2021

June 2021

Payments
Photo: Peeradon Warithkorasuth – Getty Images

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
Photo: Bunhill – Getty Images

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
Photo: Busakorn Pongparnit – Getty Images

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
Photo: Lawrence Sawyer – Getty Images

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
Photo: PM Images

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
Photo: Prime Images

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
Photo: paul mansfield photography – Getty Images

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
Photo: Busakorn Pongparnit – Getty Images

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

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)