Reserve Bank of Australia Annual Report – 1990 Banking and Note Issue Functions

Apart from the policy-related operations discussed in earlier chapters, the Bank offers a wide range of financial services to its customers. It is committed to providing these services efficiently and at a cost comparable with those offered by commercial institutions.

Among the services provided are normal banking arrangements, currency distribution and the conduct of stock registries. In all areas, the adoption of more efficient procedures, including greater use of computers, has led to a reduction in staff numbers over recent years.

The Bank is shortly to commence refurbishment of its Melbourne building and a similar program for its Head Office building is planned. Both were constructed in the early 1960s and need to be brought to contemporary standards, including the removal of asbestos in some areas.

The Bank continues to operate from its offices in London and New York. The former houses a branch of the Bank (with a modest banking operation) while there is a representative office in the latter. A major task for staff in these centres is to assist with the Bank's foreign exchange operations and, through direct and timely participation in the markets, to improve the returns on Australia's holdings of international reserves. They play a valuable role in keeping abreast of local economic and financial developments that are important to the Bank's consideration of monetary and banking policies; they also maintain regular contact with other central banks and international financial institutions. Through these offices the Bank is also able to monitor, for supervisory purposes, the overseas operations of Australian banks.

Banking Operations

During 1989/90, the Bank continued to provide a full range of banking services to its major customers — the Commonwealth Government, the State governments of Queensland, South Australia, Western Australia and Tasmania and a number of governmental authorities. In addition, it conducted accounts for each of the Australian banks, authorised dealers in the short term money market and some overseas central banks and multinational agencies.

Transaction volumes were similar to those in other recent years — a total of about 70 million paper and electronic items. This figure is lower than the peak of around 100 million in 1982/83 when the Commonwealth — the Department of Social Security, in particular — drew a much larger number of cheques on the Bank. Since then, increasing use has been made by the Commonwealth of direct credits to bank accounts in lieu of paper (cheque) payments.

During the year, a review was undertaken of the scope for streamlining further the Commonwealth's payments to the private sector while, at the same time, providing scope for the private sector to make payments more efficiently to the Commonwealth. The aim would be an electronic payments network running between the Commonwealth and financial institutions through a Reserve Bank “gateway”. This would allow further reductions in paper-based transactions and it would make the preponderance of transactions — the direct electronic entries — cheaper to effect. Private sector payments to the Commonwealth would be possible through the network, which would also facilitate the provision of data to the Bank by banks and other financial institutions. The findings from the review are now being considered.

Generally speaking, the upgrading of computer systems and a more commercially-oriented approach to its banking operations have enabled the Bank to continue to offer the Australian public sector very competitive banking services.

In conjunction with its banking business, the Bank provides public sector debt registry facilities at each of its Australian branches. The Commonwealth Government traditionally has been the major user of these facilities but in recent years there has been an increasing interest from other customers.

Since April 1990 the Bank has conducted a registry for debt issued through the South Australian Financing Authority (SAFA). At year's end, it was considering proposals from a number of other public sector borrowers seeking the provision of registry facilities.

At end June 1990, Commonwealth Government securities on issue of $42 billion were recorded in 169,000 stockholdings at Australian Registries. The number of stockholdings declined sharply in the past year, due mainly to maturities of several series of Australian Savings Bonds (ASBs). This decline will continue until the last series of ASBs matures in 1994.

Work continued during the year on the development of the Bank's electronic transfer and settlement system for Commonwealth Government securities. It is expected that the system will begin operations in the second half of 1990. It will enable traders who are members of the system to record and settle transactions through computer entries, and thereby largely eliminate the use of manually completed transfers for secondary market trading. A similar system, Austraclear, already caters for other classes of securities which are actively traded. The two systems are closely linked, with access to either available to members through a single terminal.

Gold

The Bank owns approximately 250 tonnes of gold as part of Australia's international reserves. In recent years, it has taken the opportunity to earn additional revenue through participation in the gold loan market. With gold production in Australia at high levels, there has been generally strong demand from producers for gold-denominated loans, and for facilities to allow them to hedge returns from future production. The Bank is not directly involved in these activities but, by providing loans at the wholesale level, facilitates the operations of those that are.

