The Monetary Authorities, RBA and IR (2&3) Flashcards
Functions of Central Banks
- developing and implementing monetary policy
- issuing currency
- providing banking services for the government
- overseeing the operations of the financial system
- facilitating the payments system
List the three independent monetary authority agencies
- The Reserve Bank of Australia (RBA)
- The Australian Prudential Regulation Authority (APRA)
- The Australian Securities and Investment Commission (ASIC)
Role of RBA
Responsible for MONETARY POLICY, the PAYMENT SYSTEM and STABILITY of the entire financial system
Role of APRA
Responsible for PRUDENTIAL SUPERVISION of financial institutions including banks, credit unions, building societies, insurance and superannuation companies
Role of ASIC
Responsible for enforcement of company and financial services laws. The objective is to protect customers, investors and creditors
Functions of the RBA
- determination and implementation of MP
- issuing Australian currency notes
- overseeing the payments system
- acting as the government’s banker
- issuing and providing the market for treasury securities
- managing financial system liquidity and the government’s holding of foreign exchange
What is MP? What are the three objectives?
MP is the management of short term IR.
1) Maintenance of a stable currency
2) Maintenance of full employment
3) Maintenance of the prosperity and welfare of the people of Australia
Functions of APRA
- the development, implementation and supervision of prudential regulation*
- monitoring regulated entities to ensure they are complying with relevant legislation and prudential policies
- advising the government on the development of regulation and legislation affecting regulated institutions and the financial markets in which they operate**
*Prudential supervision: to ensure regulated entities are complying with relevant legislation and policies. For example, ADIs must adhere to an 8 per cent (at least) CAR to ensure investor confidence and stability of financial system.
** For example, the implementation of Basel II to calculate risk adjusted assets
How is APRA accountable?
- appearance before parliamentary committees
- annual reporting to parliament
- audits by the National Audit Office
Specific responsibilities of ASIC
- maintain, facilitate and improve the performance of the financial system and entities within it
- promote confident and informed participation by investors and consumers in the financial system
- administer the law effectively with minimal procedural requirements
- make information about companies and other bodies available to the public as soon as practicable
Bank for International Settlements (BIS)
BIS is an international monetary authority based in Basel, Switzerland.
- facilitator of central banking cooperation
- BIS provides a meeting place and resources for meetings of CBs
- BIS acts as a bank to CBs, providing services related to their financial operations
What are interest rates?
The ‘rental price’ of money expressed as an annual percentage of the amount borrowed.
For the borrower, interest is the penalty paid for consuming income before it is earned.
For the lender, interest is the reward for postponing current consumption.
Loanable Funds Theory
A theory that may be used to explain shorter term movements in IR. According to this theory, IRs are determined by the demand for, and supply of, loanable funds.
SSUs supply loanable funds and DSUs demand loable funds
Cyclical natures of IRs
- If interest rates are low, most people will postpone very little consumption for saving.
- Thus, to coax people to save, higher interest rates must be offered.
- However, the more the interest rate rises, the fewer projects are undertaken by investors as their expected returns will not cover the interest related to its financing.
- As a result, the higher the interest rate, the fewer the number of investment projects undertaken.
- Interest rates are therefore lowered to induce greater spending, and the cycle begins again.
