The Reserve Bank is responsible for maintaining the stability of the financial system. In a healthy and stable financial system, financial institutions, financial markets and the payment system work smoothly.
The Reserve Bank promotes the stability of the financial system through managing and providing liquidity to the system, monitoring risks, and chairing the Council of Financial Regulators (which also includes APRA, ASIC and the Australian Treasury).
The Reserve Bank is also the regulator of the payments system. The Payments System Board has a mandate to promote efficiency and competition in the payments system, and contribute to the overall stability of the financial system.
Watch Assistant Governor (former Head of Financial Stability) Luci Ellis talk about why financial stability matters and how the Reserve Bank promotes stability in the financial system.
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.
Watch Head of Payments Policy Tony Richards discuss the Reserve Bank's role as regulator of the payments system and its responsibility for ensuring competition and efficiency in the system along with promoting overall financial stability.
Tony Richards, Head of Payments Policy
The Bank has got a number of roles in payments systems. One important one is that we operate the system that banks use to transfer funds between themselves – and there's very high values going through that obviously, something like $180 billion a day on average through that system. And the other important one that I'd like to talk about is the Bank's role as regulator of the payments system, and that's done by the Payments System Board. The Bank has two Boards, there's the Reserve Bank Board and the Payments System Board.
The Payments System Board has been given the responsibility for competition and efficiency of the payments system and also for controlling risk and promoting the overall stability of the financial system.
Our work on retail payments emerged from the Wallis Inquiry which found that the cost of payments in Australia were quite high and they gave the Bank a mandate to improve the competition and efficiency in the payments system. So our early work was with respect to the payments card systems, where there were a number of fees that weren't particularly transparent. There were also restrictive rules on merchants and so the Bank has put in a series of standards or regulations to improve the competition and efficiency in the card systems.
We've also done some work on the ATM system where the emphasis has been on making the cost of ATM transactions transparent to customers (rather than finding out about the cost of it a month later on their bank statement), and also ensuring that the owners of ATMs are able to charge and continue to provide the services.
The Bank has a responsibility to ensure that licensed clearing and settlement facilities operate in a way that promotes the stability of the Australian financial system. The Bank has put in place standards and it does annual assessments against those standards. What we do is we have ongoing dialogue with the clearing and settlement facilities. We understand their business models, we understand the risks they're taking, the new products they're offering and once a year we do an assessment of those clearing and settlement facilities.
The New Payments Platform is an exciting project that is building a new centralised or hub-based infrastructure that all financial institutions will connect to. And among other things, it's going to facilitate real-time payments between households. So, for example, if I was wanting to sell my car on a Saturday afternoon privately, I'd be able to make sure that the money had arrived in my account from the buyer before I hand over the keys.
So the Bank has been working closely with the industry. It's a collaborative project and the industry participants will also be building their own apps et cetera to offer new and improved payments services to their customers.
In a Nutshell
Roles and Functions of the Reserve Bank of Australia
Describes the different roles and functions of the Reserve Bank of Australia.
The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment and the economic prosperity and welfare of the Australian people.
Operations in Financial Markets
The Reserve Bank operates in domestic and international financial markets. This is to implement monetary policy, help ensure the smooth functioning of payments and manage Australia's foreign exchange reserves.
The Reserve Bank is responsible for overall financial system stability. It does this by managing and providing liquidity to financial institutions, monitoring risks and cooperating with other organisations as part of the Council of Financial Regulators.
Payments and Financial Markets Infrastructure
The Reserve Bank has responsibility for ensuring the stability, efficiency and competitiveness of the payments system. It also has a regulatory and operational role in ensuring that the payments infrastructure promotes financial stability.
The Reserve Bank is responsible for producing and issuing Australia's banknotes. Its goal is to produce banknotes that everyone can trust, both as a means of payment and a store of value.
The Reserve Bank provides a range of banking services to the Australian Government and overseas central banks. Payments and transactions often relate to the everyday lives of Australians, such as social security benefits and emergency payments to people affected by natural disasters.
Monetary Policy in Australia
Describes why and how the Reserve Bank conducts monetary policy.
The Reserve Bank conducts monetary policy to achieve its goals of price stability, full employment, and the economic prosperity and welfare of the Australian people.
