Reserve Bank of Australia Annual Report – 1992 Operations and Customer Services

Monetary policy and financial surveillance issues attract most public attention but employ a relatively small part of the Bank's resources. Financial transactions in domestic and foreign markets, and with the Commonwealth Government, employ more resources. The Bank is a substantial financial institution with a balance sheet in excess of $30 billion. Its major asset is holdings of foreign reserves, which are managed to achieve the maximum return consistent with prudent liquidity and risk considerations. The Bank also conducts specialised banking services to government, provides registry services for public sector issuers of debt, and distributes currency.

Banking

Specialised banking services are provided to the Commonwealth Government, several State Governments, and a number of government instrumentalities and overseas official institutions. The Bank's principal customer is the Commonwealth Government, through its various departments and instrumentalities; the Reserve Bank Act provides that the Bank shall, in so far as the Commonwealth requires it to do so, act as its banker and financial agent. These services are provided at competitive prices, with the Bank recouping its associated costs and charging a commercial profit margin. It has devoted considerable resources to reducing its costs and upgrading its technology in these service areas.

The Government Direct Entry Service (GDES) is one example of the use of improved technology to reduce the costs of banking services. This system, which was outlined in last year's Report and commenced operation in December 1991, was awarded a Silver Award by the Technology in Government Committee in its 1992 awards. The system uses high-speed data links to gather payments data from government agencies which, after amalgamation, verification and sorting, it distributes electronically to relevant financial institutions. Up to 3 million transactions a day and almost 160 million in a year are currently processed; over 600 different financial institutions receive customer payments through the system. The system replaces more costly paper and magnetic tape-based methods used previously by the Department of Finance and the Department of Social Security; it has the potential to encompass payments by other Commonwealth departments and instrumentalities and, in time, to be used for revenue collections.

The Bank's PC-based desk-top banking package, ReserveLink, allows customers to perform many banking-related tasks from their office – such as viewing account information, performing cheque reconciliation, effecting funds transfers, making direct entry transmissions to other financial institutions and lodging stopped cheque data. For larger Commonwealth departments with bigger volumes, these same services are provided by direct link.

The Bank is exploring new ways of building on its present electronic banking strength that will help to reduce costs. To this end, the Department of Finance and the Bank have embarked on a pilot project to develop an electronic data interchange (EDI) prototype for electronic transmission of non-routine cheque payments to accounts of suppliers (both government and private firms) at other financial institutions; simultaneously, remittance advice details would be transmitted electronically to suppliers. The project has the potential to reduce significantly present volumes of paper-based payments between the Commonwealth and its suppliers.

Other initiatives under way are with the Department of Social Security to examine the feasibility of handling electronically the payment of pensions to overseas recipients, and with the Australian Taxation Office to improve the efficiency and timeliness of tax collections – thereby saving the Commonwealth substantial sums in public debt interest.

Registries

The nature of the Bank's registry business is changing. The stock of Commonwealth Government securities on issue has increased over the past five years, but the number of transactions has fallen sharply as the Australian Savings Bond (ASB) has been phased out (only $382 million of ASBs were still on issue in June 1992). The ASB – a retail instrument issued in small denominations – involved very labour-intensive registry requirements. Conventional Commonwealth Government securities, being wholesale instruments, are much cheaper in registry cost terms.

Since 1987/88, the volume of transactions (applications, redemptions, transfers and markings) has fallen by two thirds, and the number of stock-holder accounts by a similar magnitude. Over the same period registry staff declined about 75 per cent. Staff cuts and ongoing investments in computer systems have substantially reduced costs to registry clients.

