International Financial Cooperation The Reserve Bank participates in initiatives that seek to address the challenges facing the international economy and improve the global financial architecture. It does so through its membership of global and regional forums and its close bilateral relationships with other central banks. Group of Twenty (G20) identifying possible policy measures to respond to them. Japan has continued the G20’s work on Purpose promoting private investment in infrastructure, The G20 facilitates international cooperation but with a focus on the quality of infrastructure on economic, financial and other policy issues investment. This work was advanced by the among 19 country members – including G20’s Infrastructure Working Group, which is Australia – from all regions of the world, as co-chaired by the Australian Treasury. well as with the European Union, International The G20 has also continued to discuss how to Monetary Fund (IMF) and other international strengthen the international monetary system. organisations. This discussion has been aided by a report by Reserve Bank Involvement the G20 Eminent Persons Group, which was a focus of the G20 Ministers’ and Governors’ The Reserve Bank is represented at high-level meeting in October 2018. The G20 has reiterated meetings of the G20 by the Governor and its commitment to a strong, quota-based and Assistant Governor (Economic), while other adequately resourced IMF at the centre of senior staff participate in select G20 working the global financial system. Accordingly, the groups and contribute to the G20’s financial G20 has committed to complete a review of regulation reform agenda. the IMF’s permanent ‘quota’ resources by late 2019. The G20 has also continued to monitor The G20 presidency was held by Argentina from the risks stemming from excessive volatility in December 2017 to December 2018. In January capital flows, as well as how to promote the 2019, the G20 presidency rotated to Japan. A key transparency and sustainability of sovereign debt. theme of the Japanese presidency is ageing, with a focus on understanding the macroeconomic The G20 continues to pursue the full, timely implications of demographic change and and consistent implementation of the financial identifying appropriate policy responses. Another sector reforms developed and agreed after the important theme has been monitoring of global global financial crisis, such as Basel III (to build imbalances – that is, persistent and excessive resilient financial institutions). With many of current account deficits and surpluses – and these policy reforms now largely implemented, 76 RESERVE BANK OF AUSTRALIA ANNUAL REPORT 2019 | INTERNATIONAL FINANCIAL COOPERATION 77 Governor Philip Lowe (third row, second from right) with participants at the G20 Finance Ministers and Central Bank Governors Meeting, Fukuoka, June 2019 Source: Mr Kazuki Watanabe Reserve Bank Involvement in the G20 G20 Finance Ministers’ and Central Bank Governors’ Meetings Deputies’ Meetings Framework for Financial Regulation Strong, Sustainable, International Financial Reform Workstream Balanced and Architecture (input via bodies Inclusive Growth Working Group including the Financial Working Group Stability Board) the G20 and Financial Stability Board (FSB) have monitoring of developments in financial shifted their focus away from post-crisis policy technology (‘fintech’), including crypto-assets development and implementation, to assessing and, where necessary, responding to the risks the effectiveness of the reforms. This work posed. The Reserve Bank, along with other aims to determine if the reforms are meeting Council of Financial Regulators (CFR) agencies, their intended objectives and whether there continues to work with overseas counterparts on have been any material adverse consequences. these and other global regulatory issues. The G20, in conjunction with the FSB and the global standard-setting bodies, also continues Financial Stability Board (FSB) to monitor and address current vulnerabilities in Purpose the financial system (such as banks’ exposures to leveraged loans), as well as medium-term The FSB promotes international financial emerging risks. The latter has included stability by coordinating national financial sector authorities and international 76 RESERVE BANK OF AUSTRALIA ANNUAL REPORT 2019 | INTERNATIONAL FINANCIAL COOPERATION 77 on infrastructure financing. Further evaluations standard-setting bodies as they work towards are under way, looking at the effects of reforms developing strong regulatory, supervisory on financing for small and medium-sized and other financial sector policies. It also plays enterprises, and the ‘too big to fail’ reforms. A a central role in assessing new and evolving representative