it’s certainly true for other regulators in Australia as well. We’re very, very aware of the need to make sure that our regulatory settings are facilitating and encouraging competition where it’s in the national interest but in a way that doesn’t undermine financial stability. And I can assure you that, at every meeting of the Council of Financial Regulators, we’re talking about these issues.

Does the Bank consider asset prices, especially the housing price, a potential risk factor for financial stability; and, if so, does the Bank have programs to monitor or affect housing prices in the market?

As you would expect, the Bank closely monitors developments in the housing market, both price developments and non-price developments. There’s certainly, however, no sense at the Bank of wanting to target specific levels of house prices. That’s not the way the Bank thinks about it; it’s certainly not the way that, for instance, APRA would think about it either. From financial stability, where we’re most focused here is, first of all, on household resilience. So, to the extent that households have a lot of debt in Australia, we spend a lot of time at the Bank – an increasing amount of time – looking at very large databases, lots of disaggregated data, loan level data, to better understand how resilient Australian borrowers would be to different types of shocks, and we feature that work every six months in the semi-annual Financial Stability Review; that’s a key work program for us. And I would also add that APRA are looking at this issue through the prism of the ability of lenders to absorb an increase in non-performing loans, whether it comes from household borrowers or from the corporate sector. So we’re looking at households and businesses and we’re also looking at the resilience of the financial sector to absorb shocks, including an increase in non-performing loans. That’s really where our focus from a financial stability perspective is and not so much on the level of recent change in house prices.

Thank you for those wonderful insights. I just have a quick question on what would be the future of employability linked with the Australian dream of mortgage, since you’ve mentioned databases which are being looked at constantly. So where does one see the future of that consolidating with those innovative ideas, mortgages and employability getting together?

I’m sorry; I lost the first part of your question on employability.

So I was wondering if those databases which are looked at from the banks and from the current mortgage prospectives and the Australian dream of having a mortgage, how does that link to the employability of future databases, or what is the future in that area when we combine all these policies together and see – how is that travelling?

I’m actually not clear. When you say the ‘employment’ or the ‘employability’; what do you mean by that?

So what I meant was that, when we look at the mortgage, housing, and we look at the price index and everything, how employability is travelling at the moment – like, how employment is going, how we are engaging the future generations—where do we see all this combined together for a better, let’s say, mortgage dream for people. Do you see that coming in together with all these policies; or is that something very fluid just to remain in databases, that we have so much employability and so many people actually be able to engage in their mortgage dreams? It’s a general question.

You are aware that the unemployment rate in Australia is very low.

Yes, of course. I am from Australia itself, so –

Maybe the way to cut through there a bit is, I think, possibly what you’re circling around there are questions of housing affordability. This is a critical issue of national significance. There’s a big intergenerational component to this issue. The Reserve Bank and financial regulators have fairly limited tools – in fact, very limited tools – in that regard. Ultimately, what we’re going to need to do as a country, as a society, is to look at a whole range of supply-side measures and demand-side policies to ensure that, we’re setting ourselves up for the future in a way that housing affordability is certainly less of an issue than it is today. Right now, it’s obviously a very, very binding constraint on upward mobility, and there are a whole host of not just economic but social consequences from having unaffordable housing. And that’s why the government, in particular, is very, very focused on this issue; they’ve recently announced some measures. And as a fellow Australian, I think it’s in all of our interests to get to a better place there.

Thank you very much. This is a very big question and probably it will require another presentation, but how is the Reserve Bank addressing the climate crisis?

You’re right; that is a separate dedicated speech. A number of my colleagues, including the Governor quite recently, set out in great detail how the Bank is thinking about that. Because it’s kind of off topic, if it’s okay, I might refer you to those other speeches. At a very high level, we’re looking at it through multiple dimensions: the impact on the economy; we’re looking at it through the impact on the financial system, including financial system stability; and the Bank is also engaging, in a very active way, with other domestic agencies and international agencies, for instance, in the areas of developing frameworks to help incentivise investment in renewable energy and so on. So there’s a multifaceted approach the Bank is taking to that. And I’d suggest that, if you have a look at the Reserve Bank website, you’ll see a number of speeches over recent years that set out in detail how the Bank is thinking about those various dimensions.