Report to the Inquiry into Competition in the Banking and Non-Banking Sectors Feasibility of Further Expansion

While the Reserve Bank has the capacity to offer longer maturities through its open market operations, extending maturities further, say up to 10 years, would lead to an increase in both credit and interest rate risk.

Were the Bank to deal at longer maturities than currently, the Bank's risk management processes would apply as they do now. But over the longer period, there would be a greater likelihood of larger movements in the creditworthiness of the counterparty, that is, the probability that a particular counterparty is in existence three months from the date of dealing is higher than, say, 10 years from the date of dealing. Moreover, the longer the maturity of the repo, the greater degree of interest rate risk. Interest rate risk on a 10-year repo could be almost tenfold higher than a repo with a one year maturity.

Aside from these concerns, the largest obstacle to offering even longer-dated repos is that it would tie up an increasing share of the Bank's assets, such that it would ultimately compromise the Bank's ability to manage liquidity in the overnight cash market and thereby compromise the stability of the cash rate. This would be detrimental to the functioning of Australia's money market.

By way of example, the current average maturity of the Bank's repo book is around 120 days compared to 20 days prior to the onset of the turbulence. With funds maturing less often, fewer funds are available for the primary purpose of short-term liquidity management to keep the cash rate on target. If longer terms of up to 10 years were offered, increasingly shorter terms would need to be dealt to ‘churn’ the limited funds remaining for short term ES liquidity management.

Ultimately, the capacity of the Bank to offer long terms as part of its daily market operations is a function of the size of its balance sheet. The usefulness of offering a finite amount of the repo book to dealing at longer maturities is problematic as these funds would then be tied up for up the longer term. Barring a substantial expansion of the Bank's balance sheet, the funds available for such longer-term dealing would quickly become exhausted.