September 2021

Finance
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An Assessment of the Term Funding Facility

Susan Black, Ben Jackman and Carl Schwartz

The Term Funding Facility (TFF) was announced by the Reserve Bank Board in March 2020 as part of a comprehensive policy package to support the Australian economy in response to the COVID-19 pandemic. The facility has provided low cost three-year funding to banks operating in Australia against high quality collateral. The TFF closed to new drawdowns at the end of June 2021, so the last of this funding will not mature until mid 2024. This article provides an overview of TFF usage by banks, considers the future refinancing task for the banking sector, and provides an assessment of the TFF with respect to its primary policy goals.

banking, business, credit, finance, pandemic
Finance
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Small Business Finance and COVID-19 Outbreaks

Susan Black, Kevin Lane and Laura Nunn

Economic conditions for small and medium-sized enterprises (SMEs) improved in the second half of 2020 and early 2021, although measures to contain the recent outbreaks of COVID-19 have affected firms in much of Australia. SMEs are being supported by policy measures, including a number of initiatives that continue to encourage lending to smaller firms. Nonetheless, the volume of SME lending has been little changed for some time, and access to finance continues to be a challenge for small businesses.

banking, business, credit, finance
Australian Economy
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Climate Change Risks to Australian Banks

Kellie Bellrose, David Norman and Michelle Royters

Climate change affects banks because of the impact it has on the value of assets used as collateral for loans and the incomes borrowers use to repay their loans. There is significant uncertainty about the magnitude of risks to banks from climate change. This is because of the uncertainty about how climate change will alter future weather patterns, how policies will change globally and how economies adapt. This article uses one approach to provide preliminary estimates of the possible scale of risks climate change poses to banks' housing and business exposures. This approach suggests that a small share of housing in regions most exposed to extreme weather could experience price falls that might subsequently result in credit losses, but the overall losses for the financial system are likely manageable. Banks are also exposed to transition risks from their lending to emissions-intensive industries, but their portfolios appear to be less emissions-intensive than the economy as a whole. Further estimates of the impact of climate change on banks will be provided by the Climate Vulnerability Assessment currently being undertaken by the Australian Prudential Regulation Authority and the five largest banks.

climate change, banking
Global Economy
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Towards Net Zero: Implications for Australia of Energy Policies in East Asia

Jonathan Kemp, Madeleine McCowage and Faye Wang

China, Japan and South Korea have all set targets to achieve net-zero carbon emissions by around the middle of this century. These three countries account for around two-thirds of Australia's fossil fuel exports. Based on emission scenarios consistent with these commitments, we find that Australia's coal exports could decline significantly by 2050, with a more modest effect likely for liquefied natural gas exports; both may be offset to some degree by increases in green energy exports. The effect on overall Australian GDP is expected to be relatively small and gradual. Significant uncertainty surrounds the speed and manner in which countries will work to achieve net-zero emissions, as well as the technological developments that could change the efficiency and carbon intensity of fossil fuels.

climate change, china, export, mining, resources sector
Australian Economy
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The Financial Cost of Job Loss in Australia

David Lancaster

Workers who lose a job tend to experience large and persistent earnings losses. On average, real earnings are around one-third lower in the year of job loss, and it takes at least four years for an individual's annual earnings to recover. Earnings losses are particularly persistent following the loss of a long-term job. Workers who find new employment tend to work fewer hours at lower hourly rates of pay.

employment, labour market, pandemic, wages
Global Economy
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Government Bond Markets in Advanced Economies During the Pandemic

Nick Baker, Marcus Miller and Ewan Rankin

Governments in advanced economies have funded their large fiscal policy responses to the COVID-19 crisis by issuing government debt securities. Except for a period of dysfunction in the early months of the pandemic, government bond markets have functioned well. Despite the substantial increase in debt issuance, the interest rate paid on new government debt has declined to historically low levels. A rise in private sector saving relative to investment has contributed to demand for low-risk assets like government bonds. At the same time, advanced economy central banks have lowered their policy rates and made large-scale purchases of government bonds in secondary markets in pursuit of their inflation and employment goals.

bonds, financial markets, pandemic
Global Economy
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China's Labour Market: COVID-19 and Beyond

Jonathan Kemp and Morgan Spearritt

The Chinese labour market has recovered quickly following the sharp economic downturn caused by the COVID-19 pandemic. While widespread lockdown measures in early 2020 pushed large numbers of Chinese workers out of the labour market, successful containment of the virus allowed most of these workers to return relatively quickly. Structural factors – notably a shrinking labour force – are now likely to be the dominant drivers of developments in the Chinese labour market. In the short term, policymakers are considering changes to the retirement age to boost labour supply. In the longer term, the focus of reforms is increasing labour productivity and reducing labour market frictions.

china, employment, labour market
Global Economy
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China's Evolving Financial System and Its Global Importance

Nicole Adams, David Jacobs, Stephen Kenny, Serena Russell and Maxwell Sutton

China's economic policy response to the COVID-19 pandemic has been less stimulatory than the response after the global financial crisis because Chinese authorities have sought to avoid fuelling risks in the financial system. Indeed, the authorities have continued with reforms to make the financial system more market-based so that it can better support China's economy, although the state continues to play a central role in the financial system. At the same time, China has become increasingly important for international financial markets, mainly due to its weight in international trade but also because certain cross-border capital flows are rising.

china, credit, finance, reforms

June 2021

Payments
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COVID-19 Stimulus Payments and the Reserve Bank’s Transactional Banking Services

Jiawen Chen and Kristin Langwasser

The Australian Government introduced significant fiscal support measures to limit the negative economic effects of the COVID-19 pandemic and support economic recovery. In its capacity as the banker to the Commonwealth of Australia, and importantly as transactional banker to the large agencies charged with delivering a number of these measures, the Reserve Bank facilitated the distribution of fiscal stimulus payments to households and businesses. Improvements in government processes to ensure bank account details are available when delivering large-scale economic stimulus programs ensured that the COVID-19 stimulus payments were delivered more quickly and efficiently when compared to the stimulus payments made during the Global Financial Crisis (GFC) in 2008 and 2009. This meant that there was little delay for the economic stimulus to be available to the recipients and the economic support to take effect.

banking, pandemic, payments
Payments
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How Far Do Australians Need to Travel to Access Cash?

