Reserve Bank of Australia Annual Report – 2005
International Financial Co-operation
The Reserve Bank participates in a number of international forums, along with other areas of the Australian Government, to further the country's international economic interests. In some cases, such as the Financial Stability Forum (FSF), Bank for International Settlements (BIS) meetings and the Executives’ Meeting of East Asian and Pacific central banks (EMEAP), the Reserve Bank is Australia's primary representative. In other forums, such as the International Monetary Fund (IMF) and APEC, Australia’s participation is mainly led by the Australian Treasury and the Reserve Bank plays a supporting role along with a number of other government agencies.
Co-ordination of work by various Australian Government agencies in international economic issues is undertaken through the International Economic Policy Group. This group is chaired by the Department of the Prime Minister and Cabinet, and includes, in addition to the Reserve Bank, representatives from the Australian Treasury, Department of Foreign Affairs and Trade, Office of National Assessments and AusAID.
Two major developments in the Reserve Bank's international dealings over the past year have been the announcement of Australia's chairing of the Group of Twenty (G-20) in 2006 and the launch by the EMEAP group of the second stage of the Asian Bond Fund. More detail on these and other initiatives is provided below.
Group of Twenty (G-20)
Representing two-thirds of the world's population and 90 per cent of world gross domestic product, the G-20 is a key forum for Australia's participation on the international economic stage. The G-20 comprises central banks and finance ministries from the G-7 and other 'systemically significant' industrialised and emerging market economies. As such, it has the advantage of having a broad representation of developed and emerging market economies, while still being small enough to provide for focused discussions.
|(a) The European Union is represented by the Council Presidency and the President of the ECB. The Managing Director of the IMF and President of the World Bank, plus the chairpersons of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate as ex-officio members.|
|European Union||Saudi Arabia|
There are several different levels of G-20 representation. At the highest level, finance ministers and central bank governors meet annually, while finance ministry and central bank deputies meet twice a year. The G-20 hosts workshops that draw on academic and private-sector expertise, as well as on public-sector knowledge, to provide more in-depth consideration of items on its agenda.
At the meeting of finance ministers and central bank governors in 2004, members discussed strategies for sustainable growth and experiences with institution-building in the financial sector, regional cooperation, abuse of the financial system (harmful tax practices) and demographic challenges. From this discussion, members reached an 'accord' on a number of common principles for domestic policies to help foster sustainable growth. The G-20 Accord, which was released publicly, was supported by a reform agenda for each G-20 country member, the implementation of which will be reviewed regularly.
In 2005, the major theme of the G-20 is 'Global Co-operation: Promoting Balanced and Orderly World Economic Development'. Key issues for discussion include reform of the Bretton Woods institutions against the background of the changing global economy; consideration of development assistance issues and innovative financing mechanisms; the challenges brought about by demographic transition; and differing approaches to development.
In November 2004, it was announced that Australia will chair the G-20 for 2006. To support this increased responsibility, the Reserve Bank has established a G-20 unit within its International Department. In 2005, Australia became a member of the G-20 management troika, which is comprised of the previous, current and next year's Chairs.
Financial Stability Forum (FSF)
Since its inception in 1999, the FSF has become the prime vehicle for co-ordinating the work of national authorities and international agencies aimed at strengthening the global financial system. It consists of senior representatives from the central banks, finance ministries and supervisory agencies of the G-7 countries, as well as the governors of the central banks of four other economies with globally significant markets (Australia, Hong Kong, the Netherlands and Singapore). It also includes international regulatory bodies, such as the IMF, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.
|Hong Kong||United States|
Much of the Forum's work is focused on improving the structure of the international financial system. Its recent initiatives in this area include research into the likely extent of abuses of financial reinsurance and the implications of new international financial reporting standards for financial stability. The FSF has also been co-ordinating efforts to improve business continuity planning in the event of disruptions to physical infrastructure.
