RDP 2014-10: Financial Reform in Australia and China 2. Australia's Experience with Financial Reform^[1]

Prior to the float of the Australian dollar in 1983, Australia made a gradual transition through a series of increasingly flexible exchange rate regimes. This transition was related closely to the development of Australian financial markets – including closer integration with global financial markets – which made it increasingly difficult for the authorities to manage the exchange rate and control domestic monetary conditions. The authorities responded to these challenges with a series of financial reforms throughout the 1970s and 1980s.

2.1 The 1950s and 1960s

Prior to the 1970s, Australia had a fixed exchange rate regime, which was underpinned by a system of capital controls and a highly regulated domestic banking sector. Although the domestic banking sector remained underdeveloped, the prevailing view of policymakers was that the fixed exchange rate had been beneficial. Australia's generally strong post-war economic performance provided little evidence against this view. And with global financial integration still very much in its infancy under the Bretton Woods system, there was relatively little pressure – for example, from waves of capital inflows and outflows – to deviate from the established framework.

2.1.1 The fixed exchange rate regime and system of capital controls

From 1931 until the early 1970s, Australia's currency was pegged to the UK pound sterling. There were no significant exchange controls in place during most of the 1930s, but in subsequent years the fixed exchange rate was underpinned by a comprehensive system of exchange controls which were first introduced as emergency measures during the Second World War (Phillips 1985; Laker 1988). Under this system, all foreign currency transactions were prohibited unless approved or specifically exempted by the authorities and participation in the foreign exchange market was restricted to designated ‘trading’ banks, which acted solely as agents for the central bank.^[2]

In practice, however, foreign exchange transactions related to trade and most current receipts were generally approved, as were private capital inflows and repatriations of capital by foreign investors. That is, while the system of exchange controls had the potential to be quite restrictive, it was applied in a more permissive manner. This relatively permissive approach to inflows (and outflows) of foreign capital was consistent with a broader recognition by policymakers of the important role played by foreign investment in Australia's economic development. In contrast, Australian investment abroad was heavily restricted, reflecting the authorities' preference for domestic savings to be channelled into domestic investment (Battellino 2007).

The asymmetric nature of Australia's system of exchange controls was reflected in the composition of Australia's capital flows. Australian investment abroad by the ‘non-official’ sector was virtually non-existent during the 1950s and 1960s, averaging just 0.2 per cent of GDP throughout this period, compared to an average of around 2 per cent in the decade after the float and removal of capital controls in 1983. In contrast, foreign investment in Australia's non-official sector averaged around 2½ per cent of GDP during the 1950s and 1960s and around 5½ per cent of GDP in the decade after the float.^[3]

To maintain the peg to the UK pound, these net inflows of foreign capital were offset, as required, by outflows of official capital in the form of foreign exchange reserve accumulation. This was reflected in fairly consistent net outflows of capital from the RBA in the 1950s and 1960s, and indeed until the mid 1970s (Figure 1).^[4]

2.1.2 Domestic banking sector regulation

Australia also had a heavily regulated domestic banking sector, with quantitative and qualitative controls on bank lending, ceilings on banks' deposit and lending rates and reserve requirements all used.^[5] These regulations, especially the reserve requirements, also served as the main tools for implementing monetary policy for much of the 1950s, 1960s and 1970s.

In addition to serving prudential and monetary policy purposes, these regulations also helped to maintain Australia's fixed exchange rate system by limiting capital inflows to the banking sector. For example, ceilings on deposit rates limited the ability of domestic trading banks to attract overseas funding, while domestic savings banks were effectively unable to raise funds from overseas as they were not permitted to use wholesale funding.^[6]

However, at the same time, heavy regulation of the banking sector impeded the sector's development. The ratio of bank assets to GDP stood at around 50 per cent in 1975, compared with around 200 per cent today. In comparison, the ratio of UK bank assets to GDP was higher in 1975, at around 100 per cent (Davies et al 2010). Banks also had little experience in trading in foreign exchange markets, having only been permitted to trade as principals in the market from 1971 – and then only in the context of a fixed exchange rate regime.^[7]

Banking sector regulations also had implications for the development of Australian corporate bond markets. In particular, the regulations constrained banks' ability to issue bonds, with banks representing only 3 per cent of the issuer base during the period of regulation (Black et al 2012).