James Caddy and Zhan Zhang

Our analysis finds that Australians generally do not have to travel far to reach their nearest cash access point – a location where they may make cash withdrawals and/or deposits. Around 95 per cent of people live within about 5 kilometres of a cash access point, broadly unchanged since 2017. However, there are parts of regional and remote Australia with limited access to cash. People in these areas must travel longer distances to access cash, and the available access points do not always have nearby alternatives. This means that access to cash in these areas is more vulnerable to any future removal of cash services.

atm, banking, banknotes, currency
Finance
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An Initial Assessment of the Reserve Bank's Bond Purchase Program

Richard Finlay, Dmitry Titkov and Michelle Xiang

This article provides an initial assessment of the effect of the Reserve Bank's bond purchase program on government bond yields. Overall, we estimate that the program has reduced longer-term Australian Government Security (AGS) yields by around 30 basis points and lowered the spread of state and territory bond yields to AGS yields by 5 to 10 basis points, relative to where they would otherwise have been. This reduction in yields occurred partly in anticipation of the program and partly at its announcement. Bond yields have risen noticeably since the program was announced, but this does not imply that the impact of the program was transitory: many factors contribute to changes in bond yields, and our assessment is that bond purchases serve to hold yields lower than they would otherwise have been over an extended period. The bond purchase program has not had any substantial negative impact on the functioning of government bond markets.

bonds, financial markets, pandemic
Finance
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Monetary Policy, Liquidity, and the Central Bank Balance Sheet

Sean Dowling and Sebastien Printant

In response to the COVID-19 pandemic, the Reserve Bank deployed a number of monetary policy tools, including some new measures, to support the economy and address disruptions to the smooth functioning of financial markets. This new mix of policy tools has changed how the Reserve Bank implements monetary policy, and has significantly increased the size of the Bank's balance sheet and the amount of liquidity in the banking system.

banking, financial markets, market operations, monetary policy, pandemic
Finance
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The Committed Liquidity Facility

Andrea Brischetto and Lea Jurkovic

The Reserve Bank provides the Committed Liquidity Facility (CLF) to enhance the resilience of the banking system in times of liquidity stress. Banks need to hold high-quality liquid assets (HQLA), including government securities, as a buffer against liquidity stress. However the low level of government debt in Australia limited the amount they could reasonably hold. The CLF was introduced in 2015 as an alternative. Since 2019, the size of the CLF has been reduced because the amount of government debt on issue has increased significantly. The fee charged for access to the CLF has also been increased to ensure that banks have an incentive to manage their liquidity risk appropriately. The size of the CLF and the associated fee have been adjusted in a measured way to ensure a smooth transition.

banking, market operations
Finance
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Corporate Bonds in the Reserve Bank's Collateral Framework

Jin Lim, Eva Liu, Nathan Walsh, Andrew Zanchetta and Duke Cole

In May 2020, the Reserve Bank broadened the range of corporate bonds accepted as collateral under repurchase agreements (repo) from AAA-rated to investment grade (BBB- or above). This change in policy increased the universe of potentially eligible securities for domestic market operations by around $150 billion, of which the Reserve Bank has received applications for and granted eligibility to around $50 billion. In assessing applications for repo eligibility, a number of features – including subordination, embedded options and legal risks – required further investigation to ensure the securities remained within the Bank's risk appetite. Corporate securities remain a small share of total eligible collateral. While usage of corporate bonds in repos with the Bank has been relatively modest to date, the policy change to broaden may have provided some support to the Australian corporate bond market.

bonds, market operations
Payments
Photo: (Left to Right) State Library of South Australia, B 7326; RBA Archives, 18/4741, P12/256

Review of the NGB Upgrade Program

Kate Hickie, Kathryn Miegel and Matthew Tsikrikas

A key responsibility of the Reserve Bank is to maintain public confidence in Australia's banknotes as a secure method of payment and store of wealth. To help achieve this objective the Bank initiated the Next Generation Banknote (NGB) program, which involved the design and development of a new banknote series to make Australia's banknotes more secure from counterfeiting. The decade-long program concluded in late 2020, with the release of the final upgraded banknote into general circulation. The program delivered a suite of new Australian banknotes with a range of new innovative security features. Overall the banknotes have been well received by the general public and counterfeiting rates have remained low.

banknotes, counterfeit, security features
Australian Economy
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The Transition from High School to University Economics

Gian-Piero Lovicu

To promote economic literacy and ensure the long-term health of the economics discipline, it is important to address the sharp decline in the size and diversity of the economics student population. Administrative data from the University Admissions Centre (UAC) provides information about how students transition from high school to university economics. These pathways suggest that interventions to increase the number and diversity of students studying economics in Year 12 can strengthen the pipeline of students into university economics. Interventions to improve the economic literacy of Year 12 economics students who are less socially advantaged are important to encourage more diversity in university economics; in contrast, female students appear to need less academic support and may instead benefit more from tailored interventions that pique their interest in and confidence with economics. More advocacy of economics should also increase its uptake at university, particularly among students already studying economics and/or a STEM subject in Year 12 and higher performers.

educators and students
Payments
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Bank Fees in Australia During the COVID-19 Pandemic

Karl Sparks and Megan Garner

The Reserve Bank's annual survey of bank fees shows that their fee income from both households and businesses in Australia declined notably over 2020 due to the disruption to economic activity caused by the COVID-19 pandemic.

banking, fees, pandemic, rba survey
Financial Stability
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Low Interest Rates and Bank Profitability – The International Experience So Far

