Transcript of Question & Answer Session Benchmark Reforms

Thanks Christopher. Look we have quite a lot of questions, so I might just start shooting them at you. Let's focus first of all, on benchmark reform and the discussions and that theme. The first question for you, with ADIs and particularly the major banks now issuing much less RMBS, who do you hope to take leadership on the new issuance side when it comes to transitioning away from one month BBSW?

Well, I think it's up to all parties to actually play a role. Any issuer needs to think carefully about the stability of their product when thinking about the appropriate benchmark. But also those buying these assets need to be very careful. And again, we just can't assume all the time that all of our benchmarks will be entirely robust. That's why it's important to put in appropriate fallback provisions. But in terms of thinking about whether or not, and as I raised in my speech, one month BBSW is still appropriate, there are risks there because that is the one that has the least liquidity amongst all the BBSW tenors.

So in that case, do you think that the RBA needs to take more of a stick approach to encourage the benchmark reform?

Well, we have some influence and that's what we're doing in terms of thinking carefully about making sure that products, if they want to continue to be eligible for repo in our open market operations then they need to have appropriate fallbacks in place. So we'll be taking a lead in that regard. But it's not for us to dictate to the market exactly where they should be moving if there are concerns about any particular benchmark and what they might move to as an alternative rate.

Thank you. Is the stalling of issuers looking at AONIA-linked deals indicative of wider stalling on LIBOR transition?

No, I don't think so. I mean, I think there is, as I suggested, there is good progress being made on LIBOR. The end date for LIBOR and the problems associated with LIBOR are well understood. And as I suggested, I think of the end of LIBOR as a certainty not as something that might happen. Whereas what I'm suggesting in the case of one month BBSW, is just that it is the less liquid and less robust of the BBSW tenors. So I think careful thought should just be placed as to whether or not that's an appropriate one to continue on with.

In relation to AONIA, would you consider the volume of transactions so far are within the RBA's expectations?

You mean within the … I'm not quite sure about that question. Do you understand whether they're asking about within the cash market itself?

Yeah, I would imagine, that's obviously where transactions are present.

Yeah. Look, we do make comments on a regular basis through products, like the Statement on Monetary Policy. So in the SMP, we've remarked about the fact that there have been days where we've had to use the previous published rate or other alternative options. But we do continually get days where we do have volumes, which are sufficient to base the rate on those transactions, so that's welcome. That's good news.

Okay, interesting. If the cash rate goes negative and BBSW remains positive, do you think more issuers would look at issuance linked to the cash rate?

Well I would query the premise that the cash rate would go negative. The Governor said quite a bit about this. I can't add much more to that other than to say we think it's extraordinarily unlikely.

Okay. Back to BBSW, and particularly the fallbacks, what is the risk-free rate we should use, or should have been used? Should Bloomberg or another vendor calculate a BBSW fallback rate?

Yeah, I'm not quite understanding the premise of the question.

I think it's just trying to understand who's going to be involved in picking up the differential or what's …

Well, I mean, ISDA is quite specific in exactly what differentials and calculations you should be using for these fallback arrangements. So by just signing up to those protocols and those fallback provisions the formulas are embedded in all of those. So I don't think there are further decisions to be made on that. It's taken us a long time for industry and ISDA to get to this point and they're already mapped out quite clearly there.

Thank you. I might throw some non-specific benchmark style questions in. When it comes to securitisation, what characteristics would private sector securities have to possess for a central bank like the RBA to ever incorporate such securities into their QE program?

Yeah, well, it's not entirely clear that we would. In the first instance, and the Governor talked about this shortly after we announced the package in early November of recent measures, including the QE program. He talked a bit about what more could be done if needed, including the fact that we could, if needed, support the market function through further provision and liquidity. He did mention asset purchases. So one could imagine that we could expand the universe of assets that we might consider purchasing. However, I would note that it's the AOFM that's been active in this area, supporting securitisations by non-ADIs and so I think it's very unlikely that we'd step into this space, even if we needed to provide further support to market function.

A similar theme, what does the RBA see as the efficacy in separating YCC purchases from QE purchases, that's just not make its intervention convoluted, particularly for offshore investors?

No, I don't see it that way. I think we've been fairly clear that the yield target we think is a useful way of reinforcing the forward guidance that we've also provided on the cash rate target. And so by saying that we won't be raising the cash right target until we meet certain conditions, including moving towards full employment and we've clarified that we'd want to see inflation actually be within the 2–3% range and to be there on a sustainable basis. So that's the forward guidance and the yield target is just consistent and reinforcing that. But then the QE program focuses further out the curve and we're not focused on any particular yield. What we do have is just a commitment to buy around a hundred billion in AGS and semis over the course of the six months of the program.

Right, thank you. I'm jumping around a bit. I'm sorry, I'm going to go back to … actually I won't go back to benchmarks just yet. Is there any prospect of price maker support for non-bank lenders to close the funding costs gap that has been opened up by the TFF? A rather hot topic at this present time.

Yeah, so I think the question here is whether or not the TFF might be creating competitive distortions, if you like.

That's right.