The underdeveloped state of Australia's financial sector was an important consideration in the authorities' decision to retain a fixed exchange rate regime when the Bretton Woods system broke down in the early 1970s (Phillips 1984b). In contrast to most other present-day developed economies, which chose to adopt a more flexible exchange rate regime around this time, the Australian Government decided instead to simply replace the peg to the UK pound sterling with a peg to the US dollar (in recognition of the increased importance of the United States as a trading partner).

2.2 The 1970s

Maintaining the fixed exchange rate regime became more challenging in the late 1960s and early 1970s, as non-official capital inflows became larger and more varied in nature (Figure 2). In particular, the combination of larger capital flows, a growing non-bank financial sector and structural issues with the government debt market undermined the effectiveness of monetary policy (Grenville 1991). As a result, the authorities found it increasingly difficult to control domestic monetary conditions.

The growth in the non-bank financial sector – which was itself fuelled partly by increased capital inflows – prompted the authorities to take initial steps towards banking sector deregulation. In many ways, this laid the groundwork for the eventual float of the exchange rate a decade later. Banking sector deregulation not only increased the challenges associated with capital flow management – arguably accelerating the transition from a fixed to a floating exchange rate regime – but it also facilitated domestic financial market development and innovation, laying the foundations for market participants to adapt to the new regime.

2.2.1 Capital flow management challenges

Australia experienced a period of noticeably larger capital inflows during the late 1960s and early 1970s – which coincided with a domestic mining boom – with gross capital inflows to the ‘non-official’ sector averaging almost 4 per cent of GDP in the five years to 1971/72, up from 2½ per cent in the previous five years. Further, these flows increasingly arrived in the form of portfolio and ‘other’ – rather than direct – investment, which accounted for an average of 40 per cent of Australia's gross capital inflows in the five years to 1971/72, up from less than 20 per cent in the previous five years.^[8] This shift in the composition of capital inflows was facilitated partly by an influx of international merchant banks into the Australian market, which increased domestic companies' awareness of, and access to, overseas capital (Australian Treasury 1999).^[9]

These larger capital inflows made it increasingly difficult for the authorities to control domestic monetary conditions. Under the fixed exchange rate system, capital inflows added directly to domestic liquidity (and vice versa for capital outflows) as the RBA was obliged to meet all demand for Australian dollars at the official rate. While the authorities could (and did) attempt to sterilise the impact of the additional liquidity by changing banks' reserve requirements, this mechanism became less effective as banks lost market share to non-bank financial institutions. Authorities also could (and did) attempt to sterilise the additional liquidity via domestic market operations, but this often led to higher interest rates which could then encourage further inflows. The effectiveness of open market operations as a liquidity management tool was further hampered by structural issues associated with the market for government securities, including the following.

• Procedural issues associated with the ‘tap’ system of primary issuance: under the ‘tap’ system, government securities were issued by setting a primary issuance yield, rather than a volume, and issuing as much as the market was willing to purchase at that yield. As these yields were set only periodically, there were constraints on the volume of open market operations that could be carried out without moving secondary market yields away from primary market yields, which would consequently undermine primary issuance. Further, as the primary market yields were often set too low, the government frequently needed to supplement its bond issuance by selling Treasury notes to the RBA. This monetary financing of government budget deficits increased the money supply (Grenville 1991).
• Issues associated with banks' large ‘captive’ holdings of securities: regulatory requirements forced banks to hold a large quantity of government securities, which reduced the interest rate sensitivity of these securities to changes in supply.^[10] Further, these large holdings meant that changes in secondary market yields had large effects on banks' balance sheets, which made the authorities reluctant to vary interest rates (Grenville 1991).

Early steps in the deregulation of the banking sector (discussed further below) compounded the effects of this additional liquidity on the domestic economy. In particular, the removal of quantitative controls on bank lending in 1971, and the removal of interest rate ceilings on large loans in early 1972, allowed banks to profitably lend these additional funds. Further, the removal of the ceiling on interest rates payable on certificates of deposit (CDs) in 1973 allowed banks to compete more effectively for these funds. These factors contributed to a large increase in the rate of growth in credit, which reached more than 30 per cent in year-ended terms during 1973 (Figure 3).

2.2.2 The policy response

In response to these large portfolio inflows – and more specifically, to the effects of these flows on domestic liquidity and credit growth – the authorities revalued the Australian dollar by 7 per cent against the US dollar in late 1972. A number of ‘supplementary’ exchange controls were also introduced, including an embargo on loans from overseas with a maturity of less than two years and a variable deposit requirement (VDR) for overseas loans with a maturity greater than two years. The VDR was preferred over other forms of capital controls as it was considered to be a more ‘market-based’ mechanism (Australian Treasury 1999).

