Reserve Bank of Australia Annual Report – 2009 Banking and Payments
The Reserve Bank provides a range of banking, registry and payment settlement services to other institutions in the Australian financial system, the Australian Government, and other central banks and international bodies. These include the provision of central banking services to the Australian Government for the core public accounts operated by the Department of Finance and Deregulation, transactional banking services to government agencies, custody, registry and associated services, and the operation of a real-time gross settlement system for Australian dollar high-value payments.
While the majority of services provided fall within the scope of central banks' core activities, some services, such as the transactional banking and registry services provided to Australian Government agencies, do not. Accordingly, these services are provided on a commercial basis in line with the Australian Government's competitive neutrality guidelines.
Banking
The Reserve Bank provides central banking and related services to the Department of Finance and Deregulation (DoFD) on behalf of the Australian Government, the Future Fund, the Australian Office of Financial Management (AOFM), and a number of overseas central banks and other official institutions. It also provides contestable transactional banking services to around 90 government agencies on a commercial basis.
One aspect of the Reserve Bank's central banking activities is the role it plays as core banker to the Australian Government. Among other things, this requires the Bank to manage the consolidation of all Australian Government agency account balances, irrespective of the financial institution that provides transactional services to an Australian Government agency. These balances are then transferred at the end of the operational day into a group of accounts, known as the Official Public Accounts (OPA) Group. This is where the Commonwealth's overnight at-call cash balances are held. The Bank also provides the Government with a term deposit facility for investment of its excess cash reserves, as well as a short-term overdraft facility to cater for occasions where there is an unexpected demand on Commonwealth cash balances. These broad arrangements have been established under an agreement with DoFD.
The AOFM has day-to-day responsibility for ensuring there are sufficient cash balances in the OPA Group and the investment of excess Commonwealth funds in approved investments, including term deposits at the Reserve Bank. The Bank also offers term deposit investment facilities to other government entities, including the Future Fund Board of Guardians.
The Reserve Bank's transactional banking activities relate to the delivery of more traditional day-to-day banking services. The provision of these services is contestable, and the Bank competes against other commercial financial institutions to deliver these services to Australian Government agencies. These agencies can require service features that are common to government but not routinely requested by other users of payment and collection services. Because of its particular focus on the government sector, the Bank is able to provide facilities tailored to their specific requirements. These include features such as extremely high standards of system reliability and availability, purpose-built overnight reporting and the flexibility to react quickly when changes in government policy require consequent changes to systems and processes.
During the course of this financial year, the Australian Government initiated a number of financial stimulus measures in response to the global financial crisis. Centrelink and the Australian Taxation Office were responsible for effecting one-off payments directly to eligible families, pensioners, carers, students, drought-affected farmers and other eligible recipients. As transactional banker to both agencies, the Reserve Bank worked closely with each agency to ensure the smooth delivery of large volumes of payments in a relatively short period of time. The Bank also liaised with financial institutions to ensure they had sufficient information to manage the increase in ATM and branch-related cash demand created by the stimulus payments. Centrelink distributed 5.5 million payments totalling around $8.7 billion in December 2008 and a further 2.8 million payments totalling over $5 billion in March and April 2009. The Australian Taxation Office disbursed around $7.3 billion in April and May 2009 to around 8.4 million recipients.
The delivery of direct entry payments to recipients' accounts is a significant part of the Reserve Bank's transactional banking activities. In 2008/09, approximately 270 million payments totalling $285 billion were delivered through this payment stream by the Bank. During the course of this year, the Bank worked with the industry to develop a solution to replace the dated bilateral communication infrastructure that supports the exchange of direct entry and other low-value payments between payment service providers in Australia. The existing bilateral communication links will be replaced by newer communication networks that will allow payments system participants to use a single network connection to exchange payment messages with all other network members. The Bank expects to be able to test the exchange of files across this new infrastructure in coming months. Its broader work to support this initiative is described further in the section on Settlement Services.
During the past year, the Reserve Bank has provided assistance to government agencies that are considering new payment options, or making more effective use of those currently available, to meet their developing business requirements. Some of these include more timely and robust arrangements for the delivery of financial assistance in response to natural disasters. Others include the use of EFTPOS transactions to deliver cost and process improvements to agencies that have a requirement to complete within-day payments to their clients.
The Reserve Bank also provides its government agency customers with access to a number of bill collection services, including BPAY©, over-the-counter, phone and internet-based collections, as well as card-based collection services. Increasingly, government agencies are looking to broaden the number of channels through which debts to government can be collected, especially in the sphere of electronic collection. Cost and process efficiencies, as well as greater flexibility for debtors, are the key drivers. The Bank has continued its focus on expanding its range of service delivery options to meet this demand.
Earnings after tax in 2008/09 for the Reserve Bank's transactional banking services were $3.5 million, compared with $2.3 million the previous year.
Registry
The Reserve Bank provides registry services to the Australian Government, under an agreement with the AOFM, and a number of official foreign institutions that have Australian dollar debt programs. In common with other registry operators, the services provided to clients include registration of new issuance, ongoing maintenance of ownership records, distribution of interest payments and redemption of securities at maturity.
