A Brief History of RBA and APRA, Their Regulatory Role - Coursework Example

Banking Client’s Name: Client’s Grade Course: Tutor’s Name: 31/10/2012 Introduction Australia has a decimal system of currency, the unit being the dollar which is divided by 100 cents (Australia Bureau of Statistics 1977). According to the Australian Bureau of Statistics (1973), the Reserve Bank Act of 1965 authorized the RBA to issue Australian notes in denominations of $1, $2, $5, $10, $20 and $50 or any other denomination the treasurer may determine by publishing in the gazette. Australia’s financial system consists of a widespread branch system of banking involving the RBA (as the central bank), investment banks, commercial banks and credit institutions among others. These provide many banking services including loans and credit, insurance policies, risk management and corporate finance. The RBA is the central bank of Australia. According to Singleton (2011), a central bank is a bank where other banks hold deposits and use them for settlement of interbank payments. It is an institution that is concerned with public policy which touches on the economy as well as the banking sector. The history of central banks dates back to the seventeenth century. The oldest banks, Sveriges and Riksbank and the Bank of England trace their history to the seventeenth century (Singleton 2011). The institution of the central bank is one that has undergone evolution from the seventeenth century to date. According to Singleton (2011), most started as banks of issue. This was because they were charged with the responsibility of regulating notes. A primary responsibility then was to loan governments money. Singleton (2011) then goes ahead and describes the next period as the gold standard era. Here banks were required to convert money to gold at fixed rates so as to maintain stability of the system. The period that followed is when there was the great depression and the institution has a chance to prove its existence. The great depression led to the gold standard collapse (Singleton 2011). Since then, central banks have evolved to become autonomous institutions that handle monetary policy of a society and maintain an economy’s stability. As Australia’s central bank, the RBA is responsible for the financial stability of Australia, is responsible for issuing legal tenders, formulating and implementing monetary policy and offers banking services to the Australian government A Brief History of RBA and APRA: RBA started as Commonwealth Bank of Australia (CBA). CBA was established in 1911 following legislation on the Commonwealth Bank Act and it served primary bank functions of commercial and savings banking. Initially, its functions were limited to commercial ones but it gradually evolved to acquire central banking functions (Hossain 2009). The CBA began life as a state bank rather than a central bank (Singleton 2011). Singleton (2011) notes that the CBA was set up by the labour ministry to provide banking services to the commonwealth government and offer an alternative to the mistrusted trading banks. The bank was run by a governor who had considerable autonomy and was a direct appointee of the government. CBA started evolving into a central bank at the end of the First World War and a board of directors created to determine policy (Singleton 2011). In 1924, it was a requirement that trading banks have accounts with CBA and maintain them. Singleton (2011), notes that during the gold standard era, the CBA collected gold from trading banks and started to control the exchange rate which was fixed to the sterling. During the 1930s period, CBA was considerably independent and this was evident when it refused to cash government cheques amid inflation concerns. Its central bank functions developed gradually over the years prior to or during the Second World War (Australian Bureau of Statistics 1977). According to the Australian Bureau of Statistics (1977), the commonwealth government legislated in 1945 to give full legal effect to the central banking functions already being carried out by CBA to regulate the banking system as a whole. On December 3rd 1953, there was a new entry to the banking industry by the Commonwealth Trading Bank of Australia which offloaded some responsibilities once handled by the CBA like general trading functions and this further allowed the CBA to conduct central banking functions. The establishment of the Commonwealth Development Bank of Australia (CDBA) in 1959 through legislation did the effect of separating functions between the CBA and CDBA leaving CBA to handle more central bank responsibilities. Prior to this, control of the Australian note was under the custodianship of the commonwealth treasury (Hossain 2009) but in 1920, the responsibility was transferred to the commonwealth bank. Until then, notes issue were not a preserve of the CBA. Further legislations strengthened the bank’s role especially after the Great Depression that led to CBA having custodianship over monetary policies. Further amendments on the Commonwealth Bank Act gave the bank more central bank roles and the bank was gradually evolving and assuming central bank activities including powers to determine advance policies and interest rates as well as requiring private banks to lodge money into its account. Further legislation saw the Notes Board replaced by an advisory board of six with the governor as the manager and the sole decision-maker. The governor was an ex officio member. The board was reconstituted in 1951 and the membership increased to ten members with a mix of internal and external members. The new board also included the governor, deputy governor and treasury’s secretary. The bank was still commercial and arguments were leveled as to why the bank was commercial meaning competing with other private firms while at the same time regulating their activities and carrying out macroeconomic policies thus there was a need to establish the bank as solely central banking. The Reserve Bank Act of 1959 later came to establish the Reserve Bank of Australia (RBA) which was mandated with carrying out central bank functions of the Common Wealth Bank. RBA opened its doors for business on 14th January 1960. According to the Australian Bureau of Statistics (1977), RBA preserved and continued in existence the original corporate body known as CBA under a new name; RBA. RBA’s functions relatively remained unchanged the period of the great depression. During this time, there was a growing demand of implementing monetary policy through private market functions rather than direct controls. The Campbell Committee of 1979 recommended deregulation of Australia’s financial system. The Wallis Committee of 1996 came up with two major outcomes that further changed Australia’s financial