Reserve Bank of Australia Annual Report – 2019 International Financial Cooperation

The Reserve Bank participates in initiatives that seek to address the challenges facing the international economy and improve the global financial architecture. It does so through its membership of global and regional forums and its close bilateral relationships with other central banks.

Group of Twenty (G20)

The G20 presidency was held by Argentina from December 2017 to December 2018. In January 2019, the G20 presidency rotated to Japan. A key theme of the Japanese presidency is ageing, with a focus on understanding the macroeconomic implications of demographic change and identifying appropriate policy responses. Another important theme has been monitoring of global imbalances – that is, persistent and excessive current account deficits and surpluses – and identifying possible policy measures to respond to them. Japan has continued the G20's work on promoting private investment in infrastructure, but with a focus on the quality of infrastructure investment. This work was advanced by the G20's Infrastructure Working Group, which is co-chaired by the Australian Treasury.

The G20 has also continued to discuss how to strengthen the international monetary system. This discussion has been aided by a report by the G20 Eminent Persons Group, which was a focus of the G20 Ministers' and Governors' meeting in October 2018. The G20 has reiterated its commitment to a strong, quota-based and adequately resourced IMF at the centre of the global financial system. Accordingly, the G20 has committed to complete a review of the IMF's permanent ‘quota’ resources by late 2019. The G20 has also continued to monitor the risks stemming from excessive volatility in capital flows, as well as how to promote the transparency and sustainability of sovereign debt.

The G20 continues to pursue the full, timely and consistent implementation of the financial sector reforms developed and agreed after the global financial crisis, such as Basel III (to build resilient financial institutions). With many of these policy reforms now largely implemented, the G20 and Financial Stability Board (FSB) have shifted their focus away from post-crisis policy development and implementation, to assessing the effectiveness of the reforms. This work aims to determine if the reforms are meeting their intended objectives and whether there have been any material adverse consequences. The G20, in conjunction with the FSB and the global standard-setting bodies, also continues to monitor and address current vulnerabilities in the financial system (such as banks' exposures to leveraged loans), as well as medium-term emerging risks. The latter has included monitoring of developments in financial technology (‘fintech’), including crypto-assets and, where necessary, responding to the risks posed. The Reserve Bank, along with other Council of Financial Regulators (CFR) agencies, continues to work with overseas counterparts on these and other global regulatory issues.

Financial Stability Board (FSB)

As noted above, while the FSB has continued to pursue regulatory reform of the global financial system, its focus has shifted in recent years from policy design and implementation monitoring, to evaluating the effects of the post-financial crisis reforms.^[1] Initial evaluation work examined the effects of reforms on the incentives to centrally clear over-the-counter derivatives, and on infrastructure financing. Further evaluations are under way, looking at the effects of reforms on financing for small and medium-sized enterprises, and the ‘too big to fail’ reforms. A representative of Financial Stability Department is a member of the ‘too big to fail’ evaluation team.

The Standing Committee on Assessment of Vulnerabilities is the main FSB body for identifying and assessing risks in the global financial system. Supporting this committee are the Analytical Group on Vulnerabilities and the Financial Innovation Network, which provides input on the financial stability implications of financial innovation (such as fintech and cloud services). Global vulnerabilities recently considered by the Standing Committee have included high private and public debt, elevated asset values and weaker lending standards. It has also examined risks in particular markets and products. This has included highlighting concerns about the extent of financial institutions' exposures to riskier credit instruments, such as leveraged loans, both directly and through collateralised loan obligations. The Standing Committee is currently seeking to develop a clearer framework for the assessment of vulnerabilities. This should support a comprehensive, methodical and disciplined assessment of new and emerging risks to financial stability. The Assistant Governor (Financial System) is leading one of the work streams contributing to the new framework, exploring the features of a well-defined surveillance process.

