The Reserve Bank of Australia (RBA) came into being on 14 January 1960 as Australia's central bank and banknote issuing authority, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank.
The bank has the responsibility of providing services to the Government of Australia in addition to also providing services to other central banks and official institutions. It currently consists of the Payments System Board, which governs the payments system policy of the bank, and the Reserve Bank Board, which governs all other monetary and banking policies of the bank.
Both boards consist of members of both the bank, the Treasury, other Australian government agencies, and leaders of other institutions that are part of the economy. The structure of the Reserve Bank Board has remained consistent ever since 1951, with the exception of the change in the number of members of the board. The governor of the Reserve Bank of Australia is appointed by the Treasurer and chairs both the Payment Systems and Reserve Bank Boards and when there are disagreements between both boards, the governor resolves them.
From the middle of the 19th century into the 1890s, the prospects of a national bank forming grew. In 1911, the Commonwealth Bank was established, but did not have the authority to print notes, which was a power that was still reserved to the Treasury. A movement toward reestablishing the gold standard occurred after World War I, with John Garvan leading various boards in contracting the money supply on the route to doing so, and the gold standard was instituted for both the British pound sterling and the Australian pound in 1925.
During the Great Depression, the Australian pound became devalued, no longer worth the pound sterling, and formally departed from the gold standard with the Commonwealth Bank Act of 1932. Legislation in 1945 led to regulation of private banks which H.C. Coombs was opposed to, and when he became Governor in 1949, he gave them more overall control over their institutions. When the monetary authorities implemented the advice of Coombs to have a flexible interest rate, it allowed the bank to rely more on open market operations.In 1980 the issue of short term government bonds - Treasury notes of 13 and 26 weeks duration changed from a tap system, in which the price was set, to a tender system in which the volume of stock was set and the price determined by the market. Soon afterwards the tender system was extended to the issue of longer term government bonds.
The float of the Australian dollar happened in 1983, around the same period of time that the financial system in Australia was deregulated. Administration of the banks was transferred in 1998 from the bank to the Australian Prudential Regulation Authority and the Payments System Board was created, while the bank was given power within the said Board in the same year. The current Governor of the Reserve Bank is Glenn Stevens, who has been the incumbent since 18 September 2006.
History (Mid 19th centuryâ€"1924)
The proposition of a national bank in Australia began to be raised in the middle of the 19th century. This interest accelerated significantly in the 1890s due to an austere collapse of the financial and banking sectors at the beginning of that decade. The Australian Labor Party consequently formed during the same decade and proposed a bank should be formed, which would be a protected and cheap way of having financial services. The party designed a platform in 1908 for a "Commonwealth Bank", which would be a combination of both a commercial and central bank.
Regardless, Fisher's Labor government introduced legislation in 1911 for merely a government-owned commercial bank, without a complete central banking component. He stated that "Time and experience will show how its functions for usefulness may be extended [towards central banking]." The only function at the time that made the bank characteristic of a central one was that it was the banker to the Australian government, in addition to it being the same for the states. For the time being, the Treasury of Australia maintained the role of issuing bank notes through the Notes Act of 1910.
The Commonwealth Bank of Australia gradually developed into the central bank of Australia. In response to the disruption of trade during World War I (1914â€"1918) the Commonwealth Bank began to manage the debt of the Australian government. Nevertheless, at the end of the war, the bank continued to have a primary role as a savings and trading bank. World War I had caused the currency of Australia to move away from the gold standard, in order to fund a great increase of government spending, as did the United Kingdom and other parts of the British Empire.
The value of the Australian pound remained tied to the pound sterling. Inflation in Australia thus increased, less than in Britain, but more than in the United States. The case for a central bank was increased by the need for the government to cut spending after the war to reduce its debt. Commonwealth Bank Governor Denison Miller had been arguing for the issue of Australian currency to be switched from the treasury to the bank, as it had more staff and more monetary knowledge.
The Australian Notes Board (ANB) was created in 1920 and partially acceded to the request of Miller, in having four directors, with the governor of the bank being an ex officio member. The ANB began to follow a policy of Board member John Garvan, in contracting the money supply, with the goal of reducing prices so that free convertibility of the Australian pound to gold could be re-established at pre-war rates, that is return to the former gold standard.
