Role of the Reserve Bank in Maintaining Financial Stability

Stability of the financial system is a longstanding responsibility of the Reserve Bank – a mandate reconfirmed by the Government when it introduced significant changes to Australia's financial regulatory structure in July 1998. These included the transfer of responsibility for the supervision of banks to a new integrated regulator, the Australian Prudential Regulation Authority (APRA), and the establishment of the Payments System Board within the Bank.

In fulfilling its mandate to promote financial system stability, the Reserve Bank has a role both in mitigating the risk of financial disturbances with potentially systemic consequences, and in responding in the event that a financial system disturbance does occur.

There are several ways in which the Reserve Bank aims to reduce the likelihood of financial instability. One is by laying the foundation for low and stable inflation and sustainable economic growth, an environment that will generally be conducive to financial stability.

Associated with this is the role that the Reserve Bank plays in monitoring the health of the financial system. On an ongoing basis, the Bank assesses a range of aggregate financial and economic data that help gauge the soundness of the financial system and potential vulnerabilities. The results of such analysis are published half-yearly in the Financial Stability Review.

The Bank also works to ensure that the payments system is safe and robust. The Payments System Board within the Bank has explicit authority for payments system safety and stability, and has the backing of strong regulatory powers.

The Bank regularly shares its views on these matters with other relevant agencies. Domestically, the main forum is the Council of Financial Regulators (CFR). The CFR, which is chaired by the Reserve Bank Governor, brings together the Bank, APRA, the Treasury, and ASIC, with a mandate to contribute to the efficiency and effectiveness of regulation and the stability of the financial system.

Internationally, the Reserve Bank contributes to the debate on the reform of the international financial system, primarily through its membership of the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS). The FSB has a mandate to assess the vulnerabilities affecting the financial system, identify and oversee action to address them, and promote co-operation and information sharing among authorities responsible for financial stability. The BCBS provides the international framework for prudential regulation of internationally active banks.

The Reserve Bank's mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions. The Bank does, however, have an important role in the management of crisis situations in co-operation with the other CFR agencies. In particular, the Bank has responsibility for monitoring financial markets, and payment and settlement systems, and for advising the Treasurer or other relevant Minister on emerging distress in these markets and systems. In addition, the Bank has responsibility for assessing and advising on the nature and scale of the systemic impact of any significant financial stress, including implications for financial markets and the payments system. The Bank is also responsible for evaluating and implementing response options that involve liquidity support or the use of payments system powers.