September 2020
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Managing the Risks of Holding Self-securitisations as Collateral
Self-securitisations are structured pools of assets, such as residential mortgages, created by banks specifically to use as collateral to access liquidity from the Reserve Bank. The ability of banks to transform illiquid mortgages into liquid assets improves overall liquidity in the financial system. Some financial risks the Reserve Bank faces by holding self-securitisations as collateral differ from other collateral assets (such as government and corporate securities). Unlike these assets, self-securitisations are not currently traded on any public market, and the risks of the self-securitisation are related to the risks of the bank using it as collateral. The Reserve Bank applies a series of additional controls to self-securitisations accepted as collateral to protect against potential financial losses.
Government Bond Market Functioning and COVID-19
The market for Australian Government Securities is a critical fixed income market in Australia, including because it serves as a pricing benchmark for many other interest rates in the economy. The extreme economic and financial uncertainty caused by the onset of the COVID-19 pandemic led to this market becoming dysfunctional, with investors unable to transact in reasonable size. In response to the pandemic, on 19 March 2020 the Reserve Bank announced a number of new policy measures, which, among other things, have been successful in restoring the functioning of government bond markets. This article discusses various measures of market functioning, their deterioration, and subsequent improvement.
The Economic Effects of Low Interest Rates and Unconventional Monetary Policy
The cash rate is currently at its effective lower bound and the Reserve Bank has put in place a suite of alternative monetary policy tools. This article uses the Bank’s macroeconometric model of the Australian economy, MARTIN, to analyse the implications of a constrained cash rate and illustrate how unconventional monetary policies can support the Australian economy. By lowering interest rates that are typically affected indirectly through changes in the cash rate, unconventional policies can stimulate economic activity through many of the same channels as conventional monetary policy.
Retail Central Bank Digital Currency: Design Considerations, Rationales and Implications
There has recently been increasing international focus on the possible issuance of central bank digital currencies (CBDC), or what might be considered a digital equivalent of banknotes. While the technical feasibility of such a new form of money is not yet established, this paper considers some issues around its possible design, the possible rationales for issuance, and the implications of issuance. Given the likely benefits and risks, at present there does not seem to be a strong public policy case for issuance in Australia. Nonetheless, it will be important to closely watch the experience of other jurisdictions that are considering implementing CBDC projects.
Insights from the New Economic and Financial Statistics Collection
The Reserve Bank has worked with the Australian Bureau of Statistics (ABS) and the Australian Prudential Regulation Authority (APRA) to modernise and expand data collected from Australia’s financial sector. This article discusses some of the insights from the data, known as the Economic and Financial Statistics (EFS). The EFS collection has been used to monitor developments in the provision of finance to the Australian economy since the onset of the COVID-19 pandemic. For instance, new data on housing interest rates shows that there has been a decline in these rates alongside the package of measures implemented by the Reserve Bank in March this year.
The COVID-19 Outbreak and Access to Small Business Finance
The COVID-19 pandemic has adversely affected the business sector. Overall, small businesses have been disproportionately affected because they are more likely to be in industries that have been harder hit by the pandemic. Demand for new loans appears to be weak, probably because businesses are reluctant to take on debt given heightened uncertainty about the economic outlook. The various short-term initiatives to support businesses’ cash flows are also likely to have dampened the immediate demand for credit. At the same time, access to finance continues to be a challenge for small businesses. Banks have tightened their lending practices in recent years and are more cautious about lending to businesses that have been significantly affected by the pandemic.
Modernising Payments Messaging: The ISO 20022 Standard
Electronic payments rely on the exchange of messages to instruct the flow of funds between financial institutions. The quality of payment messaging data is important as it determines what payment information is received by financial institutions and their customers. Worldwide, there is movement to develop new payment systems using the International Organization for Standardization (ISO) 20022 messaging standard, and to migrate some existing systems to the standard. In Australia, an industry-led project to migrate the High Value Payments System to ISO 20022 commenced this year. This will provide a number of benefits, including improved transfer of payment information to beneficiaries, better fraud and financial crime management for payments service providers and greater opportunities for straight-through processing.
The Rental Market and COVID-19
The COVID-19 pandemic is an unprecedented shock to the rental housing market, reducing demand for rental properties at the same time as supply has increased. Households most affected by the economic impact are more likely to be renters, and border closures have reduced international arrivals. The number of vacant rental properties has increased as new dwellings have been completed and some landlords have offered short-term rentals on the long-term market, particularly in inner Sydney and Melbourne. Government policies have supported renters and landlords. Rents have declined, partly because of discounts on existing rental agreements and it is likely that rent growth in many areas will remain subdued over coming years.
Labour Market Persistence from Recessions
The COVID-19 pandemic has led to a rapid deterioration in labour market outcomes, some of which may be long-lasting. This article examines the long-lived effects of previous downturns on unemployment in Australia, including by assessing how regional labour market outcomes varied during and after the GFC and early 1990s recession. We find that recessions have enduring effects on unemployment rates: regions that experienced larger-than-average downturns had significantly higher unemployment rates for around a decade afterwards.
Private Sector Financial Conditions in China
Historically it has been challenging to assess financial conditions for private firms in China. This article assembles a range of indicators that shows private firms find it more difficult and expensive to access financing than state-owned firms. Based on these indicators, the private sector had experienced a tightening in financial conditions over the past few years, although more recently conditions have generally eased as a result of new measures that direct more credit to private firms.
The Global Financial Safety Net and Australia
The Global Financial Safety Net (GFSN) allows for financial assistance to be provided to economies in the event of an economic or financial crisis. Together with the substantial monetary and fiscal policy response globally, the GFSN has played a key role in helping economies respond to the COVID-19 pandemic. The GFSN has a number of elements, including the assistance provided by the International Monetary Fund, regional financing arrangements and some bilateral swap lines established by central banks. This article provides an overview of the GFSN, how it has evolved and been used over recent months, and the role the Reserve Bank of Australia plays in it. Use of the GFSN could increase materially over the period ahead if economic and financial market conditions around the world deteriorate.
Different Approaches to Implementing a Countercyclical Capital Buffer
The countercyclical capital buffer (CCyB) was one of the measures designed to improve the resilience of the global banking system following the global financial crisis (GFC). It is a bank capital buffer that can be raised or lowered by jurisdictions depending on the level of risk in the financial system. This article describes different approaches to implementing the CCyB. Most jurisdictions set the ‘default’ CCyB rate at zero until risks are elevated; however, recently, several have adopted frameworks where the CCyB is positive through most of the financial cycle. The Australian Prudential Regulation Authority (APRA) has recently announced that it is also considering moving to a non-zero (positive) default CCyB (APRA 2019). This article discusses the possible benefits of a positive default CCyB.
Some graphs in this publication were generated using Mathematica.
ISSN 1837-7211