This was accomplished by refusing the exchange of notes for gold and it was hoped that this would lower domestic prices and raise the exchange rate for the Australian pound. When gold arrived from New York, U.S.A the government sold securities in order to diminish the effect of monetary expansion, therefore executing the first open market operations in the history of Australia and thus the first attempt of central banking.
History (1924â€"present)
The Department of Treasury issued notes until 1924, when this responsibility was transferred to the Commonwealth Bank. The ANB was abolished through amendments to the Commonwealth Bank Act in 1924, due to Treasurer and Country Party Leader Earle Page wanting to end the monetary contraction which particularly hurt his farming constituents, who were as a result receiving reduced export prices. The new Board of Directors replacing it, which was composed of various areas of the industry, soon appointed Garvan chairman, and thus he continued his policies. In 1925, both the pound sterling and Australian pound returned to the pre-war gold standard. The primary role of the Commonwealth Bank continued to be a savings and trading bank, even though the government attempted to make the bank into a central one through its actions in 1924.
Legislation was introduced to the Parliament at the climax of the Great Depression, in May 1930, by Treasurer E.G. Theodore, which would remove central banking powers from the Commonwealth Bank into a new central bank, but this failed. The Australian pound became devalued in 1931 and it was no longer worth a pound sterling. The Reserve Bank departed from the gold standard with the Commonwealth Bank Act of 1932, which made the notes no longer exchangeable into gold and allowed the bank not to keep any gold reserves. The monetary policy of the bank from 1931 until the early 1970s had been to keep a stable exchange rate with the pound sterling.
Through the new Commonwealth Bank Act and the Banking Act in 1945, the board was replaced by a six-member council, fully consisting of bank and treasury officials. It additionally formalised the bank's administrative powers of monetary and banking policy and exchange control and also stated the governor was responsible for managing the bank. Highly debated legislation in 1945 caused high amounts of regulation on private banks, which later-Governor H.C. Coombs was opposed to, along with his opposition to bank nationalisation in 1947. When he became governor in 1949, he allowed the private banks to have more control over their liquidity and attempted to introduce market-based monetary policy. He also warned of the possibility of stagflation in 1959.
Legislation in 1951, removing the council, established another then 10-member board which consisted of governor, deputy governor and the secretary to the treasury. This board took on the job of managing the bank from the governor. Many years later, the Reserve Bank Act 1959 took out the part of the Commonwealth Bank that executed central banking and placed it into the new Reserve Bank of Australia, while the commercial and savings bank functions stayed with the Commonwealth Bank. This finally created a separate central bank for Australia in 1959, which took effect 14 January 1960, many years after several other nations already had one and similar to the early proposal by Treasurer Theodore.
In the mid-1960s, monetary authorities accepted Coombs' conclusions and allowed a flexible interest rate, making it easier for the bank to rely on open market operations. The Exchange Control was abolished after the float of the Australian dollar occurred in 1983. In the five years after the Campbell Committee probe, 1979â€"1984, the financial system in Australia became deregulated. Another probe was the Wallis Committee in 1996, which took effect in 1998. The effects were the transfer of overseeing the banks from the RBA to the Australian Prudential Regulation Authority (APRA) and the creation of the Payments System Board (PSB), which would attempt to maintain the safety and performance of the payments system. The bank was given powers within the PSB through additional legislation in 1998.
In August 1996, then Governor-designate Ian Macfarlane and the Treasurer issued a Statement on the Conduct of Monetary Policy which restated the roles of the Reserve Bank and the Government of Australia. It affirmed government endorsement of the Reserve Bank's inflation objective, which was introduced in 1993. A change of government in December 2007 led to another Statement, which was issued by both former Treasurer Wayne Swan and Reserve Bank Governor Glenn Stevens. This amends previous statements by giving the bank independence and encourages transparency and communication.