In August 1991, the Bank introduced an electronic system for settling transactions in Commonwealth Government securities known as the Reserve Bank Information and Transfer System (RITS). RITS is a real-time, computerised system for recording and settling transactions in Commonwealth Government securities on a delivery-against-payment basis. Transactions in securities may be settled from computer terminals in RITS members' offices without additional paperwork. At the instant the transaction is confirmed in the system, the transfer of ownership of securities is recorded and an irrevocable payment obligation is created on the buying member's bank. Activity and membership have grown quickly; the system presently has 60 members and around 80 per cent of the turnover by value in the market is now being settled on RITS.

Early in June, the Bank completed a program which centralised all Commonwealth registry accounting. Counter services at the Bank's eight branches are unchanged but, with the amalgamation of the eight previously separate registries, inter-registry transfers to move stock holdings to a different city are no longer required. This program has reduced costs, and provided better reconciliation procedures for the Commonwealth Government.

Management of Portfolios

The Bank's assets consist mainly of portfolios of domestic and foreign securities, and gold. The Bank's asset holdings tend to grow over time, largely as the counterpart to the growth in currency notes on issue and deposits by its customers. Changes in the amount and composition of these assets occur largely as a result of the market operations the Bank undertakes in pursuit of its monetary policy objectives.

On the domestic side, the portfolio mix of Treasury notes, Treasury bonds and securities held under repurchase agreements is largely the outcome of domestic operations. Maximising returns is not a primary goal, although there can be circumstances when that and monetary policy objectives come together. In January 1992, for example, the Bank made purchases of long-dated paper, primarily with a view to calming the bond market at that time, at what have turned out to be attractive yields. At other times, the pursuit of maximum returns would be in conflict with the Bank's broader responsibilities.

Management of foreign currency assets, on the other hand, involves operations in overseas financial markets where the Bank is primarily an investor and more attuned to possible returns.

Liquidity and security obviously remain major objectives in the investment of Australia's foreign exchange reserves, which totalled $18 billion at end June 1992. The emphasis on security – ie avoidance of credit risk – means that foreign currency assets are invested primarily in securities issued by governments of the highest standing, along with some other central banks and international institutions, and, to a limited extent, some highly rated commercial banks. Liquidity is an important consideration because the Bank may need to sell large volumes of assets at short notice – for example, to fund its foreign exchange operations.

Consistent with its high standards for security and liquidity, the Bank has sought in recent years to improve its returns by broadening the range of eligible investments and managing those investments more actively. Diversification has been pursued in two ways. First, whereas the bulk of investments was previously in US dollars, the portfolio is now spread over the three major investment currencies – US dollars, Japanese yen and Deutschemarks. These account for over 90 per cent of the Bank's foreign currency holdings. A wide range of currencies reduces the risks of adverse movements in any one currency and opens up additional investment opportunities. The Bank adjusts the currency composition of its assets from time to time but these adjustments tend to occur gradually.

Secondly, within each currency, the Bank has sought to invest in a range of maturities, rather than just in short-term securities. The Bank now invests in securities with maturities out to ten years, which enables it to achieve higher returns and, in some cases, to get into the more liquid segments of particular markets. In both Japan and Germany, for example, the most liquid part of the government securities market tends to be for securities with maturities around ten years. While holding longer-term securities increases the risk of capital loss arising from adverse movements in interest rates, that risk is managed by trading the portfolios more actively as market conditions change. The overall exposure to interest rate changes is measured through the duration of the portfolio and is monitored closely.

The make-up of the Bank's holdings of foreign currency investments as at 30 June 1992 is shown in the following table:

The Bank has been moving toward best market practice by establishing “benchmarks” against which returns on portfolios can be assessed. The benchmark for each currency represents the portfolio of assets that the Bank would hold on average over time to meet its requirements for security, liquidity and return. Over the past year, the returns on the various portfolios were above the benchmarks established for each of the major currencies. This additional return, which is estimated at about $A165 million, can be taken as a measure of the contribution from active management, eg shortening or lengthening duration of the portfolio relative to the benchmark and trading of securities to take advantage of short-term anomalies in the pricing of securities in the market. The return on each of the major currency portfolios (measured in the relevant foreign currency) is shown below. The returns include income received, realised gains and unrealised gains as a result of valuing securities at market prices at the end of the year.

