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FMI week 2 Regulatory Authorities and Monetary Policy - Coggle Diagram
FMI week 2 Regulatory Authorities and Monetary Policy
Role of Central banking/Monetary Authorities
Stable
financial system facilitate smooth flow of funds
Stable requires
confidence.
Why we need regulatory authorities?
Supervise and control,
guarantee efficient, resilience and fair FM.
Reduce financial
instability.
monitor financial system
respond to disturbance
ensure payment system is safe and robust
RBA:
Australia's central bank. Set monetary policy. maintain stability and efficient payment system.
History:
Separation of CBA's commercial operations led to establishment of RBA in 1959.
Primary functions
set and implement monetary policy
Foster financial system stability
Support payment system
Deliver banking services to the government
provide reliable banknotes
Issuance of AUD
Legal tender
: AUD. Medium of payment.
Note Printing Australia(NPA)
. RBA subsidiary. currency notes manufacturer.
Coin made by
Royal Australian Mint
. Not part of RBA. Legal tender with restrctions.
Structure
Reserve Bank Board: monetary policy, banking policy
Payment system Board: stability and safety of payment system
Independence
free from policy actions, make policy beneficial in long run may not be politically popular in the short run
do not rely on government funding
accountability to parliment
The Australia payment system
RBA
roles in PS
promote PS efficiency and stability
provide facilities for the settlement of transaction
acting as the bank of Australian government
two types of payments
Low-value payment:
cash, EFTPOS, card etc. pre-2018:settle in batch. post-2018: settle in real time with NPP and FSS.
High-value payment:
bank cheques, warrants etc. Settle via
real-time gross settlement(RTGS)
Payment transaction
Payment clearing:
verify enough funds in payer account
Payment settlement:
transfer funds between FI's
Exchange Settlement Accounts(ESAs)
: an account FI hold with RBA. must have credit.
Settlement of cleared transactions in
Reserve bank information and transfer system (RITS)
.
New payment platforms(NPP)
:Instant money transfer between different FIs and
Fast settlement services(FSS).
New feature: PayID, Payto.
Source of funding for ESAs
Interbank loans.Incentive: 35bp higher than overnight interest rate
Intraday repos with RBA
RBA end of day overnight lending at 25bp above cash rate
RBA buy/sell
Commonwealth Government Securities(CGSs)
Monetary policy
Cash market:
borrow/lend of the balance in ESAs
provides liquid funds for large trades
Cash rate:
WA interest for unsecured loans
measures return on bank reserves
reflect reserves in banking system, banks decisions for loans
important benchmark for key derivative contracts
RBA target for monetary policy
Three objectives
1.Price stability
stability of average price of all goods and services
control inflation
keep annual inflation at 2-3%
Full employment
Frictional unemployment: unemployed in transition of jobs
Structural unemployment: mismatch between jobs and skills
maintain unemployment at 5%
5.8% at GFC
3.Economic Growth
basis of increased prosperity
accumulation of capital
RBA manages monetary policy to achieve economic growth
Open marke operations(OMO)
?
estimate net settlement obligations
adjust supply to maintain target cash rate via buy/sell CGSs
Dealers submit offer and best ones are picked
supply side of ESA funds manipulation
economic activity
Business investment:
interest rate raise, spending falls due to 1. financing cost 2.ROI falls
Consumer spending:
interest rate raise, spending fall due to 1. expensive borrowing 2. expensive existing loan 3.value of securities fall
Net export
: interest rate raise, net export and income falls due to 1. AUD increase in value 2. imports increase export decrease 3.lowers inflation due to imports are cheaper
Quantitative Easing(EQ)
central bank
increases money supply
by buying longterm T-bonds to inject money.
another approach to stimulate the economy besides cash rate
effective when:banks will to lend and borrower will to borrow
Australian Prudential Regulation Authority(APRA)
prudential supervision
of institutions
control FIs risk taking
require hold adequate capital reserves
specific functions
develop&implement prudential regulations
monitor regulated entities, comply with legislation and prudential policies
advise government on developing regulation and legislation
licenses Authorised Deposit taking(ADIs) institutions
recent change: your future your super
performance test on super products
fail must notify members, fail two years unable to accept new members
Australian securities&investment commission(ASIC)
licensing and regulating FMs
, securities, corporations and futures and
provide consumer protection
,
Enforcement
of company and financial service laws.
previously funded by tax payers, now
industry funding
International central banking systems
China
Central bank and regulators overseeing banking, securities and insurances are isolated.
US
FOMC determines monetary policy, 12 federal reserve banks clear and process payment.
Banks for international settlements(BIS)
facilitate central bank cooperations
acts as a bank to the central banks
Other regulatory authorities
The Australian Treasury
develop economic policy prepare federal budget. work with RBA,APRA and ASIC.
Council of Financial Regulations(CFR)
coordinate three agents. mechanism of information sharing.