Financial stability matters because if we don’t have it, the economic and social cost
can be huge, the human cost of financial crises is enormous as we’ve seen in a whole lot
of countries over recent years.
People lose their jobs, businesses fail, people lose their life savings – it’s a real
economic cost, not just about the financial sector.
There are a lot of ways we can help promote financial stability.
There are things we can do in terms warning about risks, there are things we can do working
with the other regulators in Australia to push against the kind of risk-taking that
could cause a problem later on.
We can advise government about possible policies across the regulatory and tax and all the
other areas that the government can respond to.
We can work with international regulators to help build global rules for banks, for
insurance companies and other parts of the financial sector to make the financial system
resilient to things that could happen to it from outside the financial system and also
to work against the financial system creating risks within themselves that could hurt the
real economy.
The Reserve Bank isn’t the regulator of the banks or insurance companies or the other
parts of the financial system.
We have some specific powers to regulate certain kinds of financial infrastructure, the platforms
that people use to trade money amongst themselves and to settle their debts, but we’re not
the regulator of the banks, that’s APRA.
What we can do though is work closely with APRA.
I like to see the team in Financial Stability Department as being the economists on tap
for APRA.
We’re there to analyse the risks, to surveil everything that’s happening in the financial
system and also in the customers of the financial system, the households and businesses whose
financial activity could expose them to risks that they perhaps might not fully understand
or appreciate or for which they might be accepting quite low compensation and all of those things
are things we would be looking for and working with APRA in terms of formulating policies
that might be helpful in leaning against those risks.
We also do a lot of communication.
I like to say that we have a telephone and a microphone, the telephone’s for calling
APRA or calling ASIC, the microphone is for speaking to the general public and to the
banks and to other people who need to be informed about the risks that might be building up
and that perhaps they may want to do something about and respond to.
The Bank also has an important role in crisis management.
We have to respond if financial instability does occur.
Again all of the regulators in Australia get involved in their various responsibilities,
in terms of responding and mitigating some of the consequences.
Among the Bank’s responsibilities would be to provide liquidity to the financial system.
The Reserve Bank is the provider of cash and liquid assets and so if there are institutions
that have good assets but they just would not get a good price if they had to sell them
today, they can instead present them to the Reserve Bank and get cash, get money in their
account with the Reserve Bank and be made liquid again.
That’s a very important role of central banks and has been for many centuries.
The Bank has to work very closely with regulators, other regulators both in Australia and overseas.
In Australia there is the Council of Financial Regulators, which includes ASIC and APRA as
well as Treasury, and the Governor of the Reserve Bank chairs that group.
And that’s where the Australian regulators work together to formulate crisis management
policy, to help advise government about issues to do with financial stability and financial
regulation and it’s where we can nut out our joint position so that all the policies
that are implemented in the Australian financial sector are well thought through and take all
of the different sectors in the financial system into account.
Internationally we also do a lot of engagement, a lot of meetings, we spend a lot of time
in planes going to those meetings and there’s an array of different international organisations
that the Reserve Bank participates in.
These are all international agencies where various countries come together and formulate
common rules because things that go wrong in one country, as we’ve seen in recent
years, can really harm the economies and the financial systems of other countries that
are in many ways innocent bystanders.
So we all have to work together to ensure high standards of regulation and supervision
in the financial system.
We all have to work together to detect the risk that might be building up that could
affect each other.
It really matters to the Australian people if something goes wrong abroad because of
what that can do to the world economy and therefore affect Australia.