Returns for 1991/92

(% p.a.)

	US Dollars	Yen	Deutschemarks
Benchmark	7.4	10.1	9.5
Actual	8.8	10.7	9.8

Gold

Approximately 250 tonnes of gold (worth around $3.6 billion) are held by the Bank as part of Australia's international reserves. A modest return ($3 million in 1991/92) is earned by lending part of this gold to selected counterparties on a fully secured basis. Last year the Bank dealt with ten separate counterparties and had loans totalling 40 tonnes outstanding at the end of June 1992, compared with 30 tonnes a year earlier.

During the year, the Bank undertook a gold transaction with the Central Bank of Iraq to facilitate a wheat sale to Iraq by the Australian Wheat Board. Relevant United Nations resolutions provided for sales of wheat to Iraq but the Iraqi Government was unable to finance the purchase by normal commercial methods. In the end, a central bank to central bank gold transaction emerged as the only feasible method of payment. The transaction involved the acquisition and sale of ten tonnes of gold from the Central Bank of Iraq, with the proceeds of over $150 million retained on deposit with the Reserve Bank to meet the Iraqi Government's obligations to the Wheat Board as wheat shipments were made. The result was that the Wheat Board was able to make sales of wheat that would not otherwise have been possible. The Bank simultaneously sold gold from its holdings to match the purchases from Iraq and there was no change in the overall level of the Bank's gold holdings.

Note Issue and Currency Distribution

Under the Reserve Bank Act, the Bank is responsible for the design, production and issue of Australian currency notes. Ready access to secure and clean currency notes is taken for granted by the community but the distribution and checking of notes for authenticity and fitness for reissue is a substantial Bank activity. The notes are printed by Note Printing Australia, a division of the Reserve Bank, at Craigieburn in Victoria.

Value of Notes on Issue

($million)

At end June	$1	$2	$5	$10	$20	$50	$100	Total	Increase %
1988	38	154	228	576	2,516	3,911	3,941	11,364	16.6
1989	36	54	241	643	2,554	4,037	4,781	12,346	8.6
1990	43	75	233	691	2,289	4,425	5,225	12,981	5.1
1991	43	73	249	679	2,048	5,345	6,356	14,793	14.0
1992	42	71	261	585	1,836	5,724	6,660	15,180	2.6

The value of notes on issue grew by less than 3 per cent in 1991/92, compared with 14 per cent in the preceding year. Several of the special factors which contributed to the strong growth in the note issue in 1990/91 – new Government cash reporting requirements and taxation arrangements, and diminished confidence in financial institutions – had much less impact in 1991/92. Other factors contributing to a slower growth in notes on issue were the recession, lower inflation, greater use of electronic point of sale terminals, and a continuing reduction in the payment of wages and salaries in cash.

New Note Series

A new $5 note, the first in a proposed series of new notes to be issued progressively over the next three years, was issued on 7 July 1992. The new note is unique in that it combines innovative plastic note technology developed in Australia with a number of special security features.

The note received a mixed reception, which is not unusual when innovative changes are introduced. An additional factor on this occasion was the differing views in the community about the appropriateness of continuing the tradition of depicting the monarch on the notes. The Bank has not sought to be the arbiter of community issues of this kind but it has been mindful of the fact that the Queen was approached – and gave her agreement to the use of her portrait – as far back as 1988 and that substantial resources were devoted to the preparation of the note in the intervening years.

Coin

Reissue of one and two cent coins ceased from 1 February 1992 and, over the following five months, $10 million or 2,500 tonnes of these coins were returned by banks to the Reserve Bank. This inflow, together with the inflow which followed the Treasurer's announcement in August 1990 that these coins would be phased out, means that around 20 per cent of the one cent and two cent coins on issue have been returned.