The VDR initially required 25 per cent of overseas borrowings to be placed in an interest-free account at the RBA, which effectively acted as a tax. The measures were considered to be largely successful, contributing to a marked contraction in capital inflows, particularly portfolio inflows, and a sharp tightening in domestic monetary conditions (Australian Treasury 1999; Debelle and Plumb 2006). Over the following decade, a number of changes were made to the VDR and the embargo in response to changes in the volume and composition of Australian capital flows.

Around the same time, authorities began to deregulate the banking sector. The move towards deregulation was prompted by a decline in the sector's market share, as banks found it increasingly difficult to compete with non-bank financial institutions (NBFIs). As NBFIs were not subject to the same stringent regulations as banks, they were able to compete more aggressively for funding (including via corporate bond markets) and were able to provide loans to a broader range of borrowers (including riskier ones).

The growth of the NBFI sector diminished the effectiveness of monetary policy by lessening the economic impact of changes in bank reserve requirements, interest rate ceilings and credit directives.^[11] While some policymakers favoured extending regulation to the NBFI sector, there was a growing consensus in favour of more market-oriented policies, rather than direct controls (Phillips 1984a). Consequently, the decision was made to remove some of the controls on banks' balance sheets and to attempt to transmit monetary policy through the general level of interest rates – which would in turn be influenced by the RBA's open market operations.^[12]

The first major step in the deregulation of the banking sector was taken in 1973, when the interest rate ceiling on CDs was removed. This allowed trading banks to compete for funds and gave them control over a larger portion of their balance sheets.^[13] In particular, it allowed them to manage their liabilities more actively, which has subsequently been cited as having played an important role in preparing banks for the larger capital flows that were ultimately associated with capital account liberalisation in the early 1980s (Battellino and McMillan 1989).

2.2.3 The market response

Despite these policy changes, the Australian dollar's peg to the US dollar continued to be difficult to maintain. Following a number of upward revaluations in the early 1970s, the US dollar peg was replaced with a peg to a trade-weighted basket of currencies in 1974, at a rate which implied a 12 per cent devaluation against the US dollar (Figure 4).

In 1976, speculators forced a further large discrete devaluation of the currency, leading to the adoption of a crawling peg (Laker 1988). The crawling peg was intended to prevent the build-up of appreciation or depreciation pressures (followed by large discrete adjustments). The value was to be set daily by a joint decision of the RBA, Treasury and the Department of the Prime Minister and Cabinet. While day-to-day changes in the value of the Australian dollar were initially small and infrequent, they became larger and more frequent over time. For example, in 1977 the value of the trade-weighted index (TWI) peg was adjusted on just 46 trading days, whereas in 1983 the TWI was adjusted on 121 trading days (prior to the eventual float of the currency on 12 December). Nevertheless, the magnitude of daily movements was still small compared with movements in floating currencies. Daily changes in the Australian dollar TWI rarely exceeded 0.2 per cent whereas for the major currencies, daily movements of over 1 per cent were not uncommon (Laker 1988).

The large discrete revaluations of the Australian dollar over the preceding few years – and then the introduction of a peg to an increasingly flexible TWI – meant that the Australian dollar's bilateral exchange rate with the US dollar had become more variable. At the same time, firms were also increasing their use of foreign funding sources. As a result, firms were exposed to a greater degree of foreign currency risk than previously, providing them with stronger incentives to manage their foreign currency exposures actively.

In response, the private sector developed an unofficial foreign currency hedging market in an effort to supplement the relatively limited forward cover that was provided at the time by the RBA.^[14] This market was an onshore non-deliverable forward (NDF) market: as the contracts were settled in Australian dollars, they did not violate the existing exchange controls. The onshore NDF market is now recognised as having been an important precursor to modern-day hedging markets, which have developed to play a crucial role in insulating Australian entities from foreign currency risk under the floating exchange rate regime.^[15]

2.3 The 1980s

Although increased innovation and integration in financial markets was a natural consequence of deregulation, it also made Australia's system of exchange controls increasingly ineffective. For example, the NDF market provided a means by which participants could speculate on the exchange rate without the need for large upfront payments, while the gradual freeing up of restrictions on deposit rates (which ultimately included the removal of all ceilings on deposit rates by 1980) made it easier for banks to attract foreign funds (Battellino 2007).

