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RBA Annual Report 2000

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RBA Annual Report 2000 INTERNATIONAL FINANCIAL CO-OPERATION international financial and Canada); and the IMF/World Bank, with co-operation around 180 members. The former was too The three years since the Asian crisis began narrow to carry out the necessary consultation have seen a substantial push within the and co-ordination among countries, while the international community for reform of the latter was too large to allow decisive actions to international financial system. The problems in deal with emerging problems. Asia (and in Eastern Europe and Latin America The initial response of the international as well) not only damaged the growth perform- community was to set up the G22, an ad hoc ance of the countries directly affected, but had group of 22 countries including those affected repercussions on major financial markets, and by the crisis. This group was able to make quick brought a recognition on the part of the progress on a number of issues, but the feeling international financial community that was that its membership was not balanced, changes should occur in the so-called inter- with some claiming that Asian countries (which national financial architecture. The RBA made up 10 of the 22) were over-represented. believed that it should contribute as strongly In the event, that group has been replaced as possible to this work, given the potential for by two new international groupings, which major changes to the shape of international seem to have a greater degree of permanance financial markets to emerge from the process. than the G22. The two groupings are the Financial As a result, the RBA increased significantly the Stability Forum and the G20. resources devoted to participating in the main Financial Stability Forum global and regional initiatives aimed at The Financial Stability Forum was established improving the functioning of the international in early 1999 by the G7. The Forum includes the financial system. In this work, the RBA G7 countries themselves, the major inter- co-operates closely with other arms of govern- national financial institutions and four other ment, such as the Treasury and the Department countries representing significant financial of Foreign Affairs and Trade. centres. Australia was chosen as a member of The unfolding crisis not only highlighted this latter group along with Hong Kong, the specific deficiencies in policies, but also Netherlands and Singapore. Australia is exposed shortcomings in the way international represented in the Forum by the Governor. By financial issues were handled by the world covering all the world’s major financial community - in the international forums where centres, the Financial Stability Forum is in a these issues are discussed, and where rules and good position to promote international procedures are developed. In essence, two financial stability and co-operation through main groupings carried these responsibilities: the formulation of consistent rules and the G7, which consists of the world’s seven procedures relating to financial institutions. It largest developed countries (United States, is expected that this will be its main focus. Japan, Germany, France, United Kingdom, Italy 19 RESERVE BANK OF AUSTRALIA Since its establishment, the Financial moving to the sidelines”. The Report was also Stability Forum has produced a series of concerned about aggressive practices alleged working group studies and reports on intern- in some countries, but there was no agreement ational capital flows, offshore financial centres, on the scale of these practices, nor on the highly leveraged institutions (HLIs), deposit implications for market integrity. insurance and the implementation of inter- Overall, the Report concluded that the issues national financial standards. The RBA part- raised merited “a concerted international icipated in the working group on HLIs, and policy response” and made a number of Australia (through the Treasury) participated in recommendations. These recommendations the task force on standards. incorporated work undertaken by the Basel Committee on Banking Supervision and the Report on Highly Leveraged Institutions International Organisation of Securities The potentially damaging impact of HLI Commissions (IOSCO) and in many respects activities on the stability and dynamics of were similar to conclusions reached by the US international financial markets has been an issue President’s Working Group on Financial of particular concern over the past two years or Markets. Much of the focus was on the risk so, and one which the RBA has consistently management practices of HLI counterparties pressed in various international groups. The RBA and regulatory oversight of credit providers. therefore welcomed the Forum’s report on HLIs The report also recommended measures to and fully supports the recommendations. improve disclosure by large unregulated hedge The Report considered both the systemic funds, development of market practices issues raised by the near-collapse in 1998 of guidelines for participants in foreign exchange Long Term Capital Management, a large hedge markets, improved financial market infra- fund, and the potential impact of HLIs on structure (including collateral practices), and market dynamics in small and medium-sized enhanced financial market surveillance, both open economies. In relation to issues of national and international. systemic stability, the Report focused on the The RBA believes that these recommend- “breakdown in counterparty credit and trading ations, when fully implemented, will discipline” which allowed both a high degree of adequately address the systemic stability leverage and large, risky positions to be built. issues posed by HLIs. They may also be On the impact of HLIs on small and medium- sufficient to contain the potential problems sized economies, it concluded that HLIs may which HLIs can pose for market dynamics, from time to time establish large and con- although this is less certain. In this regard, the entrated positions in medium-sized markets and RBA was pleased that the Report leaves open “have the potential materially to influence the possibility of taking further steps should market dynamics”. It went on to say that “the they appear necessary in future. size and duration of effects can be amplified through herding or other market participants 20 INTERNATIONAL FINANCIAL CO-OPERATION The United States, which is the country out Report on Offshore Financial Centres of which most HLIs operate, is pushing ahead The Forum’s report on offshore financial with legislation which will give effect to many centres was followed by publication of a of these recommendations. The Hedge Funds classification of offshore centres according to Disclosure Act (Baker Bill) would require the Forum’s perceived ranking of the quality of quarterly disclosure of risk taking and leverage their regulation and their degree of co- by large hedge funds (those with capital in operation with other regulators. The purpose excess of US$1 billion, or in a group of funds of this publication was to encourage efforts to with assets greater than US$3 billion). A second improve regulatory systems in these centres. piece of legislation, the Derivatives Reform Act Several countries in the Pacific region were of 1999 (Markey-Dorgan Bill), would enable identified as having scope for improvement. the US Securities and Exchange Commission to obtain quarterly disclosure statements from Group of Twenty non-bank over-the-counter derivatives dealers, The other new international group, the G20, and to issue Large Trader Reporting Rules, was set up in late 1999 and consists of allowing the agency to monitor and report on countries of systemic significance in terms of the activities of hedge funds. the world economy. As well as the G7, it includes Argentina, Australia, Brazil, People’s Report on Financial Standards Republic of China, India, Indonesia, Republic of The Financial Stability Forum recognised at Korea, Mexico, Russia, Saudi Arabia, South its inception the importance of economic and Africa and Turkey. The European Union, the financial standards in promoting sound IMF and the World Bank are also included in financial systems, and at an early stage set up the Group. Australia is represented in this a Compendium of Standards on its web site. group by the Treasurer and the Governor. It is More recently, the Issues Paper of the Task expected to have a somewhat broader agenda Force on Implementation of Standards was than the Financial Stability Forum, covering released, proposing a strategy for fostering the general issues relevant to the world economy. implementation of international standards. Since its inception, the G20 has focused on As a step in this direction, the Forum three main issues: choices between exchange identified a set of key standards, considered rate regimes; liability management by national likely to make the greatest contribution to authorities; and private sector involvement in reducing vulnerabilities and strengthening the crisis prevention and resolution. The RBA was resilience of financial systems. This was intended asked to lead the discussion on the issues to allow a more focused approach to the facing national authorities in choosing an implementation of standards, although priorities exchange rate regime at a G20 meeting for will vary considerably between countries. deputies in March 2000. G20 Ministers and Governors will consider these issues further at a meeting later in 2000. 21 Assistant Governor Glenn Stevens chairing a session at an
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