system: - one, RBA’s supervisory role was delegated to a new body; the Australian Prudential Regulatory Authority (APRA) whose function was to supervise all deposit-taking institutions. Second, a new Payments Systems Board was established under RBA whose function was to promote safety and efficiency in Australia’s payments system. The RBA today has two boards: The Reserve Bank Board and the Payment Systems Board. The former maintains financial stability of the Australian economy while the latter handles efficiency and safety of the payment systems. APRA on the other is a creation of the Wallis’ Committee recommendations that there be a prudential regulator of financial institutions. It went open on 1st July 1998 being a federal body with powers enshrined under the Australian Prudential Authority Act of 1998. The Regulatory Structure and Role: The Wallis report completely changed Australia’s regulatory structure. The Wallis report (Financial Systems Inquiry 1997) recommended:- A reduced regulatory role of RBA to be confined to monetary policy and financial systems stability. Establishment of APRA to undertake prudential regulation of all deposit-taking institutions and managed funds Establishment of a Corporate Financial Services Commission CFCS to oversee market conduct and consumer protection The commonwealth government accepted these recommendations unconditionally (Riaz Hassan et el 2003). This had the effect of creating a level regulatory playing field for all financial institutions. The Wallis report is credited with reforming the regulatory structures. Milbourne and Cumberworth (1991) found this to benefit consumers as deregulation narrowed interest margins. Therefore, the three agencies mandated with specific regulatory roles in Australia are the RBA, APRA and the Australian Securities and Investment Commission (ASIC) which is responsible for issues to deal with the market ethics and consumer protection. According to Pellerin (2010), APRA is also responsible for developing administrative practices and procedures to achieve goals of financial strength and efficiency. RBA kind of delegated its supervisory roles on banking institutions to APRA. It positioned itself to deal with issues of financial stability and in matters to do with monetary policy. According to pellerin (2010), the three regulatory bodies are all members along with treasury of the Council of Financial Regulators which is a coordinating body comprised of members of each agency and chaired by the RBA. Regulatory Role of RBA and APRA: With the RBA no longer supervising commercial banks, its monetary policy role and the management of liquidity gave the RBA gave the RBNA sufficient authority to managing risks in the financial system. The RBA continues to declare targets for single cash rates and relies on the open markets to maintain the cash rate in a narrow band around the declared target (Hassan et al 2003). Without its regulatory role, prices would be rising sharply and uncontrollably creating chaos in the economy. According to the Reserve Bank Act (1959), section 10(2) also called the “the bank’s chatter” , it is the duty of the reserve bank and its powers to ensure that the monetary and banking policy of the bank is directed towards the greatest advantage of the people of Australia in a manner that will best contribute to maintaining the stability of the Australian currency, maintaining full employment of its people and their prosperity. RBA regulates monetary policy by influencing the availability and cost of money circulating in the economy. It does this through influencing interest levels in Domestic Markets Operations mostly through the purchase and sale of second hand government securities like treasury bonds and notes. APRA on the other hand licenses and carries out prudential supervision of all Authorized Deposit-taking Institutions (ADI) and non-operating holding companies (NOHC) in addition to supervising life and general insurance companies. RBA’s regulatory role ensures that it maintains a stable financial system where there is smooth flow of funds between savers and investors thus helping in economic growth. RBA mitigates any disturbance in the stability of the financial system should it occur for instance if an ADI is unable to meet its obligations, RBA comes in as a lender of last resort and lends the ADI money whether local or foreign so as to avoid this particular ADI from affecting the whole financial system since maintaining Australia’s financial stability is a longstanding responsibility of the RBA. The APRA is charged with all prudential regulation of ADIs including credit unions and coming up with appropriate prudential policies that balance financial safety efficiently. The Banking Act 1959 gives APRA authoritative powers that include the power to revoke licenses or give enforceable directions to an ADI in difficulty or even take over control so as to protect the interest of the members. In conclusion, the three regulatory bodies work in a complementary fashion to maintain financial stability in the financial system and each must play its role so as to achieve this goal. While the RBA handles macro-economic issues and monitory policies, the APRA regulates ADIs and NOHCs thus maintaining efficiency and the CFCS which protects consumes interests, all these regulators have helped the Australian financial system to remain relatively stable throughout the global financial crisis though the regulatory reform of the Australian system has been on a much smaller scale compared to other countries in Europe and the U.S.A but there is optimism that the reform will eventually come and Australia will eventually conform with changes adopted globally. List of References: Australian Prudential Regulation Authority Act 1998, government press, Canada. Campbell, K, 1980. “Committee of inquiry into the Australian financial system”, Australian financial system-interim report, AGPS, Canberra. Commonwealth Bureau of Census and Statistics, 1977. Official year book of the commonwealth Australia, Australia Bureau of Statistics, Canada. Cornish, S, 2010. The evolution of central banking in Australia, Reserve Bank of Australia, Sydney. Hassan, R, McAllister, I, Drowick, S, 2003.The Cambridge handbook of social sciences in Australia, Cambridge university press, London. Hossain, A, 2009, Central banking and monetary policy in the Asia-pacific, Edward Alger publishing, Milbourne, R and Cumberworth, M, 1991. Australian banking performance in an era of deregulation, Australian economic papers 30(57). Pellerin, S, 2010. Consolidation of financial regulations: pros, cons and implications, Diane publishers, Washington. Reserve Bank Act of 1959, government press, Canada Wallis, S, 1997. “Financial System Inquiry”, Discussion Paper, AGPS, Canberra. Read More