The FSB has continued its work on addressing the risks posed by non-bank financial intermediation (NBFI) (previously referred to as ‘shadow banking’). This refers to credit provision involving entities and activities outside of the regular banking system. A key part of this work is an annual global monitoring exercise, which collects data on NBFI sectors within FSB and several non-FSB jurisdictions. The Reserve Bank is represented on the FSB's Non-bank Monitoring Experts Group (previously known as the Shadow Banking Experts Group), which conducts this monitoring exercise and associated risk analysis.

Reserve Bank staff members also took part in a number of other key FSB work areas during 2018/19, including meetings of the:

• Resolution Steering Group, which is progressing the FSB's work on enhancing resolution frameworks in line with international standards. Its recent policy focus has included: the adequacy of resources for central counterparty resolution; the arrangements for external and internal total loss-absorbing capacity at banks; and continuity of access to financial market infrastructures for a bank in resolution. The Resolution Steering Group also serves as an important forum to exchange information about resolution experience. The Australian Prudential Regulation Authority (APRA) took over Australia's membership of this group in June 2019.
• Cross-border Crisis Management Group for Financial Market Infrastructures, a subgroup of the Resolution Steering Group working on resolution arrangements for central counterparties and other financial market infrastructures.
• Official Sector Steering Group, which is progressing reforms of interest rate benchmarks, including coordinating the transition away from LIBOR (the London Inter-Bank Offered Rate) towards alternative interest rate benchmarks.
• Regional Consultative Group for Asia, one of six regional groups established to expand the FSB's outreach activities with non-member economies and to examine issues relevant for the region.

As a member of several FSB committees, the Reserve Bank hosts committee meetings from time to time. It hosted meetings in Sydney of the Regional Consultative Group for Asia (November 2018), and of the Non-bank Monitoring Experts Group (March 2019).

Bank for International Settlements (BIS)

The Committee on the Global Financial System seeks to identify potential sources of stress in the global financial system and promotes the development of well-functioning and stable financial markets. During 2018/19, the committee's discussions included: global financial vulnerabilities amid downward revisions to the outlook for global growth and risks related to political and trade tensions; the development of resilient capital markets; and financial stability implications of scenarios in which interest rates globally remain low for an extended period or move unexpectedly higher. The Markets Committee considers how economic and other developments, including regulatory reform and technological change, may affect financial markets, particularly central bank operations. Recent topics of discussion have included: changes in how monetary policies have been implemented and how this interacts with financial markets; implications of reforms to benchmark interest rates; and how technological change is affecting the structure of financial markets and central bank operations.

During 2018/19, Reserve Bank staff participated in a number of working groups of the Markets Committee and Committee on the Global Financial System, including:

• a Committee on the Global Financial System working group on establishing viable capital markets, which published its final report in January 2019
• a Committee on the Global Financial System study group on property price dynamics.

Basel Committee on Banking Supervision (BCBS)

Over the year in review, the Group of Governors and Heads of Supervision (GHOS) endorsed revisions to the BCBS market risk framework, which had been a major area of work in the past year, and which take effect from 2022. The BCBS also considered interest-rate benchmark reforms, aspects of the Basel III leverage ratio requirement, banks' exposures to crypto-assets and associated risks, and the results of the annual global systemically important banks (G-SIBs) identification exercise (see below). GHOS also endorsed the BCBS's strategic priorities and work program for 2019, which include: finalising ongoing policy reforms; ensuring full, timely and consistent implementation of the BCBS's post-crisis reforms; evaluating and monitoring the impact of the post-crisis reforms; assessing emerging risks; and promoting strong supervision.

The Macroprudential Supervision Group focuses on policies designed to address systemic risks arising from the banking sector, especially those posed by G-SIBs. The group discussed several issues during 2018/19, including: the annual G-SIB assessment exercise, which underpins the list of G-SIBs identified by the FSB; the next three-year review of the G-SIB identification methodology; and the experience with, and effectiveness of, the Basel III counter-cyclical capital buffer.

Committee on Payments and Market Infrastructures (CPMI)

Staff members from Payments Policy Department contributed to a number of CPMI-IOSCO implementation monitoring reports that were published in 2018/19. Staff also contributed to a CPMI-IOSCO Policy Standing Group discussion paper on default management auctions.