In addition to working on structural issues, the FSF monitors current financial conditions for emerging signs of instability. Over the past year, for example, it has discussed the potential for problems to arise from current account and exchange rate imbalances between major economies and from the higher levels of household indebtedness in a number of countries.
Bank for International Settlements (BIS) and Associated Committees
The BIS is an international institution owned by central banks. The Reserve Bank is a shareholder, and participates actively in work of the BIS. The Governor or Deputy Governor takes part in the bi-monthly meetings of central bank governors of BIS member countries. These meetings discuss issues affecting the global economy, with a particular focus on those most relevant to central banks, such as financial market developments, exchange rates and financial sector stability, as well as discussion of the global macroeconomic conjuncture. The Reserve Bank also participates in two smaller groupings of BIS Governors: one focuses on governance arrangements for central banks, and the other, the BIS Asian Consultative Council (ACC), considers issues most pertinent to the Asian region and guides the work of the BIS representative office in Hong Kong. Over the past year, discussions at the ACC have mainly concerned the implementation of Basel II – the new capital framework to enhance the prudential oversight of the international banking system.
As has been the case for a number of years, a senior official of the Reserve Bank has participated in two committees associated with the BIS – the Committee on the Global Financial System (CGFS) and the Markets Committee. The CGFS discusses vulnerabilities and risks apparent in the global financial system, as well as structural developments in financial markets. The Markets Committee focuses on a narrower range of matters related to foreign exchange and capital market developments.
The CGFS regularly commissions working groups to undertake more in-depth analysis of particular issues, most of which the Reserve Bank was involved in during 2004/05. One such group undertook a survey of stress-testing at major financial institutions in 16 countries. The results of this survey were published by the CGFS in January 2005.
The Reserve Bank was also represented on the CGFS Working Group on Ratings in Structured Finance, which examined the role of rating agencies in the markets for structured finance instruments. The Group examined the methodological differences that exist between the rating of structured finance instruments and more traditional credit products, as well as the various challenges involved in rating structured finance products. The report of this group was released in January 2005.
The Reserve Bank is currently participating in a CGFS Working Group that is examining the factors driving recent changes in the market for housing finance in member countries. Its report is due in the second half of 2005. Similarly, the Reserve Bank is represented on the Foreign Exchange Settlement Risk sub-group of the BIS Committee on Payment and Settlement Systems (CPSS). This Group is responsible for coordinating central banks' efforts to contain the systemic risk inherent in the settlement of foreign exchange trades, and also forms the basis for co-operative oversight of the Continuous Linked Settlement (CLS) Bank. Commencing operations in 2002, CLS is a private-sector initiative to address foreign exchange settlement risk.
During the year the Reserve Bank took up the offer by the BIS to all its members to increase their holdings of shares in the organisation. The share offer reflected the final step in a process that had been underway at the BIS since 2001 to withdraw BIS shares that had up to that time been held privately and, in doing so, concentrate all its shareholding in the hands of member central banks. As a result of these purchases, the value of the Reserve Bank's shareholding of the BIS increased by $40 million to $240 million.
Executives’ Meeting of East Asian and Pacific Central Banks (EMEAP)
Since its establishment in 1991, EMEAP has been instrumental in fostering closer co-operation and understanding among its 11 member central banks drawn from east Asia and the Pacific region. It has been successful in providing a forum where members can share ideas and provide each other with insights into their economies for the benefit of all in the region. EMEAP meets at the governor and deputy governor level, with support from four working groups covering financial markets, information technology, banking supervision, and payments and settlement system issues. The Reserve Bank is represented at all levels of EMEAP, with a senior Bank official in the position of chair of the Working Group on Payments and Settlement Systems. While much of EMEAP's activities typically involve discussing countries' experiences with different challenges, in recent years EMEAP has taken the level of regional co-operation one step further with the establishment of the Asian Bond Fund (see box).
