Reserve Bank of Australia Annual Report – 2006
International Financial Co-operation
In order to carry out its responsibilities, the Reserve Bank needs to interact with counterparts in other countries and international organisations. This is done in a variety of ways. The Reserve Bank is a member of various international organisations or groups, such as the G-20, the Financial Stability Forum (FSF), the Bank for International Settlements (BIS) and the Executives’ Meeting of East Asian and Pacific central banks (EMEAP). It also participates, in association with the Australian Treasury, in the work of the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), and maintains strong bilateral relationships with a range of other central banks.
The Reserve Bank keeps other arms of the Australian Government informed of its international work through the International Economic Policy Group. This body co-ordinates the work by various Australian Government agencies in international economic issues. It 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 features of the Reserve Bank’s international work in the past year were its responsibilities in helping Australia chair the G-20 in 2006 (the Reserve Bank and the Australian Treasury work jointly in this Group) and the commencement of an extensive bilateral exchange program with Bank Indonesia as part of the Australian Government’s response to the tsunami of December 2004. More detail on these and other international relations activities is provided below.
Group of Twenty (G-20)
The G-20 is an international grouping of systemically important countries that has been meeting since 1999 to share experiences and opinions on matters of international economic and financial significance. The list of member countries is shown below.
|(a) Represented by the rotating European Council Presidency and the European Central Bank|
|China||Italy||Saudi Arabia||European Union(a)|
Australia is the Chair of the G-20 Group for 2006. The G-20 is traditionally co-hosted by ministers of finance/treasurers and central bank governors. To provide appropriate support for the Reserve Bank’s share of this effort, resources have been devoted to G-20 matters in several parts of the organisation. A dedicated G-20 Unit within the International Department provides support for the participation of the Governor, Deputy Governor and other senior officials in G-20 meetings, and works closely with counterparts in the Australian Treasury in developing Australia’s general position on matters relevant to the G-20. The Reserve Bank’s Information and Systems & Technology Departments provide the hardware, technical support and management for the G-20 website. The Economic Group hosted one of the three G‑20 Workshops for 2006, on the financial market implications of population ageing.
The theme of the G-20 meetings in 2006 is ‘Building and Sustaining Prosperity’. One of the key issues being discussed is reform of the IMF and World Bank. The G‑20 has played an important role in providing a platform for discussion between the major industrialised economies and the systemically important emerging market economies on this issue. Its work has contributed to the emergence of a broad consensus on the need for a greater voice within the IMF for emerging market and developing countries. The IMF is now developing a plan for governance reform to be considered by IMF members at the annual meetings in September 2006 in Singapore, aimed at an adjustment to quotas in line with important changes in the role of countries in the world economy.
Other key issues for discussion by the G-20 during 2006 include risks to the ongoing global economic expansion; the impact of demographic change; aid effectiveness; and the state of global energy and minerals markets. While a number of these areas for discussion are carried over from one year to the next, the addition of global energy and minerals markets to the G-20’s agenda reflects the unique position that the Group (which comprises both major suppliers and users of resources) has in considering the broader effects of changing natural resource markets and the implications for economic growth and development.
G-20 Finance Ministers and Governors will meet in November 2006 in Melbourne. In preparation for this, G‑20 Deputies met in March in Adelaide and will meet again in October in Sydney. In addition, three technical workshops have been held in 2006 to allow a more detailed analysis of key issues. The first, focused on reform of the IMF and World Bank, was held in Tokyo in February; the second, held in Canada in June, focused on the implications of developments in natural resource markets; and, as mentioned above, the third, hosted by the Reserve Bank in Sydney in July, focused on the impact of demographic changes on financial markets.
|February||G-20 Workshop on Reform of Bretton Woods Institutions||Tokyo|
|March||Meeting of G-20 Finance and Central Bank Deputies||Adelaide|
|June||G-20 Energy and Resources Seminar||Banff|
|July||G-20 Workshop on Demography and Financial Markets||Sydney|
|October||Meeting of G-20 Finance and Central Bank Deputies||Sydney|
|November||Meeting of G-20 Finance Ministers and Central Bank Governors||Melbourne|
Financial Stability Forum (FSF)
The FSF was formed in 1999 and has a mandate to strengthen global financial systems and improve the stability of international financial markets. Importantly, the FSF aims to improve co-ordination and information exchange among international agencies responsible for financial stability. Members include senior representatives from the central banks, finance ministries and supervisory agencies of the G-7 countries, and central bank governors of the European Central Bank and four countries whose financial markets are of global significance (Australia, Hong Kong, the Netherlands and Singapore). Other participants include international financial institutions, such as the BIS and the IMF, and other forums, including the Basel Committee on Banking Supervision and the Committee on the Global Financial System.
