The RBA’s Contributions to Financial Stability

The RBA has a longstanding responsibility for contributing to financial stability in Australia. This is an important role – maintaining financial stability ensures the financial system can reliably provide the financial services that households and businesses depend on, in both good times and bad. This enables households and businesses to save, borrow, invest, make payments, manage financial risk and plan for the future. In turn, these are critical foundations for the economic prosperity and welfare of the Australian people, which is the overarching objective of the RBA.

The RBA’s responsibility for contributing to financial stability is set out in the Reserve Bank Act 1959. This legislative responsibility is complemented by an agreement between the Monetary Policy Board and the Government – set out in the Statement on the Conduct of Monetary Policy – on the key aspects of Australia’s monetary and central banking policy framework. Informed by this, the RBA contributes to financial stability in a variety of different ways.

Some of these contributions help prevent problems from arising, while others are designed to respond to disruptions when they occur. A snapshot of the RBA’s eight key roles is shown here, with full detail provided below.

Snapshot of the RBA's contributions to financial system stability

How the RBA contributes to financial stability

1. Monetary policy

The RBA sets monetary policy to achieve its goals of price stability and full employment. These goals are important for financial stability. When inflation is high, people’s incomes don’t go as far, which can put pressure on household and businesses finances. If unemployment rises, this can create difficulties in the community and more people may struggle to repay loans. This can lead to losses for banks. If this happens on a large scale it can, for example, make it harder for banks to lend money, affecting the wider economy. By keeping prices stable and supporting employment, monetary policy helps to keep the financial system strong.

The RBA’s Monetary Policy Board is responsible for making monetary policy decisions in Australia, supported by analysis and recommendations developed by RBA staff.

2. Working with the Council of Financial Regulators agencies

The RBA works closely with other government agencies to help keep Australia’s financial system stable. These agencies form the Council of Financial Regulators (CFR), which is chaired by the RBA Governor and includes the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian Treasury. Each CFR agency has a different role, but they all share the goal of supporting financial stability and are committed to working together.

The CFR keeps a close watch on risks to the financial system – like rising debt levels or problems in financial markets – and works together to respond when needed. As part of this, the RBA advises the other CFR agencies on the outlook for financial stability, including to support APRA on macroprudential policy.

The CFR also prepares so they are as ready as they can be to support financial stability in the event of shocks or potential disruptions to the financial system. These scenarios include: stress in financial institutions (such as banks or superannuation funds); problems in financial markets, the payments system or other key infrastructure; and major operational incidents like IT outages. Preparing for these scenarios helps to ensure an effective and coordinated response. In turn, this can support financial institutions to recover from difficulties or be resolved in a way that minimises wider disruption.

The CFR meets each quarter and is supported by a range of cross-agency working groups. To support broader policy discussions, the CFR also meets at least once a year with other government agencies that aren’t formal members.

The Governor of the RBA chairs the CFR and represents the RBA alongside the Assistant Governor (Financial System). RBA staff provide the CFR’s secretariat. The RBA’s executive keep the Monetary Policy Board and Payments System Board updated on relevant discussions, and the Monetary Policy Board is responsible for approving the RBA’s financial stability advice to the CFR and APRA.

3. Managing monetary policy and financial stability interactions

The RBA regularly advises the CFR on how monetary policy – such as changes in interest rates – might affect or be affected by financial stability concerns. This coordination helps ensure that financial stability concerns are addressed using the most appropriate tools, so the RBA can stay focused on its monetary policy goals of price stability and full employment.

However, if financial stability policies aren’t enough to manage risks – and those risks could affect inflation or employment in the future – the Monetary Policy Board may take them into account when setting monetary policy. This could happen, for example, if a period of low interest rates was judged to be likely to lead to a build-up of financial vulnerabilities – such as excessive borrowing or risk-taking – that could eventually harm the economy and make it harder to meet the RBA’s inflation and employment goals.

In these situations, the Monetary Policy Board may need to carefully make and communicate decisions about how best to balance keeping inflation and employment on track in the short term, while also managing risks that could negatively affect the economy (and therefore inflation and employment) over the longer term.

