Topic: Finance

Finance
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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
Finance
Photo: Laurence Dutton – Getty Images

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
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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
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 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
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
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
Finance Financial numbers flash on an outside display with pedestrians and traffic going past.
Photo: Nikada – Getty Images

Developments in Foreign Exchange and Over-the-counter Derivatives Markets

Julie Guo, Dushan Ranasinghe and Zhan Zhang

Global activity in foreign exchange (FX) and over-the-counter (OTC) derivatives markets increased over the three years to April 2019. Continuing a trend observed over prior years, growth in turnover of foreign exchange derivatives outpaced growth in spot market activity. Trading between dealers and other financial institutions accounted for a larger share of market activity than trading between FX dealers.
The Australian dollar remained the fifth most traded currency globally, although the volume of FX trading activity in the Australian market was little changed. Over the past three years, the growth of global and Australian OTC derivatives markets has been driven by interest rate derivatives.

forex, markets, derivatives
Finance Composite of a monitor showing an array of numbers and a person's thumb tapping on a tablet.
Photo: Chuanchai Pundej / EyeEm – Getty Images

Bank Balance Sheet Constraints and Money Market Divergence

Belinda Cheung and Sebastien Printant

The spread between key Australian money market interest rates has widened and become more volatile in recent years. While this might seem to imply scope to profit from arbitrage – by borrowing at a low rate to invest at a higher one – banks have additional balance sheet considerations that need to be taken into account. We find that money market trades have generally not been profitable for the four major banks since the financial crisis. This is partly because debt funding costs have fallen by less than money market returns. In addition, equity funding, which is more expensive than debt, has increased. Consequently, the incentive for banks to arbitrage between money market interest rates has fallen. We also note that banks tend to prefer more profitable lines of business, such as lending for residential housing, over the narrow margins implied by money market arbitrage.

banking, markets, interest rates, funding composition, mortgages
Finance A pen and calculator lie on top of a financial newspaper
Photo: Daniel Grill – Getty Images

The Committed Liquidity Facility

Michelle Bergmann, Ellis Connolly and Joseph Muscatello

The Reserve Bank provides the Committed Liquidity Facility (CLF) as part of global reforms to improve the resilience of the banking system. The CLF is required due to the low level of government debt in Australia. This limits the amount of high-quality liquid assets that financial institutions can reasonably hold as a buffer against periods of stress. Under the CLF, the Reserve Bank commits to providing a set amount of liquidity to institutions, subject to them satisfying several conditions. These include having paid a fee on the committed amount. No financial institution has needed to draw upon the CLF in response to a period of financial stress.

banking, market operations
Finance Old sandstone buildings stand out against glass skyscrapbers in the background
Photo: Karin de Mamiel – Getty Images

The Australian Equity Market over the Past Century

Thomas Mathews

This article describes developments in the Australian equity market over the past century, drawing in part from a newly compiled historical dataset which begins in 1917. Over the past one hundred years, the market has increased in size relative to the economy, while its composition by industry also changed substantially. The data also provide new evidence that historical returns on Australian equities – and therefore the equity risk premium – are lower than previously thought.

finance, markets
Finance Stock exchange numbers on a computer screen are overlaid with the silhouette of a city.
Photo: Nikada and Aurelien Coulet / EyeEm – Getty Images

Developments in Banks' Funding Costs and Lending Rates

Susan Black and Dmitry Titkov

Banks' funding costs increased a little over 2018, driven by a rise in the cost of wholesale funding linked to money market rates, but with some offset from reductions in the cost of retail deposits. Most lenders passed the increase in funding costs through to their lending rates, including for mortgages. Nevertheless, funding costs and lending rates remain low by historical standards.

funding composition, banking, finance, bonds
Finance Three office workers in front of a transparent computer screen that shows an application dashboard.
Photo: Caiaimage / Robert Daly – Getty Images

Updates to Australia's Financial Aggregates

Joel Bank, Kassim Durrani and Eden Hatzvi

The financial aggregates for Australia are important data compiled by the Reserve Bank that are used by policymakers to assess financial and economic activity of households and companies. From August 2019, the Reserve Bank will publish the financial aggregates using an improved framework based on a better data collection. This will enhance the quality of information available to policymakers and the wider community. This article gives an overview of the main changes.