of Financial Stability Department is trends and risks. a member of the ‘too big to fail’ evaluation team. FSB members include representatives from 24 The Standing Committee on Assessment economies as well as the main international of Vulnerabilities is the main FSB body for financial institutions – including the Bank for identifying and assessing risks in the global International Settlements (BIS) and the IMF – financial system. Supporting this committee are and standard-setting bodies such as the Basel the Analytical Group on Vulnerabilities and the Committee on Banking Supervision (BCBS). Financial Innovation Network, which provides Reserve Bank Involvement input on the financial stability implications The main decision-making body of the FSB is of financial innovation (such as fintech and the Plenary. The Governor is a member of the cloud services). Global vulnerabilities recently Plenary, as well as the Steering Committee considered by the Standing Committee and the Standing Committee on Assessment have included high private and public debt, of Vulnerabilities. The Governor also elevated asset values and weaker lending continued to serve as co-Chair of the Regional standards. It has also examined risks in particular Consultative Group for Asia until his term markets and products. This has included ended on 30 June 2019. highlighting concerns about the extent of financial institutions’ exposures to riskier Senior staff members of Financial Stability credit instruments, such as leveraged loans, Department participate in meetings of the: both directly and through collateralised loan • Analytical Group on Vulnerabilities, obligations. The Standing Committee is currently which supports the work of the seeking to develop a clearer framework for Standing Committee on Assessment of the assessment of vulnerabilities. This should Vulnerabilities support a comprehensive, methodical and • Resolution Steering Group (until June 2019) disciplined assessment of new and emerging risks to financial stability. The Assistant Governor • Financial Innovation Network. (Financial System) is leading one of the work As noted above, while the FSB has continued to streams contributing to the new framework, pursue regulatory reform of the global financial exploring the features of a well-defined system, its focus has shifted in recent years from surveillance process. policy design and implementation monitoring, The FSB has continued its work on addressing to evaluating the effects of the post-financial the risks posed by non-bank financial 1 crisis reforms. Initial evaluation work examined intermediation (NBFI) (previously referred to as the effects of reforms on the incentives to ‘shadow banking’). This refers to credit provision centrally clear over-the-counter derivatives, and involving entities and activities outside of the regular banking system. A key part of this work 1 Further detail on activities of the FSB is reported in the ‘Regulatory Developments’ chapter of the Reserve Bank’s semi-annual Financial is an annual global monitoring exercise, which Stability Review. 78 RESERVE BANK OF AUSTRALIA ANNUAL REPORT 2019 | INTERNATIONAL FINANCIAL COOPERATION 79 Australian Involvement in Key FSB Committees FSB Plenary RBA, Treasury Regional Consultative Steering Committee Group for Asia RBA RBA (co-Chair)(a), Treasury Standing Committee Standing Committee on Standing Committee Resolution on Assessment of Supervisory & Regulatory on Standards Steering Group Vulnerabilities Cooperation Implementation RBA(a) RBA APRA Treasury Analytical Group on Vulnerabilities RBA (a) Until June 30 2019 collects data on NBFI sectors within FSB and • Cross-border Crisis Management Group for several non-FSB jurisdictions. The Reserve Bank is Financial Market Infrastructures, a subgroup represented on the FSB’s Non-bank Monitoring of the Resolution Steering Group working Experts Group (previously known as the Shadow on resolution arrangements for central Banking Experts Group), which conducts this counterparties and other financial market monitoring exercise and associated risk analysis. infrastructures. Reserve Bank staff members also took part in • Official Sector Steering Group, which a number of other key FSB work areas during is progressing reforms of interest rate 2018/19, including meetings of the: benchmarks, including coordinating the • Resolution Steering Group, which is transition away from LIBOR (the London progressing the FSB’s work on enhancing Inter-Bank Offered Rate) towards alternative resolution frameworks in line with interest rate benchmarks. international standards. Its recent policy focus • Regional Consultative Group for Asia, one of has included: the adequacy of resources six regional groups established to expand the for central