Securency Scandal and 2014 Australian Censorship Order
Since 2007, the RBA's outstanding reputation has been affected by the 'Securency' or NPA scandal. These RBA subsidiaries were involved in bribing overseas officials so that Australia might win lucrative note-printing contracts. Australian press coverage, which has continued into late 2011, reflects concerns with the apparent laxity and tardiness of corrective actions undertaken by relevant RBA board members and officials. The matters were not referred to the Federal Police in 2007, although they are now, while in 2011 it has been revealed that the RBA had to correct evidence given to Parliamentary committees. In July 2014, WikiLeaks released a secret censorship order prohibiting publication throughout Australia of information that "reveals, implies, suggests or alleges" corruption involving a number of past and present high-ranking Malaysian, Indonesian, and Vietnamese officials.
Roles and responsibilities
It is currently governed by the Reserve Bank Act 1959, which was approved by Parliament. The Reserve Bank Board's duty stated in the Act, within its outlined boundaries, is to ensure that the bank's monetary and banking policy is used to help the Australian population. This should be accomplished through consultation with the government and so in the Reserve Bank Board's opinion that its powers are used to help with:
In practice the Reserve Bank concentrates on the first objective, that is to control inflation through monetary policy. The current objective is a policy of inflation targeting aimed at maintaining the annual inflation rate at between "2-3 per cent, on average, over the cycle". This target was first set in 1993 by the then Reserve Bank Governor Bernie Fraser and was then formalised in 1996 by the then Treasurer Peter Costello and incoming Reserve Bank Governor Ian Mcfarlane.
The Reserve Bank gives banking and registry services to agencies of the government, to other central banks, and other official institutions. The assets of the bank include the gold and foreign exchange reserves of Australia, which is estimated to have a net worth of A$101 billion.
Nearly 94% of the RBA's employees work at its headquarters in Sydney, New South Wales and at the Business Resumption Site. The remainder of the total 926 staff work in Adelaide, South Australia; Brisbane, Queensland; Canberra, Australian Capital Territory; Melbourne, Victoria; Perth, Western Australia; London and New York. A wholly owned subsidiary of the bank is Note Printing Australia, which employs 257 other workers, and which manufactures the Australian dollar and other securities, for markets both in and outside of Australia.
The Payments System Board fills the role of deciding on the bank's payments system policy and the Reserve Bank Board is responsible for all other monetary and banking policies of the bank. Conflicts between the two Boards do not occur often and when they do, they are resolved by the governor.
Reserve Bank Board
The Reserve Bank Board consists of nine members in total. These members include the three ex officio members of the board, consisting of the governor of the reserve bank, who is chairman of the board, the deputy governor of the reserve bank, who is the deputy chairman of the board, and the secretary to the treasury.
In addition, the board is composed of six external members who are appointed by the Treasurer for a period of five years. According to section 17(1) of the Reserve Bank Act, members of the board are not allowed to be a director, officer, or employee of an institution that is authorised to take in deposits. Excluding changes in the number of directors, the structure of the board of directors has remained unchanged since 1951.
The current members of the board of directors are:
The board normally meets eleven times each year, on the first Tuesday of each month except January. Every year, the board meets at least once in Melbourne, which is usually in the first six months of the year. The board occasionally also meets in other Australian capitals. Five members of the board must meet in order to constitute a quorum, and the meeting must be chaired by the governor, or the deputy governor in his absence.
The board usually forms a consensus without a need for structured voting on the issues at hand. Meetings of the board are held in the boardroom of the Reserve Bank's Head Office in Sydney or the equivalent in other regional offices of the bank. The meetings begin at 9.00 am and continue for three and a half hours, with a lunch at the end and perhaps a guest speaker. Minutes of the monetary policy Board meetings are published two weeks after the meeting is held.
Payments System Board and the ACCC
The Reserve Bank Act 1959 allows the Payments System Board to decide the Reserve Bank's payment systems policy. This is done so it can command risk and to aid in competitiveness and balance in the financial system. The bank's power through the Payment Systems Act 1998 allows it to regulate any payment system and can create binding rules for security and performance in the system. If members of a payment system are at odds over issues of market risk, admission, safety, and rivalry, the RBA can additionally administer arbitration with the consent of those involved. The Reserve Bank is also permitted to gather information from a payment system or participants thereof. The bank was also given the power to regulate the competition of transactions in August 2001.