finance, statistics, credit
Finance
Photos: neoellis, da-kuk – Getty Images

The Reserve Bank's Securitisation Dataset

Kate Fernandes and Dominic Jones

The Reserve Bank's Securitisation Dataset contains timely and detailed data on each and every one of the mortgages underlying Australian residential mortgage-backed securities (RMBS). This dataset allows the Bank to better analyse the structure of, and monitor developments in, the mortgage market. In order to examine how representative the dataset is of the wider mortgage market we compare the dataset to less frequent but more comprehensive data from the Australian Prudential Regulation Authority (APRA). We find that the Securitisation Dataset provides excellent coverage of the collateral underpinning the RMBS market, and is representative of the wider Australian mortgage market across a number of dimensions. We then use these data to explore trends in mortgage interest rates.

securitisation, markets, data analytics
Finance
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A Forward-looking Model of the Australian Dollar

Blair Chapman, Jarkko Jääskelä and Emma Smith

The exchange rate is an important mechanism that helps the economy adjust to external shocks.This article analyses the key determinants of the Australian dollar – the terms of trade and differences between interest rates in Australia and other advanced economies. It emphasises that ‘forward-looking’ measures of these determinants are important for capturing movements of the observed real exchange rate. In particular, they capture longer-term movements in the real exchange rate, including around key turning points, for instance during the global financial crisis.

modelling, currency, forex, data analytics
Finance
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Understanding Exchange Rates and Why They Are Important

Adam Hamilton

Exchange rates are important to Australia's economy because they affect trade and financial flows between Australia and other countries. They also affect how the Reserve Bank conducts monetary policy. This article outlines how exchange rates are measured, the different types of exchange rate regimes, the factors that influence the exchange rate and how changes in the exchange rate affect the economy.

currency, markets, forex
Finance
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Money in the Australian Economy

Emma Doherty, Ben Jackman and Emily Perry

Money forms part of our everyday lives and is integral to the smooth functioning of the financial system and the real economy; however, discussions of what money is and how it is created are generally left to economics textbooks. This article provides an introduction to the concept of money and describes how it is created and measured. We also discuss what these measures can tell us about economic activity.

credit, banknotes, money
Finance
Photo: Nikada

Interest Rate Benchmarks for the Australian Dollar

Serena Alim and Ellis Connolly

Interest rate benchmarks are widely relied upon in global financial markets. They are referenced in contracts for derivatives, loans and securities. They are also used by market participants to value financial instruments, and by investment funds as benchmarks for assessing their performance. The key interest rate benchmarks for the Australian dollar are the bank bill swap rates (BBSW) and the cash rate. This article provides an overview of these benchmarks, and the reforms that have been undertaken over recent years to make them more robust.

financial markets, finance, currency
Finance An image that represents a network and linkages between players in the OTC derivatives market
Photo: JulieanneBirch, AF-studio – Getty Images

The Australian OTC Derivatives Market: Insights from New Trade Repository Data

Duke Cole and Daniel Ji

Over-the-counter (OTC) derivatives have played a significant role in episodes of financial stress, including the global financial crisis. However, because these derivatives are not traded on exchanges, detailed information about them has not generally been available. Newly available trade-level data coming from trade repositories can now facilitate a closer look at these markets than was possible before. This article focusses on OTC interest rate derivatives. Central counterparties (CCPs) have become much more important, in large part because of G20 reforms to increase the central clearing of OTC derivatives. Nonetheless, Australian banks still have significant exposures to other counterparties, including foreign banks. In aggregate, Australian banks hold a variety of offsetting single-currency interest rate derivatives, and use cross-currency swaps to hedge exchange rate risks.

derivatives, interest rates, finance, regulation, central clearing
Finance Tow high-rise buildings frame the upper portion of the Sydney's Town Hall
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Developments in Banks' Funding Costs and Lending Rates

Tessa McKinnon

This article updates previous Reserve Bank research on the composition and pricing of banks' debt funding and lending rates. The major banks' debt funding costs declined a little over 2017, primarily driven by a decline in the cost of deposits. Over the same period, overall lending rates were little changed, with higher household lending rates partly offset by lower business lending rates.

funding composition, banking, finance, bonds

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)