The decreasing effectiveness of Australia's capital controls placed additional pressure on Australia's crawling peg. Large capital flows often occurred in anticipation of future change in the exchange rate, or in response to the RBA's attempts to tighten monetary policy. Under the managed exchange rate regime, these flows affected the money supply and contributed both to large misses of the monetary targets in the early 1980s and to volatility in short- and long-term interest rates.^[16] Consequently, by the late 1970s and early 1980s, Australia's relative exchange rate stability was being achieved at the cost of volatility in domestic financial conditions (Debelle and Plumb 2006).

This lack of control over domestic financial conditions was compounded by an increase in state government borrowing at the time. The increased borrowing reflected a relaxation of controls over such borrowing by the Loan Council – which was the body that coordinated state and federal debt issuance – and the states' increasing use of non-traditional financing methods that were not supervised by the Loan Council (for example, sale and leaseback arrangements).^[17]

While some measures were introduced in an attempt to counteract speculative capital flows, they ultimately proved ineffective.^[18] On 9 December 1983, faced with the prospect of further large capital inflows, the authorities suspended banks' foreign currency trading to allow time to decide on a course of action. The decision was made to float the Australian dollar – effective from 12 December 1983. While some brief consideration appears to have been given to the alternative option of strengthening capital controls, such controls were considered costly, ineffective and inefficient (Laker 1988).

Although the decision to float the dollar and to liberalise the capital account was taken over the course of just one day, there had been growing acceptance – at least among some policymakers – of the potential merits of a more flexible exchange rate regime for some years. For example, in 1981 the Campbell Committee inquiry into the Australian financial system had recommended moving to a floating exchange rate regime, noting that exchange controls were costly and inefficient, and were unlikely to be effective in regulating short-term capital flows ( Laker 1988). Most capital controls were removed at the same time as the float, because they existed largely for the purpose of maintaining the fixed exchange rate. One key exception was a ban on foreign government and central bank purchases of Australian interest-bearing securities, which was maintained in an attempt to ensure that the Australian dollar would not become a reserve currency and which was in line with similar bans in place in a number of other countries (Phillips 1985).^[19] The ban appears to have reflected concerns that foreign governments and central banks would purchase and sell Australian assets in order to influence the value of their own currencies, and, in so doing, could unduly influence the value of the Australian dollar.

Deregulation of the banking sector was not complete at the time of the float. While interest rate ceilings had been removed for all deposits, ceilings on lending rates had only been removed for loans exceeding A$100,000. Moreover, the banking sector remained subject to a number of balance sheet restrictions, with these restrictions – as well as the interest rate ceilings on small loans – remaining in place until the mid-to-late 1980s.^[20]

The immediate effects of floating the Australian dollar and liberalising the capital account were largely as expected. In particular, capital outflows increased substantially as the relatively restrictive controls on overseas investment by Australian residents were removed (Figure 5). However, capital inflows increased by even more, and net capital inflows settled at a level that was somewhat higher than they had been before the capital account was liberalised (Battellino and Plumb 2011).

Meanwhile, the exchange rate naturally became more volatile after the float, interest rates became more stable and authorities were better able to control domestic financial conditions (Figure 6). This was reinforced by the adoption of an inflation target in the early 1990s, which was the culmination of an extended search for a credible nominal anchor and framework for monetary policy (Cagliarini, Kent and Stevens 2010).

Although the float itself was intended to be relatively ‘clean’, the RBA intervened frequently to influence the foreign exchange market throughout most of the 1980s. The RBA's intervention transactions during this so-called ‘testing and smoothing’ period tended to be small in size – but relatively frequent – and were designed both to increase the RBA's understanding of how the market operated and to dampen episodes of substantial volatility (Becker and Sinclair 2004; Newman, Potter and Wright 2011). The focus on reducing volatility during these early years was motivated in large part by the fact that foreign exchange market participants still had relatively limited experience in managing their foreign currency exposure. However, as the foreign exchange market developed – and, in particular, as the supply of foreign exchange derivatives for hedging purposes increased – the RBA became less concerned about market participants' ability to hedge their exchange rate risk. As a consequence, intervention transactions became less frequent, but more targeted towards addressing episodes of market dysfunction. There were also some episodes where intervention was designed to affect the level of the exchange rate, rather than market dysfunction per se, but these were rare.