The Payment Systems and Netting Act 1998 gives the board power in areas of the law that were previously uncertain. It removed the zero hour rule that allowed a bankruptcy to date a bankruptcy the previous midnight and the Act made it so payments the same day could not be undone. Before the removal of the zero hour rule, the Real Time Gross Settlement system had been violated because payments in the system should inherently not be reversed. Some payments systems had previously agreed to pay and receive obligations to the whole system, rather than merely maintaining their own. But in the event of a bankruptcy, the bankrupt institution did not pay what it owed back to the solvent parties, while they had to pay their dues to the failed bank. This was later changed, when cheques were deemed void if the bankrupt institution doesn't have the funds to back them up, after the Cheques Act 1986 was amended in 1998. The Trade Practices Act 1974 generally does not allow competitors to make cooperative agreements, but if The Australian Competition and Consumer Commission (ACCC) is permitted to make exceptions for competitors making agreements among themselves. The ACCC and the Payments Systems Board are encouraged to work together regarding access and rivalry through the Payment Systems (Regulation) Act 1998.
Members of the Payment Systems Board are defined by Section 25A of the Reserve Bank Act 1959, with three of the members being ex officio or representatives of another organisation. The governor of the Reserve Bank of Australia is the Chairman of the Payments System Board, there is one representative of the RBA, and there is one representative of the Australian Prudential Regulation Authority (APRA). In addition, there are up to five other members of the board that are appointed by the Treasurer for a term up to five years in length. They meet once per quarter, with five members forming a quorum, and one meeting per year is generally held in Melbourne, while the rest are held in Sydney. The Chairman is to meet with the Chairman of the ACCC at least once annually on issues of interest to both parties in the payments system, in addition to members of both organisations consulting over issues that are mutually important.
The current members of the Payments System Board are:
Governors and their roles
The governor of the Reserve Bank of Australia is the most senior position in the Reserve Bank of Australia. The governor of the Commonwealth Bank of Reserve Bank of Australia was both an ex officio member of the Notes Board from 1920 to 1924 and of the eight directors of the Commonwealth Bank from 1924 to 1945. The Commonwealth Bank and Bank Acts in 1945 clearly stated the governor's responsibilities of managing the bank. In 1951, legislation established a 10-member board which the governor is a member of. The bank has maintained a similar structure ever since the 1951 legislation.
The governor is required by the Reserve Bank Act 1959 to keep in contact with the Secretary on matters concerning both the Treasury and Reserve Bank and vice versa. It is also mandated that the board inform the government of the bank's monetary and banking policy, which is often accomplished through the governor's meetings with the Treasurer. Since 1996, the governor and other senior members of the bank have appeared twice annually before the House of Representatives Standing Committee on Economics to explain the conduct of the bank. The Reserve Bank governor is appointed to a term of up to seven years by the Treasurer and are eligible to be reappointed at the end of their term. The governor is the chairman of both the Payment Systems Board and the Reserve Bank Board and therefore resolves any disputes that occur between the two entities.
The longest-serving governor, if his service to both the Commonwealth Bank and the Reserve Bank of Australia are included, is H.C. Coombs, who served nineteen years and six months combined. He is regarded by some as one of the most committed anti-inflationists in government throughout the 1950s and 1960s. The longest-serving Commonwealth Bank governor is Sir Ernest Riddle, who served eleven years and four months, while the longest-serving Reserve Bank governor is Ian Macfarlane, who served ten years. The shortest-serving governor by many years is James Kell, who served 2 years for the Commonwealth Bank.
Key
Governors
See also
Notes
- ^A Members are eligible to be appointed to another term.
References
External links
- Reserve Bank of Australia
- Museum of Australian Currency Notes
- RBA Economics Competition
- Australia and World Interest Rates data and chart, updated by ForexMotion.
- Official Cash Rate historical data, chart and media releases, updated by CentralBankRates.