Cooperative Oversight Arrangements

International Monetary Fund (IMF)

A core function of the IMF is to provide conditional financial assistance to member countries encountering balance of payments difficulties. During the IMF's 2018/19 financial year (which runs from May to April), the IMF provided seven new lending arrangements (excluding concessional facilities) with a total value of 59 billion Special Drawing Rights (SDRs). This included a three-year SDR35 billion stand-by lending program to Argentina, which was increased to SDR41 billion in September. IMF non-concessional credit outstanding increased by around 40 per cent in the 12 months to July 2019, primarily because of payments to Argentina under its lending arrangement.

The Reserve Bank and other CFR agencies continued to work closely with the IMF during the first half of 2018/19 as the IMF concluded its 2018 Financial Sector Assessment Program (FSAP) review of Australia's financial system and regulatory framework. The IMF focused on assessing financial sector vulnerabilities and the overall framework for systemic risk oversight, as well as Australia's banking regulatory framework and supervisory practices. It reviewed the regulation of financial market infrastructures and the insurance sector, and crisis management arrangements. The FSAP assessment was informed by responses to detailed questionnaires, along with a large number of face-to-face meetings. These included a high-level discussion with agency heads during the September 2018 CFR meeting, as well as more policy related and technical meetings with individual CFR agencies, other government bodies and private sector firms, including banks. The key findings of the FSAP review were published in the IMF's Financial System Stability Assessment in February 2019.

The IMF's overall assessment was positive, indicating that the Australian financial system is fundamentally sound and has been further strengthened since the IMF's previous assessment in 2012. Nonetheless, the IMF made several recommendations to improve current arrangements. CFR agencies have been considering how best to address the IMF's recommendations.

Over the course of the past year, several Reserve Bank staff were seconded to the IMF as short-term experts. One staff member assisted as a technical expert in the FSAP review of a foreign jurisdiction, while another contributed to a training program on payment system oversight for central banks in developing countries.

Executives' Meeting of East Asia-Pacific Central Banks (EMEAP)

The Monetary and Financial Stability Committee meeting, which is chaired by the Deputy Governor, provides an important forum for the discussion of current economic and financial market issues of direct relevance to EMEAP members. The two meetings of the Monetary and Financial Stability Committee in 2018/19 focused on the effect of trade tensions on the EMEAP economies and also considered the application of distributed ledger technology, financial stability issues and cybersecurity. Developments in fintech continued to be a major focus of discussions.

The Working Group on Financial Markets focuses on the analysis and development of foreign exchange, money and bond markets in the region. Every second meeting of this group is held in conjunction with the BIS Financial Markets Forum. The group continued its work on developing local currency bond markets, through the Asian Bond Fund Initiative (see the chapter on ‘Operations in Financial Markets’ for details of the Reserve Bank's investments in the Asian Bond Fund). Areas of focus in 2018/19 also included financial benchmark reform and the development of securities lending in Asia.

The Working Group on Banking Supervision (which also includes representatives of EMEAP members' prudential regulators, including APRA) is a forum to share experiences about best practices in banking supervision and to discuss issues of relevance in the region. During the past year, members discussed the health of banking systems in the region, financial stability risks, and the implementation of Basel III and other post-financial crisis reforms. The group also discussed issues such as bank culture, the future of banking, bank recovery planning and cyber resilience practices.

The EMEAP Working Group on Payments and Market Infrastructures (formerly the Working Group on Payment and Settlement Systems) is a forum for sharing information and experiences relating to the development, oversight and regulation of retail payment systems and financial market infrastructures. The group discussed a range of issues during the year in review, including:

• the development of fast retail payment systems and other efforts to facilitate the shift towards electronic payments
• initiatives to enhance the security and efficiency of cross-border payments
• developments in crypto-asset markets and emerging regulatory approaches for dealing with the risks associated with crypto-assets
• measures to build resilience and enhance the security of financial market infrastructures, including in response to cyber-risks
• the application of new technologies, such as distributed ledger technology, to payment systems and financial market infrastructures.

