My friend, Chris Joye, today published a note on what he thought of some of the Q+A with RBA Gov Stevens’ following the CEDA dinner.
As I see it, Chris has three key points — and as I’ve been asked to comment, here’s my view on each of them.
The first is that APRA’s supervision should be extended to non-banks. Here I disagree. The point is not to prevent Banksia-like failures. The point is to change the system so that Banksia-esque failures can happen safely. While there are doubtless many hard times for those directly involved in Banksia’s failure, it does not seem to have had systemic consequences — so I regard the system as working well enough.
The second is that Australia’s major banks ought to hold more capital. Here I agree. Supervision and capital are substitutes — if you accept intrusive supervision, you are presumably less profitable than you might otherwise have been. That’s the cost of supervision — and it’s also the implicit price of things like government guarantees and liquidity support from the RBA’s discount widow (which I suspect probably amount to a massive subsidy from the taxpayer to bank shareholders).
I would prefer a better capitalised banking system, with lighter regulation. Put enough capital in banks, and add some ‘living wills’ and other regulation, and we might just be able to make the system robust to failure — getting rid of ‘too big to fail’ would be a significant achievement.
Chris’ third point is really an observation — that Gov Stevens used the speech to acknowledge that the odd developments on the RBA’s balance sheet did indeed signal something new. Stevens said:
As for the so-called “passive intervention”, let’s say that was customer business that we decided to keep on the balance sheet because the prices seemed attractive to do that as this time.
We don’t know who the client was, but the price Stevens is referring to is the foreign exchange value of the Australian Dollar. Someone wanted to buy AUD, and the RBA expanded their balance sheet, providing them with AUD and obtaining foreign exchange reserves on the other side. Some call this money printing — but that’s not quite right. It’s reserve creation — which is a little bit different.
This isn’t the scale of intervention that has characterised Swiss or Japanese currency interventions — however there’s no doubt that this is a change of behavior and though small it is designed to lower the foreign exchange value of the AUD.
I am surprised at this development — but i think that those who identified this development as a change in the RBA’s stance on the AUD are indeed correct.