Well look, the main thing to realise is that the RBA and the government's policies are focused on lowering funding costs for lenders and that that's being passed on to borrowers. And that includes the AOFM's support for securitisations by non-ADIs. The outcome is that we're getting pretty strong competition for high quality borrowers, and that is helping to support economic activity. But there are many factors affecting competition, and it's not clear how consistent the experiences are across the non-ADIs. And part of the difference might be that some of the customers that they might service are being harder hit than others during the pandemic.

The Aussie dollar and US dollar exchange rate has been rising since the election. Is this a concern for the RBA?

Yeah, no, look, I think what we're seeing with the exchange rate for the last few months was that I think it came down from end of August on speculation that the Bank would conduct further easing a policy. And then we did follow that up in November. And all of that meant that the interest rate differential on Aussie dollars versus other assets in foreign currency terms has declined. So that brought the exchange rate down. What I think has happened more recently though is that not so much on the election, as much as the vaccine announcements that have been very positive and welcome news, has seen risk sentiment improve and I think that's pushed the Aussie dollar up a bit. It's still, I think pretty close to our assessment of its fundamental value and it should be noted of course, that any response to these sort of positive announcements on the vaccine, well, those announcements are a good thing for the global economy, including for the Australian economy.

All right. I might just hit back to benchmark discussion. Given the heightened level of government intervention and widespread market disruption during the pandemic. Is it really the time for significant changes in benchmarks? If everything is paused, why not this as well?

Well, unfortunately I think those market disruptions showed us just how fragile some of these benchmarks can be, but most particularly, LIBOR and I think it highlighted that LIBOR is just not a robust benchmark. There is nothing that will compel LIBOR to be continued beyond the end of 2021. It exists because of pressure from the regulators on the panel banks that are making submissions and the panel banks saying, well, it's for the good of all that we continue to do that until the end of 2021. But I don't see there's a need to stop the planning and the transition away from LIBOR. I think it could be, you know, in fact the market disruption says we should make our financial system as robust as possible and moving away from LIBOR is part of doing that.

All right. Thank you. I've got a question on climate change, a little bit different topic. Other central banks are making a move to address climate change risk for financial stability. Is the RBA looking into this at all at this point in time?

My interpretation of what other central banks are doing, they're doing that in their capacity as regulators of the banks and that's not our job, we're not a regulator of the banks.

All right. Thank you. I'm not sure if you want to have another question relating to TFF, but here it is. You just repudiated the claim that ADIs are given a funding advantage versus non-banks through the TFF and because there are other competitive factors in play, can you elaborate on this?

No, I mean, the TFF is providing the banks with lower cost funding. I think I just wanted to put it in perspective that to say that there are other influences on competition. I think that's my main point. It's not to dispute that their funding costs are not benefiting from the TFF, that's the whole point of the program. I'd put it in perspective though, because the amount of funding through the TFF is still a modest one. So it's having a strong effect on their marginal cost of funding, but the average cost of funding is fairly modest.

Okay. Thank you. Prime non-ADI COVID-19 rates are about half that of the major banks. How can they compete for prime customers if banks are funded at 10 bps and non-banks pay market rates at over 100–130?

Yeah. So my understanding of the average funding costs for non-ADIs and ADIs, there's always been a gap and I don't think the gap has opened up particularly since our efforts through this year to lowering funding costs to the economy as a whole. Remember what we're doing is lowering everyone's funding costs by keeping interest rates low right across the yield curve.

Okay. In relation to TFF, if an ADI has issues refinancing these TFF maturities, has the RBA considered its likely a response to that at this point in time?

Sorry, can you restate the question, Robert? I didn't quite understand it.

So I think it's around the term of the TFF. So if an ADI has issues or finds difficulty refinancing its TFF exposures or maturities in say three years, has the RBA considered a response to this?

Well, I don't see that would be an issue. Of course, we'd have to see where market conditions are at the time. But the TFF is still a modest size of banks' books. There's still quite a lot of bonds out there. Bonds are in high demand for good quality issuers like the banks particularly the Australian banks. So I don't envisage that they'll have trouble doing this. Of course, they have to plan all of this very carefully and make sure that they get on this in time. But I have every confidence that they'll be able to do this, including potentially by pre-funding some of it and they might roll out of them earlier rather than wait until exactly the three-year mark rolls around.

All right, thank you. At which point on the curve, is the RBA currently seeing the most demand from investors looking to offload government bonds and semis?

Well the bond purchase program auctions have been well subscribed across most bond lines. Of course, it's not true of each and every bond line but it's fairly consistent across that sort of medium belly of the curve and further out where we're buying closer to the 10-year mark. There's no sort of significant difference in terms of demand across those sort of two bunches of auctions that we're running.

All right. I think we've almost come to the end, but I can throw something in which is a bit left field. Jamaica Central Bank recently communicated its monetary policy decisions via a reggae music video. Do you think the RBA would consider doing this?

I saw that one. I was very appreciative of that. I had a very fond spot for that video for all sorts of reasons, including because I spent one nice summer while I was studying offshore working at the Bank of Jamaica. I'm not sure if my reggae skills are quite up to it. Although we do have some very qualified and good musicians in the Bank, but we'll let you know when that one's coming. I'm sure it will get a lot of views, if and when it's put out.

Thank you. I think that's all we have time for today. I want to thank you very much for joining us and delivering those very insightful remarks on behalf of the RBA. It's much appreciated.

Thank you, Robert, and thanks for everyone's attention.