Mark Hack and Sam Nicholls

This article discusses the effect that low interest rates may have on bank profits, and reviews the experience of banks in economies that have had very low interest rates for an extended period. In the short to medium run, low or negative interest rates appear to reduce bank profits only a little, after accounting for the positive effects of lower interest rates on loan losses and demand for credit. However, the negative effects on bank profits increase when interest rates remain very low for a prolonged period. The profits of smaller banks – which have more household deposits, limited pricing power or less capacity to adjust their activities – are more sensitive to a prolonged period of low interest rates.

banking, cash rate, interest rates, international
Australian Economy
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Underemployment in the Australian Labour Market

Mark Chambers, Blair Chapman and Eleanor Rogerson

Underemployment in Australia has been moving higher for several decades. This article reviews the trends that have been driving this, including the long-run increase in part-time employment and changes in how the labour market adjusts to fluctuations in labour demand. The article also discusses the implications of the upwards trend in the underemployment rate for assessing spare capacity in the labour market. One implication is that the unemployment rate may need to decline by more than has previously been the case before wage pressures start building strongly.

employment, labour market, wages
Global Economy
Photo: Kanawa Studio

The Global Fiscal Response to COVID-19

Callum Hudson, Benjamin Watson, Alexandra Baker and Ivailo Arsov

Globally, the fiscal policy response to the COVID-19 crisis has been the largest and fastest in peacetime. Governments have prioritised direct fiscal support for private incomes and employment, which has limited economic scarring and established a solid foundation for the recovery. The size and composition of the fiscal response has varied across countries, reflecting differences in automatic stabilisers, pre-pandemic fiscal space, the severity of infections and policy preferences. Fiscal policy is likely to remain supportive for some time after the pandemic subsides, and in many countries is expected to focus increasingly on boosting investment. For as long as governments anchor spending decisions in a sound medium-term fiscal framework and interest rates remain lower than the rate of economic growth, ongoing fiscal support need not pose problems for government debt sustainability.

debt, employment, households, interest rates, international, pandemic
Finance
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Examining the Causes of Historical Failures of Central Counterparties

Nicholas Cross

Although historically rare, the failure of a central counterparty (CCP) could severely disrupt and destabilise the financial system. This has driven a global push to implement resolution regimes so that authorities can support the continuity of critical functions of a distressed CCP. This article examines 3 CCP failures to identify common causes of failure that could help authorities prevent or prepare for a resolution. It finds that while there are some common causes of failure in the episodes considered, they have largely been addressed by improvements in CCP financial risk management in recent years.

financial markets, financial stability, market operations, regulation

March 2021

Payments
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Cash Demand during COVID-19

Rochelle Guttmann, Charissa Pavlik, Benjamin Ung and Gary Wang

Since the onset of the COVID-19 pandemic, the value of banknotes in circulation has risen sharply. This was despite cash being used much less for everyday transactions. Much of the strong demand for banknotes can be attributed to people's desire to hold cash for precautionary or store-of-wealth purposes. This behaviour is common during periods of significant economic uncertainty and stress, and many other countries saw similar patterns of cash demand.

banknotes, currency, pandemic, payments
Payments
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Property Settlement in RITS

Gabrielle De Freitas and Emilie Fitzgerald

Property transactions are among the largest and most significant financial undertakings that many Australians enter into. As with other aspects of Australia's economy, innovation and technological change have led to the introduction of electronic solutions for property conveyancing, replacing the traditional paper-based process. To support the shift to electronic conveyancing, in 2014 the Reserve Bank of Australia introduced new functionality in the Reserve Bank Information and Transfer System to enable near real-time settlement of interbank obligations relating to property transactions. This functionality minimises settlement risk for the transfer of property ownership, while also ensuring that the property settlement process remains secure, reliable and efficient.

housing, payments, technology
Australian Economy
Photo: Reserve Bank of Australia Archives PN-000271

From the Archives: The London Letters

Jacqui Dwyer and Virginia MacDonald

The Reserve Bank has a rich and unique archives that captures almost 2 centuries of primary source material about Australia's economic, financial and social history. To enhance public access to these records, we have launched a digital platform, Unreserved. Unreserved enables users to browse information about our archival collection and directly access our digitised records. Unreserved will be regularly populated with new records as the digitisation of the Bank's archives progresses. The first release of records is a ‘sampler’ of the diversity of information in our archives. This article introduces Unreserved and highlights a particular series – the London Letters – which comprises the information exchanged between the Bank's head office and its London Office from 1912 to 1975. The London Letters provide insights into the development of Australia's central bank, along with its role and experiences during some of the most significant events of the 20th century.

banking, educators and students, finance, history
Australian Economy
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The Anatomy of a Banking Crisis: Household Depositors in the Australian Depressions

Gianni La Cava and Fiona Price

Looking into archival material can provide a new lens through which to view historical events. With the launch of Unreserved, the RBA has released archival records to the public, including longitudinal data on individual bank depositors that uncovers new facts about the behaviour of Australian households during the economic depressions of the 1890s and 1930s. Depositors responded to both depressions by withdrawing more money, consistent with households drawing down on their saving buffers in the face of rising unemployment and falling incomes. The net withdrawal rate of depositors also increased when deposit interest rates fell and when public confidence in the banking system deteriorated, with clear evidence of a run on a savings bank in the 1930s. In more normal times, most saving deposits were ‘sticky’ with transactions being very rare. This high degree of deposit stickiness appears to be because most people held these bank accounts to save for significant life events. While it is difficult to draw policy implications from the historical analysis, some features of the depositor behaviour are likely to hold true today.

banking, history, households, interest rates
Finance
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Australia's Economic Recovery and Access to Small Business Finance