EMEAP Governors met in July 2004 and June 2005. Discussions focused on recent economic and financial developments, with particular emphasis on exchange rate arrangements and investment flows in Asia. The Reserve Bank hosted one of the bi-annual meetings of EMEAP Deputies in Sydney in April 2005. At this meeting, as well as considering progress reports from each of the working groups, deputies discussed issues regarding risks to economic and financial stability in the region.
Asian Bond Fund (ABF)
The overall aim of the ABF project has been to accelerate the deepening of local currency bond markets in Asia, following the dislocation that resulted from the Asian crisis in 1997 and 1998. The Working Group on Financial Markets, under guidance from the EMEAP Deputies, has for the past two years developed the second phase of the ABF initiative (ABF2). The RBA has played an active role in this exercise, including through the investment of US$222 million of foreign exchange reserves in the Fund in 2005, which is in addition to the US$50 million investment in the first stage (ABF1) in 2003. The table summarises the main features of each Fund.
Compared with ABF1, which involved investment in US dollar-denominated bonds, the second stage is more significant for bond market development as the investment is in local currency-denominated bonds issued by sovereign and quasi-sovereign issuers in eight EMEAP economies (i.e. excluding Australia, Japan and New Zealand, which already have developed bond markets). While the initial investment was limited to EMEAP central banks, ABF2 has now also been opened to investment by external investors.
ABF2 has two components: the Pan Asian Bond Index Fund (PAIF), which contains a mix of securities from all eight markets; and eight individual country funds. The PAIF was listed in Hong Kong in early July while the individual country funds are also in the process of being listed.
Within the overall objective of financial deepening, ABF2 is expected to yield three main benefits for the region. Firstly, it involves the introduction of a new class of products in the form of passively managed bond funds. Secondly, the initiative has helped to promote market and regulatory reforms across the region to the benefit of all potential issuers and investors. Finally, the introduction into Asia of a new set of independent and replicable bond indices should constitute a substantial improvement to financial market infrastructure across the region.
|• Investment in US dollar-denominated sovereign and quasi-sovereign bonds.||• Investment in local currency-denominated sovereign and quasi-sovereign bonds.|
|• Investment in bonds of eight markets: China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.||• Investment in bonds of eight markets: China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand. Nine separate funds – one for each market and one, the PAIF, invests in bonds across each of the markets.|
|• Investment limited to EMEAP central banks. US$1 billion invested in July 2003.||
• EMEAP invested US$2 billion in
half of 2005. Funds open to investment
by external investors.
|• Passively managed by BIS to benchmark.||• EMEAP investment held by BIS. Funds passively managed by private-sector fund managers to benchmark.|
The Reserve Bank also hosted a meeting of the Working Group on Banking Supervision in April. Over time this Group has acted as a conduit for information between countries in the region on issues relating to Basel II. Matters discussed by the Working Group in 2004/05 included the degree of readiness of EMEAP members to implement the intensified supervisory review process associated with Basel II, as well as sharing experiences of home-host supervision. The Group held a seminar in Sydney in conjunction with the BIS Financial Stability Institute on the supervisory review process of the Basel II framework.
The Working Group on Payments and Settlement Systems undertook work in two main areas during the year. It examined members' experiences with business continuity planning for payment and settlement systems, with the emphasis on the system as a whole. A report on this work, which drew out common themes and lessons, was prepared and also circulated to members of the BIS CPSS. The second major area of work dealt with liquidity management in real-time gross settlement (RTGS) systems. The aim was to compare the means by which liquidity is provided in members' RTGS systems and to discuss indicators of system liquidity. It canvassed the means of dealing with a liquidity shortage in the system that might be triggered by a bank in difficulty.
International Monetary Fund (IMF)
One of the important functions carried out by the IMF is to benchmark the strengths and vulnerabilities of member countries' financial systems. This is undertaken through the IMF and World Bank's Financial Sector Assessment Program (FSAP). The Australian Government has volunteered to take part in an FSAP in the coming year. The assessment process will include analysis of economy-wide financial soundness indicators, stress testing of the financial system and Australia's compliance with international standards relating to banking supervision, securities regulation, insurance supervision, anti-money laundering and payment and settlement systems. The Reserve Bank will be involved in the assessment of payment and settlement systems, including a formal assessment against the Core Principles for Systemically Important Payment Systems as well as informal assessments of the Recommendations for Securities Settlement Systems and Recommendations for Central Counterparties. It is also chairing the working group responsible for co-ordinating the stress test of the financial system.