One of the meetings of the full FSF this year was held in Sydney, back to back with an Asia-Pacific regional meeting. Issues reviewed at the meetings included the continuation of relatively benign conditions in financial markets and the global economy, and the response of the financial system to a number of corporate credit disturbances in recent years. A particular focus was the potential for factors such as high levels of household indebtedness, the ‘search for yield’ in global markets, counterparty risk management practices and the rapid growth in credit derivatives to have an adverse affect on the stability of financial markets.
|Hong Kong SAR||United States|
The FSF, as a co-ordinating body, has been a driving force behind improvements to the functioning of the global financial system and its infrastructure. Its ongoing work has revolved around the robustness of international standard-setting processes, counterparty and liquidity risk management practices, the role of hedge funds, and international accounting and auditing requirements. One issue that emerged in the context of ongoing work on business continuity planning was the implications of an avian flu pandemic. The FSF has also maintained an interest in the activities of offshore financial centres, with a particular emphasis on ensuring that the centres meet acceptable standards of international co-operation.
Executives’ Meeting of East Asian and Pacific Central Banks (EMEAP)
During 2005/06, the Reserve Bank continued to be heavily involved in EMEAP, the main vehicle for co-operation among central banks and monetary authorities in the Asia-Pacific region. EMEAP Governors met on two occasions during the year. At the formal annual Governors’ meeting, which took place in New Zealand in May 2006, discussions focused on macroeconomic management in the context of internal and external imbalances and the precautions central banks are taking in the event of an avian flu pandemic. EMEAP Governors also took the opportunity to meet with representatives of the Eurosystem central banks, where they shared views on the challenges each region faces in achieving balanced economic growth, and approaches to regional surveillance and financial arrangements.
The two meetings of EMEAP Deputies that take place each year direct and oversee the work of EMEAP’s working groups, covering financial markets, banking supervision, and payments and settlement issues. Recently, the Deputies’ meetings have taken on a more intensive surveillance role, focusing on key challenges to monetary and financial stability in the region.
|Hong Kong SAR||Philippines|
The Head of the Reserve Bank’s Payments Policy Department was the chair of the Working Group on Payments and Settlement Systems during 2005/06. The work of that Group focused on two main areas. The first involved an investigation of whether there was evidence that arrangements for settlement of bonds in the EMEAP markets were impeding the development of bond markets in the region. This involved an assessment of settlement arrangements in each country against the Recommendations for Securities Settlement Systems of the BIS, as well as a study of how cross-border bond trades within the region were actually settled. Members concluded that settlement arrangements for cross-border bond trades within the region did not appear to be constraining the market. The second major topic of discussion was participation of EMEAP central banks in oversight arrangements for SWIFT, the messaging system used to send settlement instructions for many of the world’s financial market transactions.
The Working Group on Banking Supervision continued to focus mainly on Basel II in 2005/06. It met with the Basel Committee on Bank Supervision to discuss the latter’s review of Core Principles, effective supervision of financial conglomerates, consolidated supervision of international banking groups, and prudential issues arising from the new accounting standards and Basel II. Emphasis was also placed on promoting effective co-operation between macro-surveillance and banking supervision, and sharing early warning systems for identifying sources of vulnerabilities and risks. To facilitate this co-operation, the Working Group established a number of interest groups during the year, including one chaired by the Reserve Bank on stress-testing practices.
The Working Group on Financial Markets continued to focus on issues relating to the Asian Bond Funds during 2005/06 (see the 2005 Annual Report for more detail on the ABF). The main focus was to review the lessons learnt from the initiative. A number of factors potentially hindering the development of bond markets in the region were identified; efforts to address these impediments will be the focus of the work of this Group in future. The Group also meets twice yearly with representatives of central banks from the other major foreign exchange markets to discuss developments in international financial markets.
Bank for International Settlements (BIS) and Associated Committees
During 2005/06, the Reserve Bank continued its involvement with the BIS through active participation in the BIS bi-monthly meetings of central bank governors and associated BIS committees involving senior officials of member central banks. At the governor level, these meetings discussed developments in the global macroeconomic situation, as well as structural developments in areas of particular relevance to central banks, including inflation, exchange rates and financial sector stability. The Governor was a member of the BIS Central Bank Governance Group, which discusses a range of issues relating to the management of central banks. The BIS Asian Consultative Council, of which the Governor is also a member, focuses its discussions on financial and monetary developments in Asia and provides direction for the work of the BIS in Asia.
The Assistant Governor, Financial Markets sits on two of the committees associated with the BIS – the Committee on the Global Financial System (CGFS) and the Markets Committee. The CGFS discusses risks and vulnerabilities in the global financial system, as well as structural developments in financial markets. The discussion in the Markets Committee focuses on matters related to foreign exchange and capital markets.
The Reserve Bank took part in two of the working groups commissioned by the CGFS during 2005/06. One of the working groups is examining the ways in which the development of local currency bond markets can contribute to financial stability. The group is expected to improve the quality of information on emerging economy bond markets, especially at the sectoral level. A second working group is analysing how asset allocation decisions are made by institutional investors. The Reserve Bank was also represented on the CGFS Working Group on Housing Finance, which analysed developments affecting the supply of, and demand for, housing finance. The report of this group, which was published by the BIS in January 2006, highlighted important similarities and differences that have helped shape the evolution of national housing finance systems.