Joel Bank and Michelle Lewis

Economic conditions for many small businesses in Australia began to improve in the second half of 2020 alongside the broader recovery from the severe economic disruption caused by the COVID-19 pandemic. While small businesses' access to finance from lenders tightened in the early stages of the pandemic, various policy measures were provided to help support the provision of credit. However, lending to small businesses remains little changed. Businesses have been reluctant to take on more debt in an uncertain environment and, at the same time, many have been able to make use of a range of temporary measures that have supported revenues or allowed for deferral of payments.

business, credit, finance, monetary policy, pandemic
Finance
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Developments in Banks' Funding Costs and Lending Rates

Megan Garner and Anirudh Suthakar

Banks' funding costs declined to historical lows over 2020, reflecting the monetary policy measures announced by the Reserve Bank. In aggregate, lending rates have fallen in line with banks' borrowing costs, such that the major banks' average interest spreads were little changed over the year.

banking, cash rate, credit, interest rates, monetary policy
Payments
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Developments in the Buy Now, Pay Later Market

Chay Fisher, Cara Holland and Tim West

The buy now, pay later (BNPL) sector is growing rapidly and new providers and business models are emerging. While the development of these new payment services is evidence of Australia's innovative and evolving payments system, it may also raise issues for policymakers. The Reserve Bank is currently considering policy issues raised by BNPL providers' no-surcharge rules as part of its Review of Retail Payments Regulation. This article discusses developments in the BNPL sector, focusing on different business models and implications for the cost of electronic payments to merchants.

credit, fees, payments, retail
Global Economy
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Determinants of the Australian Dollar over Recent Years

Tim Atkin, Isabel Hartstein and Jarkko Jääskelä

The exchange rate is influenced by a number of domestic and international factors. Two key fundamental determinants of the exchange rate are the terms of trade and differences between interest rates in Australia and those in major advanced economies. Since the end of the mining boom, the decline in the terms of trade and easing in domestic monetary policy, including the recent introduction of quantitative easing measures, have contributed to the depreciation of the Australian dollar. On a shorter-term basis the Australian dollar has also moved closely with prices in other international financial markets in response to changes in global risk sentiment.

commodities, currency, financial markets, forex, trade
Australian Economy
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Understanding the East Coast Gas Market

Timoth de Atholia and Aaron Walker

Wholesale gas prices on the east coast have become linked to LNG export prices since 2015. This is because local gas producers can now sell into international markets through the 3 Queensland LNG export terminals. Wholesale prices will continue to be influenced by LNG export prices as long as this option is available. Contracted prices apply to the bulk of east coast gas demand and production. Contracted gas prices are likely to remain structurally higher than their pre-2015 levels over coming decades, reflecting higher marginal costs of domestic production.

export, resources sector
Global Economy
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The Response by Central Banks in Emerging Market Economies to COVID-19

Sam Pordeli, Lorenzo Schofer and Maxwell Sutton

The COVID-19 health and economic crisis has severely affected emerging market economies (EMEs). As a result, emerging market central banks have employed a wide range of tools to support their economies and financial systems, many of which have been used for the first time. These measures have helped to support the functioning of domestic financial markets, lower domestic interest rates and facilitate the flow of credit to households and businesses. The scale of monetary easing by EME central banks was larger, and the pace faster, than in some past crisis periods. This was influenced by the sudden and synchronised nature of the COVID-19-induced economic shock and the large scale policy response in advanced economies that occurred alongside the EME response. It also reflects the significant improvements emerging market central banks have made to their institutional frameworks over recent decades and the development of EME financial markets over the same period.

emerging markets, financial markets, financial stability, monetary policy, pandemic

December 2020

Finance
Photo: Reserve Bank of Australia

The Term Funding Facility

Max Alston, Susan Black, Ben Jackman and Carl Schwartz

The Reserve Bank’s Term Funding Facility (TFF) was announced in March as part of a monetary policy package to reduce funding costs across the economy and to support lending, especially to small and medium-sized businesses. Most of the initial allocations of the TFF were drawn upon by the time the first phase of the facility closed in September. In September, the Reserve Bank Board adjusted the TFF in response to economic conditions, expanding and extending the facility and in November it lowered the interest rate on new drawings. Drawdowns from the TFF have increased the Reserve Bank’s balance sheet significantly and the facility has contributed to an easing in financial conditions. As a result of the Reserve Bank’s policy measures, including the TFF, bank funding costs and lending rates are at historically low levels.

banking, business, credit, finance
Payments
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A Counterfeit Story: Operation Gridline

Kathryn Miegel and Kylie Symeonakis

In 2019, the counterfeiters responsible for the production of a group of high quality $50 and $100 counterfeit banknotes were sentenced. From first detection at the Reserve Bank’s Counterfeit Examination Laboratory, through police investigation, arrest and finally prosecution and sentencing, this counterfeit episode was resolved reasonably quickly. This experience highlighted the benefits of collaboration between the Bank, federal and state police and legal authorities, and how such a collective effort can be very effective in the disruption of counterfeit production and distribution in Australia.

banknotes, counterfeit, law enforcement, security features
Finance
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Governance of Financial Market Infrastructures

Stephanie Bolt and David Meredith

Good governance is critical to delivering effective risk management outcomes. Several high-profile reports have underscored this point in recent years, finding governance issues to be at the heart of poor compliance and risk management outcomes in the financial industry. Given the key role that financial market infrastructures (FMIs) play in supporting efficient and stable markets, the RBA has a strong interest in promoting good governance within these entities. This article explores aspects of FMI governance and how governance arrangements can help promote the safe and effective delivery of FMI services.

financial markets, financial stability, market operations, regulation
Finance
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Secondary Market Liquidity in Bonds and Asset-backed Securities

Julie Guo and Zhan Zhang

Liquidity is an important measure of health and stability in financial markets. This article assesses liquidity in markets that trade Australian fixed income securities by analysing market turnover using data for the period 2015–17, which was one of relative calm. We find heterogeneity across these markets. Australian and State Government bonds have higher turnover than other securities. Turnover was generally higher for larger bond lines, but not universally so. In particular, there is relatively high turnover in a number of small asset-backed security lines.