Preliminary work commenced early in 2005 with the establishment of an FSAP Steering Group, comprising the Reserve Bank, Australian Treasury, Australian Securities and Investments Commission and Australian Prudential Regulation Authority. This group will continue to meet on a monthly basis. In April 2005, the IMF undertook a 'pre-FSAP' mission to Australia, holding discussions with the various regulatory authorities and the private sector.
South Pacific Central Bank Governors
Each year, the Governors of the six island nations of the Pacific region which have their own currency (Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu) meet with their counterparts from Australia and New Zealand. In December 2004, this meeting was hosted by the Reserve Bank in Sydney. Representatives from the Pacific Financial Technical Assistance Centre and the IMF also attended. At the December meeting there was a discussion of economic developments, focusing on key issues for the Pacific region, as well as internal audit and risk management in central banks, which has particular relevance as the island states strive to improve overall standards of governance.
Bilateral Relations and Assistance
Central bankers in developing countries often look to their colleagues in more developed countries to provide assistance in improving their performance across the range of central bank functions. The Reserve Bank has been a regular source of such assistance, especially to countries in the Asia-Pacific region. Mostly this involves occasional country visits with intermittent work and correspondence from Sydney. During 2004/05, two Reserve Bank staff members were involved in this kind of technical assistance, one working on the monetary policy framework of Papua New Guinea and the other on the payments and settlements system in Fiji. Both these projects are being undertaken in conjunction with the IMF. In addition, a Reserve Bank staff member has taken extended leave to work as an economist at the National Reserve Bank of Tonga.
Assistance is also provided to staff from overseas central banks visiting the Reserve Bank on both long- and short-term attachments. During the year, staff were received from the central banks of Indonesia, Korea, the Solomon Islands and Zambia. The Reserve Bank also assists by providing presenters at international conferences and seminars conducted by multilateral institutions, other central banks and academic institutions, and occasionally makes its training centre (the HC Coombs Centre for Financial Studies) available for such purposes. In June 2005, one such seminar was the annual APEC Future Economic Leaders' Think Tank. Sponsored by Axiss Australia, the Think Tank brings together policy practitioners in APEC economies to discuss regional economic and financial challenges. The seminar focused on the challenges posed by population ageing for APEC economies, and in particular the implications for fiscal policy, public finances and financial markets.
During 2004/05 the Reserve Bank commenced an exchange program of senior officials with the European Central Bank (ECB), involving short-term placements of two to three months. One official from the ECB spent time in Economic Analysis Department at the end of 2004, while a Reserve Bank staff member made a reciprocal visit for two months from May 2005, working on external developments in the Economics Directorate of the ECB.
Although the Reserve Bank does not have direct responsibilities for Australia's work in anti-money laundering and combating the financing of terrorism, its staff have a broad knowledge of the operations and activities of banking systems and financial markets. This means that it is well placed to provide experts to help with the review of institutional arrangements in other countries' efforts to meet international standards in these areas. Such reviews are carried out by the IMF and the World Bank and, on a mutual basis, by the Financial Action Task Force (FATF) as well as regional bodies, such as the Asia-Pacific Group on Money Laundering. Australia is a member of both these latter groups, and during the year a staff member participated in a review of Pakistan's efforts to combat money laundering and financing of terrorism. A member of staff is also assisting in a joint IMF/World Bank review of the reports that have been undertaken by the FATF and other such bodies to ensure the standards are being adequately and consistently applied. During March, the FATF also carried out a review of Australia's efforts to prevent money laundering and financing of terrorism. The Reserve Bank provided working facilities for the review team during its two weeks in Sydney.