(Bloomberg) — The Reserve Bank of Australia has yet to see the case for lending directly to pension or other investment funds in the way that recently occurred in the US and UK after major dislocations, Assistant Governor Brad Jones said on Thursday.
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“The main reason is that, historically at least, the Australian financial system has been less directly exposed to the risk of systemically important liquidity mismatches associated with these funds,” Jones said in a speech titled “Bagehot and the Lender of Last Resort — 150 Years On” in Sydney.
Earlier this year, the collapse of US banks and the bailout of Credit Suisse Group AG in Europe sent shock waves across the globe and resulted in tightening of financial conditions in some economies. Australian banks were mostly insulated, thanks to their strong liquidity and capital ratios and relatively lower reliance on overseas funding markets.
Unlike the US, Australia doesn’t have a large money market fund industry that is interconnected with the banking system while pension or superannuation funds don’t have “runnable liabilities” in the traditional sense, Jones said.
In addition, relative to the UK, Australian pension funds are also much more restricted in their capacity to borrow, have larger cash holdings and most do not offer guaranteed returns to members.
“Nevertheless, given the industry is an important source of funding for banks and the events of 2020 showed superannuation funds can experience liquidity-draining events (including margin calls on currency hedges), it is important that their approach to liquidity risk management continues to strengthen,” Jones added.
Australia’s biggest lenders also don’t have large exposures to risky sectors such as commercial real estate while the country has a very small non-bank or shadow banking industry.
In speaking about overarching lessons from recent global disruptions, Jones said that central banks will be prompted to revisit their frameworks for emergency lending to non-banks and outright buy-sell operations in key markets.
“Ensuring these operations operate as effective backstops (without worsening moral hazard) and don’t interact with monetary policy in an unhelpful way,” will require ongoing consideration, Jones added.
“This latter issue is a bigger challenge when severe liquidity shocks require the central bank to expand its balance sheet at the same time that it is tightening monetary policy,” he said.
The RBA has raised interest rates by 4.25 percentage points since May 2022 to a 12-year high of 4.35%. Money market bets imply the RBA is now done with hikes and an easing cycle is likely to begin around mid-2024.
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