bonds, financial markets, market operations
Australian Economy
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The COVID-19 Outbreak and Australia's Education and Tourism Exports

Philipp Grozinger and Stephanie Parsons

International travel restrictions to contain the spread of COVID-19 and precautionary behaviour on the part of travellers have significantly disrupted the movement of people globally. Education and tourism were Australia’s fourth and fifth largest exports prior to the pandemic, and exports of these services have fallen sharply. This article documents the effects of the virus on Australia’s education and tourism exports and draws on information from the Reserve Bank’s regional and industry liaison program to discuss the uncertainties around the medium-term outlook once international travel resumes.

educators and students, export, pandemic, tourism
Australian Economy
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Long-term Unemployment in Australia

Natasha Cassidy, Iris Chan, Amelia Gao and Gabrielle Penrose

Are your future employment prospects affected by past periods of unemployment? And does it matter how long you were unemployed? The average duration of unemployment has increased steadily over the 2010s. At the same time, the rate at which unemployed people are able to find a job has slowed. Long-term unemployed people are more likely to be older and male and have lower levels of formal education than those who have been unemployed for a shorter period. We use micro-level labour market data to show that future employment prospects are closely tied to the duration of unemployment: people who are unemployed for longer are less likely to find a job. We also find some evidence that an extended period of unemployment can harm people’s employment chances for a long time afterwards.

employment, labour market
Global Economy
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The Response by Central Banks in Advanced Economies to COVID-19

Christian Vallence and Peter Wallis

Central banks in advanced economies have employed a wide range of tools to support their economies and financial systems during the COVID-19 pandemic. Some measures have involved scaling up standard central bank tools or reactivating facilities introduced during the global financial crisis. Other measures are new innovations. The speed at which these tools were deployed and scale of their usage has been unprecedented. These measures have helped to restore functioning of financial markets, lower interest rates, and support the flow of credit to borrowers.

bonds, credit, financial markets,interest rates, market operations, monetary policy, pandemic
Global Economy
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Economic Developments in India

Zan Fairweather and Maxwell Sutton

Over recent decades, India’s rapid economic growth has led to a substantial increase in its demand for Australian exports. However, India is currently facing the most significant setback to its economic development in decades as a result of COVID-19. Like in many other economies, the pandemic has severely affected near-term economic activity and exacerbated existing vulnerabilities in the Indian economy. While it will take some time for the Indian economy to recover, underlying fundamentals should support growth in the long term. This in turn should increase demand for some key Australian exports such as coking coal and education services, and so India will likely remain an important trading partner for Australia. The outlook for other resource exports such as iron ore and thermal coal is less positive because India is expected to be self-sufficient in these commodities.

commodities, india, pandemic, trade
Finance
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Shadow Financing in China

Maxwell Sutton and Grace Taylor

In 2016, Chinese authorities launched a campaign to reduce risks in China’s shadow finance system. The campaign managed to reduce the size of China’s shadow finance system, which has declined from over 60 per cent of GDP to around 40 per cent. This has been a positive development from a systemic risk perspective. Regulatory reform has improved the visibility authorities have over the financial system and improved their ability to target policies to address emerging risks. However, savers now have fewer investment options that offer attractive returns, while financial intermediaries have faced increased pressures on both the assets and liabilities sides of their balance sheets. In addition, the supply of credit has been curtailed in sectors that rely on shadow finance. The COVID-19 pandemic has further highlighted the difficult trade-off policymakers face between containing longer-term financial system risks while supporting economic growth in the near term.

china, reforms, regulation, shadow banking

September 2020

Finance
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Managing the Risks of Holding Self-securitisations as Collateral

Duke Cole and Calebe de Roure

Self-securitisations are structured pools of assets, such as residential mortgages, created by banks specifically to use as collateral to access liquidity from the Reserve Bank. The ability of banks to transform illiquid mortgages into liquid assets improves overall liquidity in the financial system. Some financial risks the Reserve Bank faces by holding self-securitisations as collateral differ from other collateral assets (such as government and corporate securities). Unlike these assets, self-securitisations are not currently traded on any public market, and the risks of the self-securitisation are related to the risks of the bank using it as collateral. The Reserve Bank applies a series of additional controls to self-securitisations accepted as collateral to protect against potential financial losses.

financial markets, securitisation, mortgages
Finance
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Government Bond Market Functioning and COVID-19

Richard Finlay, Claudia Seibold and Michelle Xiang

The market for Australian Government Securities is a critical fixed income market in Australia, including because it serves as a pricing benchmark for many other interest rates in the economy. The extreme economic and financial uncertainty caused by the onset of the COVID-19 pandemic led to this market becoming dysfunctional, with investors unable to transact in reasonable size. In response to the pandemic, on 19 March 2020 the Reserve Bank announced a number of new policy measures, which, among other things, have been successful in restoring the functioning of government bond markets. This article discusses various measures of market functioning, their deterioration, and subsequent improvement.

bonds, financial markets, market operations, pandemic
Australian Economy
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The Economic Effects of Low Interest Rates and Unconventional Monetary Policy

Rochelle Guttmann, Dana Lawson and Peter Rickards

The cash rate is currently at its effective lower bound and the Reserve Bank has put in place a suite of alternative monetary policy tools. This article uses the Bank’s macroeconometric model of the Australian economy, MARTIN, to analyse the implications of a constrained cash rate and illustrate how unconventional monetary policies can support the Australian economy. By lowering interest rates that are typically affected indirectly through changes in the cash rate, unconventional policies can stimulate economic activity through many of the same channels as conventional monetary policy.

cash rate, pandemic, martin, modelling, monetary policy
Payments
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Retail Central Bank Digital Currency: Design Considerations, Rationales and Implications