It does this by using an inflation target to help keep inflation between 2-3%, on average, over time. The tool to manage inflation is the cash rate.
The Reserve Bank Board meets eleven times a year, on the first Tuesday of the month, to decide what the cash rate should be.
The cash rate has a strong influence over other interest rates, such as lending and deposit rates.
A reduction in the cash rate typically stimulates spending and inflation, while an increase in the cash rate typically dampens spending and inflation.
If inflation is likely to be too high for too long, the Reserve Bank Board would typically increase the cash rate to bring inflation back to the target. If inflation is likely to remain too low, the cash rate would typically be lowered.
Monetary Policy Implementation in Australia
Describes how the Reserve Bank implements monetary policy and keeps the cash rate as close as possible to its target.
The Reserve Bank implements monetary policy by keeping the cash rate as close as possible to the target.
It does this by conducting money market transactions. These ‘open market operations’ are typically conducted as auctions.
Open market operations increase or decrease the amount of cash held by banks.
The Reserve Bank also helps banks manage cash under terms where lending and deposit rates form a corridor of 0.25 percentage points above and below the cash rate target. The corridor helps keep the cash rate close to target.
The Reserve Bank lends cash to banks at an interest rate 0.25 percentage points above the cash rate target. Banks would not borrow cash at a higher rate, so there is no market above this lending rate.
Banks deposit cash with the Reserve Bank at 0.25 percentage points below the cash rate target. Banks do not lend cash at a lower rate, so there is no market below this deposit rate.
The Inflation Target
Defines Australia's inflation target and explains why and how it is used.
The Reserve Bank has an inflation target to achieve the goals of price stability, full employment, and prosperity and welfare of the Australian people.
Australia's inflation target is to keep consumer price inflation between 2–3%, on average, over time. The inflation target is flexible and allows for temporary fluctuations in inflation above or below the target.
Low and stable inflation reduces uncertainty in the economy, helps people make saving and investment decisions, and is the basis for strong and sustainable economic growth.
The Reserve Bank adopted the inflation target in the early 1990s. The Bank and the government agree on the importance of the inflation target and formally set out this agreement in the Statement on the Conduct of Monetary Policy.
The Reserve Bank uses the cash rate to stimulate or dampen economic activity such that inflation is in the target range over the medium term.
If inflation is likely to be too high for too long, the Reserve Bank Board would typically increase the cash rate to bring inflation back to the target. If inflation is likely to remain too low, the Board would typically lower the cash rate.
Financial System Regulation in Australia
Describes who is responsible for financial system regulation in Australia.
The Council of Financial Regulators (CFR) is the coordinating body for Australia's main financial regulatory agencies. It includes the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury.
The role of the CFR is to contribute to the efficiency and effectiveness of regulation and to promote the stability of the Australian financial system. The Governor of the RBA chairs the CFR and each of the agencies plays a different role in promoting financial stability.
The RBA is responsible for promoting overall financial system stability. It does this by managing and providing liquidity to institutions, regulating the payments system (including financial market infrastructures) and monitoring risks in the financial system.
Describes why and how the Reserve Bank helps maintain a healthy and stable financial system.
The Reserve Bank helps maintain a healthy and stable financial system. This is fundamental to the economic prosperity and welfare of the Australian people.
In a healthy financial system, money is channelled between savers and borrowers so that different activities, like spending by households or investment by businesses, can be undertaken.
A healthy financial system is resilient so that money keeps flowing even when the economy slows or there are disruptive events.
The Reserve Bank ensures that there are adequate funds in Australia's financial system. During the global financial crisis, the Reserve Bank provided temporary extra funding to the system.
In normal times, the Reserve Bank watches for emerging risks in the financial system. Twice a year it publishes a financial ‘health check’ in the Financial Stability Review. Where risks pose a threat to the financial system, the Review explains the issue and the policy response.
The Reserve Bank chairs the Council of Financial Regulators, which includes the prudential regulator APRA, the corporate and financial services regulator ASIC, and the Australian Treasury. The Council meets at least four times a year to discuss current issues and policies. In a financial crisis, it coordinates responses across the member agencies.
Defines money and credit and describes how they can be used to understand developments in the economy.