The Reserve Bank also provides a small-investor facility that enables retail investors to buy or sell CGS. As a result of the global financial crisis, there was increased interest and activity in this facility this financial year. Information relating to the small-investor facility, including indicative buying/selling prices, is available on the Bank's website.
Notwithstanding the Australian Government's recent increased debt issuance activities, the level of transactional activity in the Reserve Bank's registry remains quite low as a result of wholesale financial market participants settling their CGS trades electronically in Austraclear. Earnings after tax for the CGS registry business in 2008/09 were $0.1 million, the same as the previous year.
Settlement Services
The Reserve Bank Information and Transfer System (RITS) provides the Australian financial system with a real-time interbank payment and settlement service. It is accessed by around 60 institutions approved by the Bank to operate an Exchange Settlement Account (ESA).
Payments between these institutions are settled in RITS across respective ESAs. About 90 per cent of these payments, by value, are settled on a real-time gross settlement (RTGS) basis, including time-critical customer payments, all wholesale debt and money market transactions and Australian dollar legs of foreign exchange transactions. The latter includes Australian dollar trades involved in continuous linked settlement (CLS), for which net amounts are paid to CLS Bank each day.
Following strong growth in the previous two financial years, the average daily value of RTGS transactions fell by 5.0 per cent in 2008/09, to $184 billion. This is the first financial year in which values settled have fallen since the introduction of RTGS in June 1998. The decline is likely to be associated with a fall in foreign exchange settlements. The average daily number of transactions rose modestly, by 4.9 per cent in the year, to around 32,000. The highest daily value of transactions during 2008/09 was $289 billion, on 28 November 2008, well down from the peak of $312 billion recorded in 2007/08.
RITS also settles batches of netted interbank payments. One batch is a dedicated multilateral settlement at around 9.00 am, mainly for payments arising from cheque, direct entry and retail card transactions that are cleared overnight prior to interbank settlement across RITS. A batch settlement facility in RITS also allows approved parties to submit batches of netted interbank payments to RITS at any time during the business day. This facility is used once each day by the Australian Securities Exchange for settlement of payments arising from equity transactions.
The Reserve Bank invests significant financial and staff resources to ensure that RITS meets the exceptionally high standards of availability and resilience appropriate to its critical role in the financial system. As part of an ongoing RITS evolution program, an upgrade of the core RITS hardware, operating system and database was completed in February 2009. This major upgrade provided improvements in capacity and resilience while also placing RITS on a better footing for system support and maintenance. It followed an extensive project to replace the user interface and security regime between 2005 and 2008.
Future improvements to RITS business functionality include an additional liquidity optimisation feature, a targeted bilateral offset, and facilities for same-day exchange and settlement of files for low-value payments. These developments are described below.
The targeted bilateral offset is planned to be implemented in the September quarter 2009 and will allow two RITS members to offset selected transactions, for example those on behalf of the same client. This will reduce the amount of liquidity required for those transactions and assist in the management of client credit positions.
The Reserve Bank plans to use its significant public policy investment in RITS to assist the industry to make major improvements in the infrastructure for low-value payments (such as cheques and direct entry) and the timeliness of settlement of these payments.
Currently, institutions use low-speed bilateral network connections to exchange clearing information on customers' low-value payment transactions. As noted above, the respective positions of each institution in each clearing are collated each night and settled across RITS in a batch, at around 9.00 am on the business day following exchange.
The Reserve Bank and the industry are now working together to enhance some aspects of these arrangements significantly. In particular, the Bank is very supportive of industry initiatives to replace the ageing bilateral links with a modern ‘network cloud’, described as a Community of Interest Network (COIN), or by making more use of SWIFT. The Bank believes that migration to new network arrangements will bring significant benefits to Australia, including easier access to low-value payments systems for new entrants. In other projects, the Bank and industry are also exploring ways to move the settlement of low-value files (particularly those for direct entry) onto the same day as exchange. This will reduce remaining settlement risk associated with the current deferred settlement arrangements, and may in some cases also allow faster customer access to funds.
To facilitate the same-day settlement of files of low-value payments, the Reserve Bank will make a number of changes to RITS over the next year. Some broader work is also necessary to support the proposed upgrading of network connections. Since these will provide RITS members with the option of providing settlement instructions to RITS by means of SWIFT or via the COIN ‘network cloud’, the Bank is building a Settlement Interconnector to link RITS to any agreed industry networks for the exchange of low-value payments. The Bank is targeting availability of these facilities by around the middle of 2010.
Using the Settlement Interconnector infrastructure, the Reserve Bank is also developing a ‘clearing connector’, a facility that will allow participant institutions to exchange clearing files across their preferred network (SWIFT or industry network) rather than having them need to use both. This will enable participants, on their initiative, to send all clearing files to the connector for on-forwarding to their various exchange partners. The Bank is planning for this facility to be available by the end of 2009.
Settlement services are also provided for banknote lodgements and withdrawals by commercial banks and for high-value transactions undertaken by the Reserve Bank and its customers, including the Australian Government and overseas central banks and official institutions. At the end of June 2009, 35 central banks and official institutions overseas were using the settlement and safe custody services provided by the Bank to settle their Australian dollar transactions.