Tony Richards, Chris Thompson and Cameron Dark

There has recently been increasing international focus on the possible issuance of central bank digital currencies (CBDC), or what might be considered a digital equivalent of banknotes. While the technical feasibility of such a new form of money is not yet established, this paper considers some issues around its possible design, the possible rationales for issuance, and the implications of issuance. Given the likely benefits and risks, at present there does not seem to be a strong public policy case for issuance in Australia. Nonetheless, it will be important to closely watch the experience of other jurisdictions that are considering implementing CBDC projects.

cryptocurrency, currency, money, payments, technology
Finance
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Insights from the New Economic and Financial Statistics Collection

Megan Garner

The Reserve Bank has worked with the Australian Bureau of Statistics (ABS) and the Australian Prudential Regulation Authority (APRA) to modernise and expand data collected from Australia’s financial sector. This article discusses some of the insights from the data, known as the Economic and Financial Statistics (EFS). The EFS collection has been used to monitor developments in the provision of finance to the Australian economy since the onset of the COVID-19 pandemic. For instance, new data on housing interest rates shows that there has been a decline in these rates alongside the package of measures implemented by the Reserve Bank in March this year.

banking, business, credit, households, interest rates, pandemic, statistics
Finance
Photo: Maskot Bildbyrå – Getty Images

The COVID-19 Outbreak and Access to Small Business Finance

Michelle Lewis and Qiang Liu

The COVID-19 pandemic has adversely affected the business sector. Overall, small businesses have been disproportionately affected because they are more likely to be in industries that have been harder hit by the pandemic. Demand for new loans appears to be weak, probably because businesses are reluctant to take on debt given heightened uncertainty about the economic outlook. The various short-term initiatives to support businesses’ cash flows are also likely to have dampened the immediate demand for credit. At the same time, access to finance continues to be a challenge for small businesses. Banks have tightened their lending practices in recent years and are more cautious about lending to businesses that have been significantly affected by the pandemic.

business, credit, finance, pandemic
Payments
Photo: Berkah – Getty Images

Modernising Payments Messaging: The ISO 20022 Standard

Tarnia Major and Joseph Mangano

Electronic payments rely on the exchange of messages to instruct the flow of funds between financial institutions. The quality of payment messaging data is important as it determines what payment information is received by financial institutions and their customers. Worldwide, there is movement to develop new payment systems using the International Organization for Standardization (ISO) 20022 messaging standard, and to migrate some existing systems to the standard. In Australia, an industry-led project to migrate the High Value Payments System to ISO 20022 commenced this year. This will provide a number of benefits, including improved transfer of payment information to beneficiaries, better fraud and financial crime management for payments service providers and greater opportunities for straight-through processing.

banking, data, payments, technology
Australian Economy
Photo: imamember – Getty Images

The Rental Market and COVID-19

Richard Evans, Tom Rosewall and Aaron Wong

The COVID-19 pandemic is an unprecedented shock to the rental housing market, reducing demand for rental properties at the same time as supply has increased. Households most affected by the economic impact are more likely to be renters, and border closures have reduced international arrivals. The number of vacant rental properties has increased as new dwellings have been completed and some landlords have offered short-term rentals on the long-term market, particularly in inner Sydney and Melbourne. Government policies have supported renters and landlords. Rents have declined, partly because of discounts on existing rental agreements and it is likely that rent growth in many areas will remain subdued over coming years.

housing, pandemic
Australian Economy
Photo: Adam Smigielski – Getty Images

Labour Market Persistence from Recessions

Iris Day and Keaton Jenner

The COVID-19 pandemic has led to a rapid deterioration in labour market outcomes, some of which may be long-lasting. This article examines the long-lived effects of previous downturns on unemployment in Australia, including by assessing how regional labour market outcomes varied during and after the GFC and early 1990s recession. We find that recessions have enduring effects on unemployment rates: regions that experienced larger-than-average downturns had significantly higher unemployment rates for around a decade afterwards.

labour market, pandemic
Global Economy
Photo: owngarden – Getty Images

Private Sector Financial Conditions in China

Matthew Bunny

Historically it has been challenging to assess financial conditions for private firms in China. This article assembles a range of indicators that shows private firms find it more difficult and expensive to access financing than state-owned firms. Based on these indicators, the private sector had experienced a tightening in financial conditions over the past few years, although more recently conditions have generally eased as a result of new measures that direct more credit to private firms.

business, china, credit, finance
Global Economy
Photo: imaginima – Getty Images

The Global Financial Safety Net and Australia

Meika Ball, Ashwin Clarke and Clare Noone

The Global Financial Safety Net (GFSN) allows for financial assistance to be provided to economies in the event of an economic or financial crisis. Together with the substantial monetary and fiscal policy response globally, the GFSN has played a key role in helping economies respond to the COVID-19 pandemic. The GFSN has a number of elements, including the assistance provided by the International Monetary Fund, regional financing arrangements and some bilateral swap lines established by central banks. This article provides an overview of the GFSN, how it has evolved and been used over recent months, and the role the Reserve Bank of Australia plays in it. Use of the GFSN could increase materially over the period ahead if economic and financial market conditions around the world deteriorate.

financial stability, international, pandemic
Global Economy
Photo: Ezra Bailey – Getty Images

Different Approaches to Implementing a Countercyclical Capital Buffer

Katarina Stojkov

The countercyclical capital buffer (CCyB) was one of the measures designed to improve the resilience of the global banking system following the global financial crisis (GFC). It is a bank capital buffer that can be raised or lowered by jurisdictions depending on the level of risk in the financial system. This article describes different approaches to implementing the CCyB. Most jurisdictions set the ‘default’ CCyB rate at zero until risks are elevated; however, recently, several have adopted frameworks where the CCyB is positive through most of the financial cycle. The Australian Prudential Regulation Authority (APRA) has recently announced that it is also considering moving to a non-zero (positive) default CCyB (APRA 2019). This article discusses the possible benefits of a positive default CCyB.

