Financial Institutions and Markets

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Financial Institutions and Markets

2.1 Outline the roles of the various monetary authorities that regulate the Australian financial system. What is the role of Council of Financial Regulators?

In Australia, the role of monetary authorities is split between three independent statutory agencies with specific responsibilities in the Australian financial sector:

1. The Reserve Bank of Australia (RBA), Australia’s central bank, is responsible for monetary policy, systemic stability and the payments system;

2. The Australian Prudential Regulation Authority (APRA) is responsible for prudential supervision of financial institutions including banks, credit unions, building societies, and insurance and superannuation companies.

3. The Australian Securities and Investments Commission (ASIC) is responsible for enforcement of company and financial services laws, with the aim of protecting consumers, investors and creditors. This includes the responsibility of licensing and monitoring financial markets and advisors, and monitoring the disclosure and conduct of Australian companies and financial services providers.

The three agencies are coordinated by the Council for Financial Regulators (CFR) which acts as a mechanism for information sharing in relation to views and discussion on regulatory issues between the three agencies.

2.2 Explain the sense in which the RBA is independent of the Federal Government. How independent is the RBA in reality? What is your opinion about the importance of the RBA’s independence for the Australian economy?

The term ‘RBA independence’ means that the RBA is free from political and bureaucratic pressures when it formulates and executes monetary policy. The RBA is not directly under the authority of the Government or the Prime Minster. Whether independence is important is a debated issue. Advocates of independent central banks believe that independence from day-to-day political pressure allows central banks to better manage their countries’ national economies. By ‘better’ we mean that the central bank can take short-run policy actions that may be politically unpopular but in the longer run benefit the economy’s overall macroeconomic performance. For example, this is often the case when inflationary pressures begin to build up in an economy during a period of rapid economic expansion. To dampen inflation, a central bank will raise interest rates to slow the rate of economic growth and thus dampen inflationary expectations. Needless to say, raising interest rates to slow down an economy rarely wins political applause.

In the short run, the RBA has a relatively high degree of independence because it operates as a bank and does not rely on the Government for funding. In addition the long, up to 7-year, terms of the governors, which insulate them from day-to-day political pressures. Assuming no resignations, an incoming government may have little control over the composition of the RBA Boards.

Over the longer run, the RBA’s independence is constrained with the RBA being fully aware that Parliament created the Central Banking System and that its charter can always be modified by Parliament. Also, the RBA in practice is obliged to consult with the Federal Treasury and the Treasurer in relation to monetary policy. Finally, the RBA is subject to the laws of Australia, which come close to spelling out the economic responsibilities of the federal government. As a result, the RBA is keenly aware of political pressures and of secular changes in economic policy.

2.3 What are the RBA’s primary statutory responsibilities? Where can these be found and how does the RBA operationalise them?

The primary statutory responsibilities of the RBA are now embodied in the Reserve Bank Act section 10(2) and are often referred to as the Bank’s Charter:

‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is...
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