2.4 Developments since the Float

The decision to introduce a floating exchange rate is now widely recognised as having brought substantial benefit to the Australian economy (Beaumont and Cui 2007; Lowe 2013; Stevens 2013). In addition to the advantages associated with monetary policy independence, exchange rate flexibility has played a crucial role in buffering the economy from external shocks, in particular – given Australia's status as a small open commodity exporter – from terms of trade shocks. The exchange rate's role as a buffer was also exemplified during the Asian financial crisis in 1997–1998, the tech boom and bust in the early 2000s, and again during the global financial crisis in 2008–2009. Sharp depreciations of the Australian dollar during each of these episodes served to offset part of the contractionary effects of these crises.

Financial and capital account liberalisation also provided the impetus for further development of Australia's corporate bond markets – and, in particular, the market for Australian bank bonds. At the same time, the removal of capital controls and the development of hedging markets also facilitated increased offshore bond issuance by Australian firms (discussed below).^[21]

Nevertheless, there were challenges associated with Australia's adoption of a floating exchange rate, particularly in the early stages of the regime. Most notably, deficiencies in the prudential supervision framework and an underdeveloped foreign exchange hedging market meant that the transition was not smooth. However, both of these elements – which are now recognised as being crucial for minimising the financial instability risks that can be associated with a floating exchange rate and open capital account – have developed over time. In part, this has occurred in response to the incentives created by the floating exchange rate regime itself.

2.4.1 Banking supervision

At the time of the float, Australian banks and regulators were relatively inexperienced at assessing and pricing risk, notwithstanding some of the earlier steps taken towards financial deregulation in the 1970s. This reflected the fact that banking sector regulations had served to ration credit, and so banks were accustomed to – and able to profit from – lending only to the most creditworthy borrowers. Consequently, they had not developed the ability to assess and price risk for less creditworthy borrowers (Thompson 1991; Lowe 2013).

When these regulations were removed, banks attempted to expand their market share by offering credit to higher-risk borrowers. This competition for market share intensified with the entry of foreign banks in the mid 1980s and was, at least in part, funded by increased capital inflows associated with the removal of capital controls. The combination of pent-up demand for credit, relatively underdeveloped risk assessment frameworks (both for banks and for prudential supervisors), freer access to overseas capital and increased competition led to a boom in credit (Figure 7), and then to a bubble, and eventual bust, in commercial property prices in the late 1980s and large losses for banks. This episode led to an increase in the pace of reform to risk management practices for banks and regulators and, later on, a broader overhaul of the regulatory framework (Gizycki and Lowe 2000).

2.4.2 Development of hedging markets

Market participants had developed a relatively small foreign exchange derivatives market before the float. Yet the float proved to be the catalyst for further development in Australia's (non-deliverable) hedging and (deliverable) foreign exchange markets; within a year these markets doubled and tripled in size, respectively, albeit from a low base (Phillips 1984b; Figure 8). This growth was facilitated by the entry of around 40 new non-bank foreign exchange dealers and, a few years later, the entry of a number of foreign banks.

Over the remainder of the decade, the cross-currency swaps market developed particularly rapidly. This in turn reflected the increasing role of banks in intermediating between the domestic economy and international investors – and therefore, strong demand for instruments that were capable of providing a hedge against both the foreign currency risk associated with foreign currency bond issuance and the interest rate risk associated with borrowing at foreign interest rates and lending at domestic interest rates (Debelle 2006).

The development of the cross-currency swaps market was aided by the establishment of a risk-free government yield curve. This, in turn, was able to develop following the introduction of a ‘tender’ system for the primary issuance of government securities (which replaced the previous ‘tap’ system). The system allowed government securities to be priced transparently by the market, rather than by the authorities. This ensured that the government's budget could be fully funded through the issuance of securities to the market, rather than to the RBA, and so would no longer directly affect domestic liquidity (discussed above). While the government was initially forced to pay very high yields, the more open and transparent system helped to establish the government's credibility and yields subsequently declined (Battellino and Plumb 2011).

Nevertheless, it took time for hedging practices to develop. While some entities had gained experience in managing their foreign currency exposures during the pre-float period, others were not sufficiently aware of the risks of such exposures in the early stages of the floating exchange rate regime. For example, in the mid 1980s a number of borrowers took out loans denominated in Swiss francs, without being adequately prepared for the potential exchange rate risk associated with this practice. When the Australian dollar depreciated sharply between 1985 and 1986, many were unprepared for the higher Australian dollar payments required to service the loans. While the scale of the borrowing and the associated losses were relatively small, the episode received a large amount of publicity. The high-profile nature of the episode, together with agents' growing experience with a relatively volatile floating exchange rate, may help to explain the relatively high level of hedging in the Australian economy today (Becker and Fabbro 2006; Battellino and Plumb 2011).