The IT Directors' Meeting provides a forum for discussions on developments in IT and its implications for central banks. Recent meetings have focused on IT developments in central banks, including the adoption of cloud technology, cyber security and people management strategies.

Network for Greening the Financial System (NGFS)

The NGFS produced two reports in 2018/19, including its first comprehensive report. The comprehensive report set out a range of recommendations, including for central banks and supervisors, to support a smooth transition towards a low-carbon economy. The focus of the Macrofinancial workstream over the past year was on measuring the effect of climate change and related risks on macroeconomic variables and financial stability, and identifying scenarios and climate risk indicators for use by central banks and supervisors.

Global Foreign Exchange Committee (GFXC)

During the year in review, the GFXC met twice, discussing recent developments in market structure and ongoing efforts to expand adherence to the FX Global Code throughout the industry. The GFXC also published reports on the role that disclosures play within the market and on the trading practices of dealers that seek to avoid market risk when transacting with their clients.

Organisation for Economic Co-operation and Development (OECD)

The OECD Committee on Financial Markets examines a range of financial market issues and aims to promote efficient, open, stable and sound financial systems. The committee's regular discussions with private sector experts in 2018/19 covered environmental, social and governance investing, and open banking. The committee has also continued to review and contribute to the OECD's work on fintech and digitalisation.

The OECD's Codes of Liberalisation are rules-based frameworks to promote the freedom of cross-border capital movements and financial services. All OECD members adhere to the codes. The Advisory Task Force on the OECD Codes of Liberalisation meets periodically to address questions and discuss policy issues related to the codes. It also examines specific measures by individual adherents with relevance to their obligations under the codes. During 2018/19, the task force completed its review of the Code of Liberalisation of Capital Movements.

Technical Cooperation and Bilateral Relations

Australia Indonesia Partnership for Economic Development (Prospera)

The Bank participates in the Australian Government's ‘Prospera’ program, which in 2018/19 brought together the former Government Partnership Fund and the Australia Indonesia Partnership for Economic Governance programs. Under the Prospera Program, the Bank will work with Bank Indonesia, as it did under the Government Partnership Fund program, to promote institutional capacity building. In 2018/19, a range of activities were agreed with Bank Indonesia relating to the payments system, note issue, information technology and statistics. These activities will be undertaken in 2019/20.

Engagement in the South Pacific

The Reserve Bank fosters close ties with South Pacific countries through participation in high-level meetings, staff exchanges and the provision of technical assistance across a wide range of central banking issues.

In November 2018, the Reserve Bank participated in the annual meeting of the South Pacific Central Bank Governors, held in Samoa. A key outcome of the meeting was an agreement among governors to lead the development of a regional ‘Know-Your-Customer’ utility and associated regionally linked payment and settlement arrangements in response to the decline in correspondent banking in the region. In April 2019, the governors met in New Zealand to advance this work.

The Reserve Bank of Australia Graduate Scholarship for Bank of Papua New Guinea officers to undertake postgraduate studies at an Australian university in the areas of economics, finance and computing was first awarded in 1992. The most recent recipient of this scholarship commenced studies at the University of Queensland in July 2018; the previous recipient completed their studies in October 2016.

International visitors and secondments

As in previous years, the Reserve Bank hosted a number of overseas visitors, predominantly from foreign central banks. The visits covered the full range of the Bank's activities and included delegations from China, Finland, Indonesia, Papua New Guinea and South Korea. The Bank also hosted a number of secondees from the Bank of Canada, the Bank of England, the Deutsche Bundesbank and the Reserve Bank of New Zealand. A number of Reserve Bank staff were seconded to other central banks and various international organisations, including the BIS, the Bank of Canada, the Bank of England, the IMF, and the Reserve Bank of New Zealand. These arrangements facilitate a valuable exchange of skills and expertise between the Bank and the broader global economic and financial policymaking community.

Footnote

Further detail on activities of the FSB is reported in the ‘Regulatory Developments’ chapter of the Reserve Bank's semi-annual Financial Stability Review. [1]