The BIS and the Reserve Bank jointly hosted a conference on reserves management in Sydney in October 2005. The conference provided the opportunity for foreign reserves managers from 25 countries to exchange views and experiences on reserves management policies, objectives and strategies. Reserve Bank staff also presented a paper on the development of Australia’s corporate bond market at a conference on developing corporate bond markets in Asia, which the BIS jointly hosted with the People’s Bank of China in November 2005. In December, the Reserve Bank hosted a BIS Asia-Pacific Heads of Audit conference in Sydney.
International Monetary Fund (IMF)
An important element of the Reserve Bank’s work with the IMF during the past year involved the assessment of the Australian financial sector undertaken by the IMF through its Financial Sector Assessment Program (FSAP). FSAP assessments seek to identify the strengths and vulnerabilities in countries’ financial systems and evaluate how key sources of risk are being managed. More than 100 countries have been assessed since the IMF began the FSAP program in 1999.
The FSAP process includes analysis of economy-wide indicators of financial soundness and compliance with international standards relating to banking supervision, securities regulation, insurance supervision and systemically important payment systems. As part of this process, the Reserve Bank, APRA and ASIC compiled detailed self-assessments against the above standards, and along with the Australian Treasury, provided a range of other relevant background material to the IMF. The IMF staff and external experts then held extensive discussions with the Australian authorities and a range of participants in the financial system. Several exercises were also conducted to examine vulnerabilities in the financial system.
Another aspect of the IMF’s work in which the Reserve Bank has taken an interest over the past year is the strategic review the IMF has begun of its operations, especially relating to its surveillance work. This is a key area of the IMF’s crises prevention work.
The Reserve Bank also participated in a number of the initiatives undertaken by the IMF during 2005/06 to strengthen the latter’s engagement with Asia. The Deputy Governor and the Assistant Governor, Financial Markets participated in two seminars jointly hosted by the IMF and the Monetary Authority of Singapore, which examined issues surrounding regional financial sector integration. The Deputy Governor also met with the IMF Managing Director during his visit to Australia in June 2006.
South Pacific Central Bank Governors
Each year the central bank Governors of the six Pacific Island nations that have their own currencies (Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu) meet with their counterparts from Australia and New Zealand. This year’s meeting took place in Vanuatu in December 2005. It reviewed international economic developments, with particular emphasis on the effect on the island nations, and discussed the management of foreign exchange reserves.
Bilateral Relations and Assistance
The Reserve Bank has a long history of providing technical assistance to other central banks, particularly to those in the Asia-Pacific region. This was stepped up in 2005/06 as part of the Australian Government’s assistance program to Indonesia following the tsunami of December 2004. With the help of funding under the Government Partnership Fund, the Reserve Bank was able to provide technical assistance and training to a significant number of Bank Indonesia staff. Further details of the exchange program that has been established between the two organisations are in the box on page 20.
Recent Annual Reports have noted a change from giving assistance by means of long-term attachments to using short-term visits. Modern communications using electronic means are now allowing, in some cases, the provision of assistance without travelling at all. This method was used to help the Reserve Bank of Vanuatu review its audit and risk management procedures.
During 2005/06, a member of the Reserve Bank’s staff worked with the IMF on the monetary policy framework in Papua New Guinea, while another continued on extended leave to serve as an economist at the National Reserve Bank of Tonga under an AusAID contract. Reserve Bank staff also participated in an IMF review of the compliance of countries with international standards against money laundering and the financing of terrorism. This review was completed in September 2005 and submitted to the Executive Boards of both the IMF and the World Bank.
The Reserve Bank provided presenters during the year for a number of conferences and seminars conducted by multilateral institutions, other central banks and academic institutions. The HC Coombs Centre for Financial Studies (the Reserve Bank’s training college) was made available for a week-long seminar organised by the Association of Financial Supervisors of Pacific Countries, and for the APEC Future Leaders’ Conference.
As has been common in recent years, during 2005/06 the Reserve Bank received many visitors from overseas central banks who wish to study how it undertakes particular areas of work. This year there were visits from the central banks of Bhutan, Cambodia, the People’s Republic of China, Nepal, Thailand, Tonga and Uganda.
Government Partnership Fund (GPF)
During 2005/06, the Reserve Bank received funding under the GPF for an exchange program designed to assist Bank Indonesia (BI) strengthen its monetary policy-making capacity and credibility under its inflation targeting framework. The program is aimed at capacity building in BI in the areas of economic and financial management. It has two main components. The first has involved the attachment of groups of BI staff to the Reserve Bank for a period of three months each. A total of 15 secondees have been placed in the Reserve Bank’s Economic Analysis, Domestic Markets, Financial System and International Departments, where they have gained in-depth knowledge of how the Reserve Bank undertakes tasks relevant to their work in BI.
A second element of the program seeks to reinforce the skills gained by the secondees and assist BI in the adoption of these skills. It has involved visits by senior managers of the Reserve Bank to Jakarta for around one week on each occasion, to have meetings with counterparts in BI to discuss a range of topics. These include the development of the foreign exchange market and management of reserves; the operation of regional offices and integration of liaison information into monetary policy determination; surveillance of the financial system; and the interbank money market and securities lending.