Macroprudential Analysis and Policy in the Australian
Financial Stability Framework – September 2012
2. Mandates

Responsibility for financial stability policy in Australia is spread across several agencies.

  • The RBA has had a longstanding responsibility for financial stability, which was reconfirmed in the context of the 1998 reforms to financial sector regulation in Australia (which, inter alia, created APRA), and more recently was outlined in the September 2010 Statement on the Conduct of Monetary Policy.[1]
  • APRA is required to promote financial system stability in Australia while balancing its objectives of financial safety and efficiency, competition, contestability and competitive neutrality.
  • ASIC is responsible for taking certain regulatory actions to minimise systemic risk in clearing and settlement systems, working with the RBA.
  • The Australian Treasury has responsibility for advising the Government on financial stability issues and on the legislative and regulatory framework underpinning financial system infrastructure.

The specifics of the RBA's mandate rest on the provisions in section 10 of the Reserve Bank Act 1959 requiring the Bank to ‘ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia’ and that its powers are ‘exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to: (a) the stability of the currency of Australia; (b) the maintenance of full employment in Australia; and (c) the economic prosperity and welfare of the people of Australia’. Given the serious damage to employment and economic prosperity that can occur in times of financial instability, the Act has long been interpreted to imply a mandate to pursue financial stability. This implicit goal has been made more explicit by successive governments. In 1998, the then Treasurer explicitly referred to financial stability being the regulatory focus for the RBA, in the Second Reading Speech in support of the APRA Act.[2] More recently, in 2010 the RBA and the Government recorded their common understanding of the RBA's longstanding responsibility for financial system stability, as part of the periodically updated Statement on the Conduct of Monetary Policy.[3]

APRA's objectives, including its mandate to pursue financial stability considerations in concert with its other goals, are set out in the Australian Prudential Regulation Authority Act 1998 (APRA Act). Section 8(2) of that Act states: ‘In performing and exercising its functions and powers, APRA is to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, is to promote financial system stability in Australia.’ This was reinforced by the Treasurer's Statement of Expectations in 2007 which noted that prudential regulation seeks to reduce market failure by limiting the systemic risks associated with breaches of financial promises.[4]

The RBA and APRA agreed on a Memorandum of Understanding (MOU) in 1998, which sets out some of the specifics of the modes of cooperation and procedures for information sharing.[5]

The Corporations Act 2001 includes as an objective ‘the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities’. To support this objective, the Act sets various obligations for providers of clearing and settlement facilities, and gives the RBA the power to set financial stability standards, and gives both the RBA and ASIC various powers relating to licensing, standard-setting and direction over a provider of such facilities. Section 823E gives ASIC a directions power over holders of clearing and settlement facility licences, to direct them to take actions to reduce systemic risk. Before giving, varying or revoking such a direction, ASIC must consult the RBA, although failure to do so does not invalidate the direction, variation or revocation. The RBA may at any time request ASIC to make a direction, but ASIC is not required to comply with the request. The two agencies agreed on an MOU in 2002, detailing the processes and information-sharing arrangements they would follow in pursuit of these joint responsibilities.[6]

More broadly, and consistent with recent revisions to the IOSCO Objectives and Principles of Securities Regulation, ASIC also plays an important role in monitoring, mitigating and managing systemic risk in the Australian financial system, appropriate to its mandate.[7] This work primarily takes place through ASIC's Emerging Risk Committee, which meets regularly to identify and assess emerging systemic and thematic risks and, in doing so, keeps the perimeter of securities regulation under review. Important issues and concerns arising from this process are communicated with the RBA and APRA directly or through the Council of Financial Regulators. In addition to its MOU with the RBA, ASIC has an MOU with APRA establishing a framework for cooperation in areas of common interest.[8]