The Reserve Bank publishes and monitors data on the stock of money and credit in Australia. These data are called the financial aggregates. They can be used to help understand developments in the economy.
Money can be held in different forms – for example, as banknotes in your wallet and as deposits in the bank. The main measures of money are the money base, currency, M1, M3 and broad money.
Credit is a measure of funds borrowed from the banking system. People borrow to purchase things such as houses, cars and holidays. Businesses also borrow to invest in projects and buy assets. Total credit can be broken down into housing credit, personal credit (such as on credit cards) and business credit.
Monitoring changes in the stock of money and credit is important because it can help us understand more about what's happening in the economy. Monitoring changes in credit can also be helpful for identifying risks to financial stability.
Higher credit growth tends to be associated with more positive economic conditions (e.g. people wanting to borrow and spend more and banks being willing to lend more). Lower credit growth tends to be associated with less positive economic conditions. But rapid credit growth could signal growing risks to financial stability, particularly if debt levels are already high.
Changes to the cash rate can influence credit growth because of the effect that the cash rate has on other interest rates related to credit, such as on housing loans, credit cards and business loans.
How Australians Pay
Describes some of the most common payment methods used when paying for goods and services.
When you pay for something, you can usually choose how you pay. Here are some of the most common payment methods. Debit card 30%. Credit card 22%. Cash 37%. Other 11%.
When you pay – for example, in a shop – the shop owner faces costs for accepting your payment, including bank fees and the opportunity cost of their time. These costs depend on how you pay.
Cash is usually a low-cost method, particularly for small transaction sizes. A shop owner might not pay any fees related to the use of cash, but may face other costs (for example, time taken to deposit the cash received).
Debit cards (which use your own money from your bank account) are generally lower cost than credit cards.
Shop owners usually pay higher fees to accept credit cards (which borrow money from your bank). Fees vary depending on the type of card, and are typically higher for cards that provide rewards (such as frequent flyer points) to the cardholder.
If you use a more expensive payment method, the shop owner has to pay for it. Shop owners can either increase the prices of what they sell for all customers, or can pass on the cost directly to customers that use high-cost methods by adding a surcharge, which encourages people to switch to low-cost methods.
Banknotes in Australia
Describes the role of the Reserve Bank in producing Australia's banknotes and highlights some common features of the banknotes.
The Reserve Bank is responsible for designing, producing and distributing Australia's banknotes. Its goal is to produce banknotes that everyone can trust as a payment mechanism and a store of value.
Australia has five denominations of banknotes: the $5, $10, $20, $50 and $100. There are more than 1.5 billion banknotes on issue, worth more than $73 billion.
Australia has very low levels of counterfeiting. The Reserve Bank keeps our banknotes safe by researching anti-counterfeit technologies and upgrading security features.
Australia's banknotes are printed on polymer (plastic). They start out as plastic pellets that are melted down into large sheets, and then designs are printed onto them.
Each banknote is produced with a unique serial number. The two letters represent the banknote's position on the sheet and the first two numbers indicate what year the banknote was printed.
Polymer banknotes are recyclable. At the end of their life cycle, old and damaged banknotes can be recycled into products such as building materials and compost bins.
Explains what monetary policy is, what it aims to achieve and how monetary policy decisions are both made and implemented.
Describes how changes made by the Reserve Bank to the cash rate – the ‘instrument’ of monetary policy – flow through to economic activity and inflation.
Describes the Australian cash market and explains how the Reserve Bank ensures that the cash rate is as close as possible to its target.
Describes the inflation target, why the Reserve Bank targets inflation and how the target works.
Describes how inflation is measured, explains how different indicators of underlying inflation are calculated, and outlines some of the limitations of using the Consumer Price Index.
Explains how the unemployment rate is measured and describes the main types of unemployment.
Explains how changes in the value of the Australian dollar affect economic activity and inflation in Australia, along with the nation's balance of payments.
Explains the concept of an exchange rate, how exchange rates can be measured and the different types of exchange rate regimes that exist.
Discusses the causes of the terms of trade boom of 2005 to 2012 and explains the way in which it affected the Australian economy.
Summarises the main causes of the global financial crisis, how the crisis unfolded and how policymakers responded to it in Australia and abroad.