During 1989/90, the Bank dealt with seven separate counterparties (bullion houses) and had loans of 17 tonnes outstanding at the end of June, compared with seven tonnes twelve months previously. All loans made by the Bank are subject to stringent security conditions.

Note Issue and Currency Distribution

The Bank is responsible for the issue, distribution and processing of currency notes, and for co-ordinating the distribution of coin. New notes are produced at Note Printing Australia to replace notes no longer fit for re-issue, and to accommodate growth in circulation. These new notes are initially distributed to the Bank's branches in Australia. Coin is transported from the Royal Australian Mint in Canberra to various holding points across the country. From these points, notes and coin are distributed by armoured car companies to banks and other users. In ten country centres, note distribution facilities are provided under agency arrangements.

In May 1990, the Bank announced that a new series of currency notes would be issued, commencing with the $5 note. As well as incorporating state-of-the-art security features, which will assist in minimising the risk of serious counterfeiting in Australia, the new series provides the opportunity to acknowledge the achievements of a number of famous Australian women and men not previously depicted on notes.

The new $5 note will be printed on plastic, similar to that used for the commemorative $10 note issued in 1988. It will measure 65mm × 130mm. Other notes in the new series will be issued progressively over the following two to three years. The notes will have a common height of 65mm, with their length increasing by 7mm per denomination.

The use of plastic for currency notes offers a number of advantages, including the capacity to leave part of the note transparent and thereby provide protection against photocopying. Plastic is also a good vehicle for other anti-counterfeiting devices, including optically variable devices (OVDs), like the silver image of Captain Cook on the commemorative $10 note. These are intended to be incorporated in the higher denomination notes. Experience with the commemorative $10 note also suggests that plastic notes do not soil as readily as paper and are likely to have a much longer life in circulation.

During 1989/90, the Bank issued notes valued at $50 billion and received back notes valued at $49 billion; total turnover was 18 per cent higher than in 1988/89. Reflecting its concern about the level and growth of currency note turnover through its accounts, the Bank has discussed with banks and armoured car companies the scope for eliminating any unnecessary movements of notes.

During 1989/90, the Bank's machines processed some 1,300 million notes of which about 70 per cent were re-issued and the remainder destroyed.

The volume of notes on issue reflects community demand, with the level subject to seasonal fluctuations. Overall, 1989/90 saw the note issue increase by only 5 per cent. Lower levels of economic activity and the high cost of holding idle cash balances were important factors. Almost all of the growth over 1989/90 was accounted for by the $50 and $100 denominations (see table); the strong growth in $50s probably reflected an increased usage of that denomination in automated teller machines.

In previous years, the volume of notes was reduced by excluding notes of a denomination not exceeding two dollars which had been on issue for more than twenty years, and larger denomination notes which had been on issue for more than forty years. A change to the Reserve Bank Act during 1989/90 removed the need for this requirement and an amount of $48 million recorded as “Provision for Notes not Presented” was added back into notes in circulation. This explains why $1 and $2 notes on issue appear to have increased in 1989/90. However, an assessment was made of the value of notes nominally in circulation but likely to have been destroyed and therefore not available for presentation. Following this assessment, the liability for certain pre-decimal notes was reduced by $35 million, with a corresponding transfer to profit and loss account.

Coin surplus to the community's requirements is returned to the Bank. During 1989/90, the Bank co-ordinated the distribution of coin valued at $1,594 million, and received back coin valued at $1,560 million. As in the previous two years, the Bank's holdings of some coins were excessive and a further $17 million was resold to the Mint.

“So long as actual and expected inflation and nominal demand remain strong, high interest rates should not be surprising. Only when inflation slackens significantly and markets believe the slowdown will be sustained can we look forward to meaningful, sustained declines in dollar interest rates, consistent with growth in real activity.”

Paul A. Volcker
Statement to the Joint Economic Committee of
US Congress, July 1981