How RBA discovered its financial stability mandate post-2008 crisis?

RBA released its Statement on the Conduct of Monetary Policy. This is released once in every three years. It is a kind of a joint statement by the central bank and Aus treasury on common understanding between the two on mon pol in Aus:

The Statement on the Conduct of Monetary Policy (the Statement) has recorded the common understanding of the Governor, as Chairman of the Reserve Bank Board, and the Government on key aspects of Australia’s monetary and central banking policy framework since 1996.

The Statement seeks to foster a sound understanding of the nature of the relationship between the Reserve Bank and the Government, the objectives of monetary policy, the mechanisms for ensuring transparency and accountability in the way policy is conducted, and the independence of the Reserve Bank.

The centrepiece of the Statement is the inflation targeting framework, which has formed the basis of Australia’s monetary policy framework since the early 1990s.

The Statement has also been updated over time to reflect enhanced transparency of the Reserve Bank’s policy decisions and to record the Bank’s longstanding responsibility for financial system stability. Building on this foundation, the current Statement reiterates the core understandings that allow the Bank to best discharge its duty to direct monetary policy and protect financial system stability for the betterment of the people of Australia.

It is a nice, simple worded statement on what the govt expects from the central bank.

‘Interestingly, I was going through its previous such statements and one sees financial stability mentioned as a core objective only from 2010 onwards. Infact financial stability is not even mentioned in 1996, 2003, 2006 and 2007 statements.

In 2010 it adds the fin stab objective saying:

This statement also records our common understanding of the Reserve Bank’s longstanding responsibility for financial system stability.

Financial Stability

The stability of the financial system is critical to a stable macroeconomic environment. Financial stability is a longstanding responsibility of the Reserve Bank and its Board, and was reconfirmed at the time of significant changes made to Australia’s financial regulatory structure in July 1998. These changes included the transfer of responsibility for the supervision of banks to a new integrated regulator, the Australian Prudential Regulation Authority (APRA), and the establishment of the Payments System Board within the Reserve Bank.

The Reserve Bank Board oversees the Bank’s work on financial system stability. Without compromising the price stability objective, the Reserve Bank seeks to use its powers where appropriate to promote the stability of the Australian financial system. It does this in several ways, including through its central position in the financial system and its role in managing and providing liquidity to the system, and through its chairmanship of the Council of Financial Regulators, comprising the Reserve Bank, APRA, the Australian Securities and Investments Commission and Treasury. In addition, the Payments System Board has explicit regulatory authority for payments system stability. In fulfilling these obligations, the Reserve Bank will continue to publish its analysis of financial stability matters through its half-yearlyFinancial Stability Review and will be available to report as appropriate to relevant Parliamentary committees.

The Reserve Bank’s mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the Bank does not see its balance sheet as being available to support insolvent institutions. However, the Reserve Bank’s central position in the financial system, and its position as the ultimate provider of liquidity to the system, gives it a key role in financial crisis management. In fulfilling this role, the Reserve Bank will continue to co-ordinate closely with the Government and with the other Council agencies.

The Treasurer expresses support for these arrangements, which served Australia well during the recent international crisis period.

The minds of central bankers were purely captured by the price stability objective. This was because most econs struggled with inflation in 1980s and 1990s.

No one really cared about fin stab. Now we see fin stab occupying the same pedestal as price stab.

What is next?

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