4. Providing adequate liquidity to the financial system

To carry out monetary policy and support payment system functioning, the RBA regularly lends to banks and other financial institutions. This helps to ensure that banks have access to liquidity to meet their day-to-day payment obligations. It also influences the interest rates that financial institutions charge each other in private funding markets, and the interest rates for household and business loans.

During times of financial stress, when borrowing in private funding markets is limited or prohibitively expensive, the RBA can adjust its lending operations. It might lend more often, or change the terms and conditions of its regular lending. This supports the smooth functioning of the financial system, by distributing liquidity across the system when private funding markets are disrupted.

In exceptionally rare circumstances, the RBA can also provide liquidity directly to an individual financial institution – rather than the market as a whole – through what’s known as exceptional liquidity assistance (ELA). This is only available to institutions that are solvent but are facing temporary liquidity pressures, and it is designed to prevent broader problems that could affect financial stability. The Monetary Policy Board is responsible for decisions related to whether to provide ELA and would only do so where it is required to support financial stability.

5. Intervening in financial markets

In very rare instances, financial markets can stop working properly. This can happen for example when extreme uncertainty causes a mass withdrawal of market participation, leading to large and sudden price movements that are detached from economic conditions. In the exceptional circumstances in which this type of disruption threatens financial stability – for example, if price movements become self-reinforcing or disrupt financial market functioning – the RBA can step in to help restore order in key financial markets, such as those for the Australian dollar or Australian Government debt.

The RBA can do this by temporarily buying or selling assets in the affected market. These actions help improve market conditions, restore confidence and make sure that important parts of the financial system continue to function smoothly. This helps prevent broader problems that could affect households, businesses and the economy as a whole.

The Monetary Policy Board is responsible for determining the RBA’s policy for financial market interventions, as set out in Monetary Policy Board – Policy on Financial Market Intervention to Address Market Dysfunction.

6. Undertaking and communicating regular assessments of financial stability

The RBA keeps a continuous eye on developments in the financial system, and what they mean for financial stability. Twice a year (usually around March and September) the RBA publishes its assessment in the Financial Stability Review (FSR). RBA staff prepare the FSR, which is presented to the Monetary Policy Board to inform its monetary policy and financial stability assessments.

The FSR looks at the global and Australian financial environment, highlights potential risks, and assesses the resilience of households, businesses and financial institutions. It also explains how the RBA and other authorities are responding to any concerns.

By sharing this information publicly, the RBA helps raise awareness of issues that could affect the financial system. This helps to support banks, households, businesses and others to adjust their behaviour, manage risks more carefully, and avoid taking on too much risk in the first place.

7. Participating in international forums

The RBA takes part in a range of international forums that help support global and regional financial stability. These groups promote strong standards for oversight of the financial system and encourage cooperation between countries. This kind of international work is important because Australia’s financial system is closely connected to the global economy.

The RBA is a member of several key international bodies. These include:

• the Basel Committee on Banking Supervision (BCBS), which sets global standards for banks
• the Committee on Payments and Market Infrastructures (CPMI), which sets global standards for payment systems and other financial market infrastructure
• the Financial Stability Board (FSB), which brings together financial authorities from around the world to coordinate regulations and policies that support financial stability.

The RBA’s executive represent the RBA in these international forums. By participating in these groups, the RBA helps shape global standards and ensure the international financial system stays strong.

8. Determining payments system policy and operating RITS

The RBA works to support a safe, competitive and efficient payments system so money can move securely between people, businesses and banks. It oversees the payments system as a whole, which includes a wide range of payment methods – from cheques and cards to large corporate transactions.

The RBA also plays an important role in regulating and supervising key financial market infrastructures – the usually unseen arrangements that keep the financial system running smoothly. These include clearing and settlement (CS) facilities, which ensure financial market trades are completed safely by transferring money and assets between parties. In rare cases, the RBA may need to support a distressed CS facility or step in to maintain essential services that are critical to financial stability. The Payments System Board is responsible for the RBA’s payments system policy, including policy in relation to CS facilities.

In addition, the RBA owns and operates the Reserve Bank Information and Transfer System (RITS). RITS is Australia’s high-value payments system and is used by banks and other approved institutions to settle large payments in real time. This helps ensure that important financial transactions are completed quickly and reliably, which is essential for the smooth functioning of the economy.