Finally, the market also needed to develop a deep and diverse pool of participants. In particular, the ability of Australian entities to hedge their foreign currency risk ultimately depends on foreigners being willing to hold Australian dollar exposure.^[22] This demand for Australian dollar exposure depends on both the return and the perceived risk associated with the investment. Over time, the latter has been closely linked to investors' perceptions about the credibility of Australia's economic policy framework and institutions.

Footnotes

A time line of reforms is presented in Appendix A. [1]

The Reserve Bank of Australia (RBA) was established as Australia's central bank in 1960. Prior to that time, Australia's central banking functions were carried out by the Commonwealth Bank of Australia. At the time of the establishment of the RBA, the Commonwealth Bank of Australia's commercial and savings bank functions were transferred to a new institution, which carried on the old name. [2]

Unless otherwise stated, Australian historical data are sourced from Foster (1996) and are now available at http://www.rba.gov.au/statistics/frequency/occ-paper-8.html. [3]

One notable exception was 1952/53, which coincided with the end of the Korean War-related wool price boom and a large rise in net exports. For more information, see Atkin et al (2014). [4]

For more detailed information on these regulations, see Battellino and McMillan (1989) and Grenville (1991). [5]

Broadly, savings banks lent to households and trading banks lent to businesses. While savings banks could only accept deposits from households and non-profit organisations, trading banks could raise wholesale deposits. Both were subject to a number of ‘reserve requirements’; however, the requirements on savings banks were more stringent. For more information, see Battellino and McMillan (1989). [6]

Before 1971, banks were only permitted to trade as agents of the RBA. [7]

‘Other’ investment primarily consists of loans (including trade credit) and deposits. [8]

Many of these merchant banks entered the Australian market with the intention of funding mining projects that, due to regulations, could not be funded by domestic banks. [9]

The creation of a ‘captive market’ for government securities was, in part, intended to allow the government to fund itself at a relatively low cost (at the end of the Second World War government debt stood at around 100 per cent of GDP; Grenville (1991)). [10]

The effectiveness of monetary policy was further diminished by banks' increasing use of the bank bill market, which was off-balance sheet and was regulated less heavily. The lighter regulation reflected the authorities' preference for bill financing to remain within the banking sector (Grenville 1991). [11]

This shift in the approach to monetary policy implementation was facilitated by a lower level of government debt – which had declined to 30 per cent of GDP by 1970, from 100 per cent in 1950 – and the authorities' greater readiness to accept changes in interest rates (Grenville 1991). [12]

Savings banks were still constrained by interest rate ceilings on housing loans and prohibited from raising wholesale deposits. Consequently, their behaviour was largely unchanged in response to the removal of interest rate ceilings on CDs (Battellino and McMillan 1989). [13]

The RBA only provided forward cover for trade-related transactions, not for capital transactions. Further, from May 1974 this cover had to be obtained within seven days of the transaction. This was known as the ‘seven-day rule’. It was introduced to prevent participants from taking out forward cover just before an expected revaluation (Manuell 1986, p 177; Debelle and Plumb 2006). [14]

For more information on foreign currency hedging in Australia, see Becker and Fabbro (2006) and Rush, Sadeghian and Wright (2013). [15]

The large misses of the monetary targets occurred despite the introduction of the ‘tender’ system for primary issuance of government securities, which gave authorities more control over domestic liquidity. For more details, see Grenville (1991). [16]

For more information, see James (1993). [17]

In particular, a number of measures were introduced to prevent participants from speculating on the next day's AUD/USD ‘mid rate’, announced daily by the RBA, based on movements in major currencies during Australia's trading day. These included announcing the mid rate in the afternoon, rather than in the morning, and occasionally making unexpected changes to the TWI peg (Debelle and Plumb 2006). [18]

Restrictions on interest-bearing investments in Australia by foreign private banks were also retained for a period after the float, although these banks were permitted to hold Australian dollar assets in the form of loans. These restrictions were removed in January 1985 (Phillips 1985). [19]

For a time line of the changes to bank regulations, see Battellino and McMillan (1989). [20]

For a discussion of the development of the Australian corporate bond market, see Black et al (2012). [21]

While there are some natural counterparties who wish to hedge Australian dollar exposures into foreign currencies, such as Kangaroo bond issuers, these are not sufficient to meet the demand for the hedging of foreign currency exposures into Australian dollars. Consequently, foreign investors have tended to take a net long position in the Australian dollar (McCauley 2006). [22]