How governments bank with their central bank: Case of Australia

One of the least known aspect of central bank operations is how the governments bank with them. After all central bank is banker to the government and plays a crucial role in government policies. But both the government and central banks are usually silent about these operations.

This is a rare speech from Lindsay Boulton Assistant Governor of Reserve Bank of Australia. He gives us some insights into how Australian government banks with their central bank.

There are two banking services RBA provides to the government:

There are two components to the banking services that the Reserve Bank provides the Australian Government.[1]

The first is a core banking facility directed at maintaining a core group of accounts that the government is legally required to hold at the Reserve Bank. Maintaining central government core accounts is a service that almost all central banks provide, though arrangements vary from country to country.

The second component is a transactional banking facility. This is an account and transaction service available to government agencies to assist in undertaking their policy responsibilities and day-to-day operating expenses.[2]

Unlike core banking, transactional banking is not a service universally provided by central banks. In some countries it is the sole responsibility of the central bank, while in others government agencies must purchase these services under competitive pricing arrangements from commercial banks.

It is interesting to note that RBA despite being a banker to the government has to compete with other banks while bidding for government services:

Arrangements in Australia are a unique mix of the two. While the Reserve Bank has authority to provide transactional banking services to the government under its charter, it competes with commercial banks under government competition policy to do so, submitting bids at tenders conducted by the agencies themselves. The Bank must cost and price its transactional banking services as a business that stands alone from its other activities, including its core banking service, and meet a prescribed minimum annual return on capital. The minimum is equivalent to the 10-year government bond yield plus a margin for risk of a few hundred basis points.

These arrangements have been in place since the late 1990s. Their objective has been to ensure, through competition, that government agencies get value for money for their transactional banking business as well as access to innovations in payments products. At the same time, maintaining core accounts at the Reserve Bank means that the government’s core balances are not exposed to overnight credit risk and that the Reserve Bank can meet its responsibility to manage the impact of the government’s daily cash transactions on banking system liquidity.

Allowing the Reserve Bank to provide transactional banking services to government agencies also provides a way for agencies to avoid conflicts that might arise between their policy responsibilities and their banking arrangements if they were to bank with a commercial bank.

Although it is unique for a central bank to compete to provide banking services to their central government, the Reserve Bank has been awarded business in three-quarters of the tenders for government banking business in which it has participated over the past 15 years and, reflecting a focus on meeting customer needs, more than doubled its available range of banking services (see Graph).

Hmm..interesting to learn this.

Later, Boulton points to how digital tech is shaping this central bank-government relationship…

 

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