banking, capital, financial stability, international, pandemic

June 2020

Finance A bush fire burns through shrub land.
Photo: Stefan Mokrzecki – Getty Images

Transactional Banking at the RBA in Extraordinary Times

Talina Leung

The Reserve Bank of Australia (RBA) is the banker to the Commonwealth of Australia, supporting the Australian Government in its daily banking needs. During extraordinary times, such as the bushfires of the 2019/20 summer season or the current COVID-19 pandemic, demands on banking services are heightened as additional payments are made to Australians who require funds immediately. By modernising its products and service offerings and the underlying technology, the RBA has ensured payment and banking systems are fit to perform these tasks securely and reliably. In the past, additional payments during extraordinary times required additional effort and at times unconventional means. Today, government payments can be made seamlessly, even during crisis situations, ensuring funds are received without unnecessary delays.

banking, payments, npp, technology, pandemic
Global Economy Bank employees are wearing face masks during the Spanish Flu pandemic.
Photo: Reserve Bank of Australia – PN-006877

Economic Effects of the Spanish Flu

James Bishop

The Spanish flu reached Australia in 1919 and remains the country’s most severe pandemic in terms of health outcomes. At the peak of the pandemic, sickness due to influenza temporarily incapacitated 2 per cent of the labour force. However, despite the social distancing measures used by governments to contain the virus, few job losses in this period were due to a lack of available work. The labour market also recovered quickly, but it is not clear how relevant this experience is for the modern economy.

labour market, consumption, pandemic
Australian Economy A collage of newspaper headline clippings related to economic topics.
Photo: Allkindza – Getty Images

News Sentiment and the Economy

Kim Nguyen and Gianni La Cava

The large and immediate effect of the COVID-19 pandemic on economic activity has increased the need for more real-time indicators of the economy. This article discusses a new indicator of `news sentiment’, which uses a combination of text analysis, machine learning and newspaper articles. The news sentiment index complements other timely economic indicators and has the advantage of potentially being updated on a daily basis. The news sentiment index captures key macroeconomic events, such as economic downturns, and typically moves ahead of survey-based measures of sentiment. Related indicators, such as the news uncertainty index, similarly help to better understand real-time developments in the Australian economy.

technology, data analytics
Australian Economy An older male employee sits at a table talking to his younger colleagues.
Photo: Phil Boorman – Getty Images

Why Study (or Not Study) Economics? A Survey of High School Students

Tanya Livermore and Mike Major

There has been a stark decline in the size and diversity of the Year 12 Economics student population since the early 1990s. The Reserve Bank has commissioned a comprehensive survey of students to gain quantitative evidence of the factors contributing to this decline. The survey responses highlight that while economics in general is perceived to be important for society, many students lack an interest in, or understanding of, Economics as a subject. This finding is even more pronounced for students who are female, those from a lower socio-economic background and those from regional schools.

educators and students, rba survey
Payments A roll of Australian 50 dollar notes and some coins.
Photo: Vicki Smith – Getty Images

Bank Fees in Australia

Stephanie Crews and Michelle Lewis

The Reserve Bank’s 23rd annual bank fees survey shows that, overall, banks’ income from fees declined in 2019. Fee income from households decreased, largely driven by lower fees from deposit accounts. A number of reforms related to merchant services contributed to banks’ fee income from businesses growing at a slower pace than in recent years.

banking, fees, atm, rba survey
Payments The hands of an older woman holding a few 50 dollar notes.
Photo: Toni Faint – Getty Images

Cash Use in Australia: Results from the 2019 Consumer Payments Survey

Luc Delaney, Nina McClure and Richard Finlay

The Bank’s 2019 Consumer Payments Survey (CPS) suggests that the use of cash for transactions has continued to fall alongside growing use of electronic payment methods. Despite this, a substantial share of consumers still use cash intensively, with this share having reduced only a little over recent years. These high cash users are more likely to be older, have lower household income, live in regional areas, and/or have limited internet access. The survey suggests that around one-quarter of consumers would face major inconvenience or genuine hardship if they could no longer use cash, although most respondents stated that their current access to cash was convenient. The survey was conducted before the emergence of COVID-19 and the associated social distancing measures, however, and so did not capture any change in behaviour that may have resulted from this.

payments, rba survey, data analytics, money
Australian Economy A collection of old and new mobile phones.
Photo: Peter Dazeley – Getty Images

Quality Change and Inflation Measurement

Stephanie Parsons

Households’ perceptions of inflation can differ from inflation as measured by the Consumer Price Index (CPI). One factor that may contribute to this difference is that the CPI seeks to take into account changes in the quality of many items that households buy. Around 2–3 per cent of the CPI basket is adjusted for quality change each quarter, with the prices of consumer durables most affected. While a range of methods have been developed to help statisticians identify and quantify quality change, it remains a challenging area of price measurement.

inflation, consumption, prices, data analytics
Australian Economy The hand of a woman inserts a coin into a piggy bank.
Photo: Nattakorn Maneerat / EyeEm – Getty Images

Household Wealth prior to COVID-19: Evidence from the 2018 HILDA Survey

Nicole Adams, Cara Holland, Gabrielle Penrose and Lorenzo Schofer

This article examines the distribution of wealth in Australia prior to the COVID-19 pandemic and considers the implications for the financial resilience of households during the associated economic downturn. In terms of their wealth, most Australian households appear well placed to withstand a temporary fall in income. However, younger households and those working in industries most affected by activity restrictions are likely to be more vulnerable to income loss; only around half of these households could cover three months of expenses out of their liquid assets. Highly indebted households that experience shocks to their income and have limited liquid assets will also find this period particularly challenging. Policies to support household income, as well as those aimed at rescheduling debt repayments, should cushion these effects. The resilience of households will also depend on the timing and sustainability of the economic recovery.

wealth, data analytics, households, debt, pandemic
Global Economy An aerial view of motorways and skyscrapers in a residential area in Beijing, China.
Photo: Liyao Xie – Getty Images

