Saturday, February 25, 2023

How has Reserve Bank of Australia (RBA) contributed to the stability of the financial system

    Reserve bank of Australia, also known as the central bank of Australia. The RBA's principal responsibility is to oversee and protect the economy by implementing monetary policies, working to maintain a stable financial system, and issuing the country's currencies. This blog will look at how the Reserve Bank of Australia has aided the banking industry in sustaining a solid and stable financial system. According to the Reserve Bank of Australia corporate plan (2022), the measures and targets are; work with international bodies to address systematic risk, assess and communicate risk affecting the financial system and ensuring a stable financial system that support the growth of the economy. The risks of climate change and crypto-asset will be considered as determine ways the reserve bank helps to stabilize these risks to financial system.

The Risks Posed by Climate Change to The Financial System

Climate change has been seeming to be a massive issue to the world. It also poses risk such as financial, transition and physical risks to the banking sector (Baranović Busies, Coussens, Grill & Hempell, 2021). The three ways by which the Reserve Bank of Australia contribute to the stability of the financial system is to;

  1. Communicate and ensure understanding of the effect of the risks to banks (RBA, 2022)
  2. Increasing the standards for disclosure and management of climate-related risks by banks (RBA, 2022)
  3. Considering climate-related risks in regulatory policy and capital frameworks (RBA, 2022)

In the pursuit of achieving these goals, The RBA participated with various bodies such as;

  1. Participation in the CFR Climate Working Group
  2. Participation with the Australian Prudential Regulation Authority (APRA) 
  3. RBA served as chair of the Monetary and Financial Stability Committee (MFSC), an executive meeting of East Asia Pacific Central Banks (EMEAP), which explored the effects of climate change on monetary policy and financial stability.
  4. RBA is a member of the Basel Committee on Banking Supervision (BCBS), which published a set of guidelines for banks' management and oversight of financial risks connected to climate change.
  5.  RBA is a member of the NFGS, which is a global leader in the production of shared climate scenarios.
  6. RBA in 2022, decrease its carbon emission by 70.4 tonnes which is equivalent to 6,652 trees.
  7. Lastly, RBA is a member of the Network for Greening the Financial System.

The Risks Posed by Crypto-Asset to The Financial System

    There has been a significant increase in stablecoins (RBA, 2022). Stablecoins provide a quicker and less expensive alternative to payment processing and foreign transfers, becoming the first use for digital assets in the real world. In crypto-asset markets, stablecoins are frequently used to enable lending, borrowing, and trading (RBA, 2022).

The Rise in Stablecoins

Despite the rise in stablecoins as shown in the diagram above, Banks face a number of risks as a result of their connection with crypto-assets, such as credit, liquidity, operational risk, settlement risks and huge losses to investors, customers, banks and merchants (Kearns, 2021). In respect to these risks and its bad effect on the financial stability of the Australian economy. RBA, alongside domestic governments, and international organisations are all working hard to understand the financial stability risks posed by the crypto-asset, as well as the need for regulatory changes. Actions taken to mitigate these risks include;

  1. Stablecoins are being incorporated into the proposed regulatory framework for stored-value facilities to reflect their similar risks.
  2. The Financial Stability Board is presently seeking feedback on changes to a set of ten high-level suggestions for regulating global stablecoins and stablecoins having the potential to become global stablecoins (FSB 2022).
  3. In an effort to strengthen consumer safeguards for crypto-assets, regulators are focusing on operators of the crypto market, such exchanges and lending platforms, who may be using deceptive or fraudulent advertising.
  4.  Regulator are striving to make sure that crypto operations follow the law as it now stands.

Conclusion

A stable financial system is supposed to be strong and prepared to assist the economy during a time when companies will face greater risks. This blog considers the impact of RBA and on the stability of the financial system in Australia. Two risks were considered namely climate change risk and the crypto-assets risks. Climate change and crypto-assets risks represent a major challenge to the financial system. In the course of assessing these risks, we found various ways RBA alongside partnership with domestic and international bodies manage these risks. However, risks like climate change as still in its early stage and there is a need for all financial institutions to continue to investing in ways to fully assess, understand and manage these risks posed by climate change.

References 

Baranović, I., Busies, I., Coussens, W., Grill, M. and Hempell, H.S., 2021. The challenge of capturing climate risks in the banking regulatory framework: is there a need for a macroprudential response? Macroprudential Bulletin15.

CFR Working Group on Financial Implications of Climate Change (2021), ‘Council of Financial Regulators: Climate Change Activity Stocktake 2021’, September. Available at <https://www.cfr.gov.au/publications/policy-statements-and-other-reports/2021/council-of-financial-regulators-climate-change-activity-stocktake-2021/>.

Dark, C., Emery, D., Ma, J. and Noone, C., 2019. Cryptocurrency: Ten years on. Reserve Bank of Australia Bulletin.

Daubanes, J. and Rochet, J.C., 2021, June. Green finance and climate policy. In Energy, COVID, and Climate Change, 1st IAEE Online Conference, June 7-9, 2021. International Association for Energy Economics.

Kearns J (2021), ‘Evolving Bank and Systemic Risk’, Speech at the 34th Australasian Finance and Banking Conference, 16 December

Hermans, L., Ianiro, A., Kochanska, U., Törmälehto, V.M., van der Kraaij, A. and Simón, J.M.V., 2022. Decrypting financial stability risks in crypto-asset markets. Financial Stability Review, 1.

RBA 2022. Box A: Australian Financial Regulators’ Box A: International Banks' Response to Climate Risk, Financial Stability Review, April.

RBA 2022. Box A: Australian Financial Regulators’ Actions on Climate Change-related Risks’, Financial Stability Review, October.

Yi Gang 2021. Green Finance and Climate Policy’, Opening Remarks at a High-Level Seminar on Green Finance and Climate Policy, 15 April

Yi Gang 2021. Central Banks and Climate Change: How to Manage Expectations, Balance Actions and Communication and Contribute to Coordinate with Other Important Actors?’, Concluding Panel Speaker at the Green Swan Conference, 4 June.









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