China's Residential Property Sector

Jonathan Kemp, Anirudh Suthakar and Tom Williams

The property sector is a significant driver of economic growth in China and a key source of demand for Australian commodity exports. Authorities have become increasingly wary of financial risks in the sector, and moved to reduce the importance of policies directed at real estate for managing short-run fluctuations in aggregate demand. The effect of COVID-19 on property sales and developer balance sheets necessitated a moderate easing of policy to support the real estate sector, but it only appears to have delayed rather than halted efforts to de-risk the sector.

china, housing, investment, prices, pandemic

March 2020

Payments Dollar signs emerge from a mobile phone held in a hand.
Photo: Sarinya Pinngam – Getty Images

Two Years of Fast Payments in Australia

Emilie Fitzgerald and Alexandra Rush

It has been two years since the public launch of the New Payments Platform (NPP) and the Fast Settlement Service (FSS). Together, the NPP and FSS now enable customers of more than 90 financial institutions to make fast payments 24 hours a day, every day of the week (‘24/7’). Customers can send detailed information with a payment and nominate the payment recipient in a simple way. While the rollout of the NPP has been gradual, usage grew rapidly over the second half of 2019 and compares favourably with other successful fast payment systems introduced overseas. With a range of new functionality under development, the NPP and FSS are well placed to deliver innovative new payment services to support the Australian economy into the future.

payments, NPP, technology
Payments A mobile phone with a blurred screen of transactions.
Photo: Carolyn Hebbard – Getty Images

Consumer Payment Behaviour in Australia

James Caddy, Luc Delaney, Chay Fisher and Clare Noone

The Reserve Bank’s 2019 Consumer Payments Survey has provided further evidence that Australian consumers are increasingly preferring to use electronic payment methods. Many people now tap their cards, or sometimes phones, for small purchases rather than paying in cash. Consumers also have an increasing range of options available for making everyday payments. Despite this, cash still accounts for a significant share of lower-value payments and a material proportion of the population continues to make many of their payments in cash.

payments, rba survey, data analytics, money
Payments A customer holds their credit card above an eftpos reader.
Photo: Hispanolistic – Getty Images

The Cost of Card Payments for Merchants

Kateryna Occhiutto

Data on merchants’ costs of accepting card payments show large differences in payment costs across both merchants and card systems. Smaller businesses typically face higher payment costs than larger businesses, credit card transactions are generally more expensive that debit cards, and debit card transactions tend to be more costly for most merchants when processed through the international card schemes compared with the domestic debit scheme. Overall costs of accepting card payments have nevertheless declined over the past decade, following the implementation of various reforms by the Bank.

payments, fees, retail
Finance Outlines of skyscrapers and images of charts mirror on glass facades.
Photo: Busakorn Pongparnit – Getty Images

Developments in Banks' Funding Costs and Lending Rates

Susan Black, Dmitry Titkov and Lydia Wang

Banks’ funding costs declined over 2019, driven by reductions in the cash rate. Lenders passed most of the decrease in funding costs through to interest rates on mortgages and business loans. Funding costs and lending rates are at historical lows.

funding composition, banking, finance, bonds
Australian Economy The sun rises behind windmills and solar panels.
Photo: zhongguo – Getty Images

Renewable Energy Investment in Australia

Timoth de Atholia, Gordon Flannigan and Sharon Lai

Renewable energy investment has increased significantly in Australia over recent years, contributing to a continuing shift in the energy generation mix away from traditional fossil fuel sources. Current estimates suggest that investment in renewable energy has moderated from its recent peak and is likely to decline further over the next year or two. In the longer term, the transition towards renewable energy is expected to continue. Significant coal-fired generation capacity will be retired over coming decades and is likely to be replaced mainly by distributed energy resources and large-scale renewable energy generators, supported by energy storage.

investment, non-mining
Finance Detail of an old stone building's ornament.
Photo: ilbusca – Getty Images

The Road to Australian Dollar Funding

Elliott James and Christian Vallence

A key feature of Australia’s financial system is that nearly all liabilities are denominated in, or hedged into, Australian dollars. A pre-condition for this state of affairs is that investors are willing to hold Australian dollar-denominated assets. Investor confidence in Australian dollar assets is supported by Australia’s sound institutional framework, history of positive macroeconomic outcomes, and well-functioning financial system. Australia’s journey to funding in its own currency spanned nearly a century and involved various costs. Today, these funding arrangements confer substantial benefits to the Australian economy, including by reinforcing the same positive economic, financial and institutional outcomes that made Australian dollar funding possible in the first place.

finance, currency, forex, bonds
Australian Economy The detail of a map showing the Australian continent.
Photo: omersukrugoksu – Getty Images

Regional Variation in Economic Conditions 

Fiona Price

Differences in economic conditions between capital cities and regional areas have widened since the early 2000s. Some regional areas, particularly outer regional and remote areas, have faced considerable structural changes and have taken longer than other regions to adapt to these developments. Most regional labour markets appear to have adjusted quite well to the differences in regional economic conditions, though the adjustment process may have been more difficult for some regions.

monetary policy, labour market, mining, technology, capital
Australian Economy Family members spanning three generations gather outside.
Photo: xavierarnau, filadendron and Thurtell – Getty Images

Demographic Trends, Household Finances and Spending

Tomas Cokis and Kate McLoughlin

The share of the population in their peak earning and spending years (ages 35–54) has decreased over the past decade, while the share aged 65 and above has increased. Demographic change has tended to reduce aggregate growth in household income and consumption, but by less than what previous patterns of household spending would suggest. This is because older households have earned and consumed more than in the past, and they have become wealthier. By contrast, growth in spending by younger households has been subdued, consistent with their weak income growth. The different earning and spending behaviour of households across different age groups will continue to affect trends in aggregate household consumption and income as the population ages further.

consumption, wealth, finance, debt

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)