Chapter Nine: Stability and Payments

Summary of Part Two: Key Issues in Regulatory Reform from The Wallis Report on the Australian Financial System: Summary and Critique

In any financial system a limited range of financial claims can be used as a means of payment to settle transactions. For example, notes and coins, the deposit liabilities of banks (mobilised by instruments such as cheques) and credit cards backed by lines of credit, can all be used to settle transactions, and thus form part of the payments system. There is scope for increased competition in the payments system which will help to lower its costs of operation. However, this must be balanced against the need to maintain stability in the financial system. The payments system provides one central way in which instability can be generated. The RBA should retain overall responsibility for the stability of the financial system, the provision of emergency liquidity assistance and for regulating the payments system.

Large scale instability (called systemic instability) can arise from default on settlement of transactions, especially for high value transactions on bonds, foreign exchange and derivatives products where receipts and payments may not be synchronised. Initiatives such as the 'real-time-gross-settlement' (RTGS) system should mitigate domestic sources of settlement risk; here, each high value transaction is settled as it occurs. Time lags in other settlements are also being shortened. However, substantial risks remain, especially for international transactions. The RBA should give high priority to promoting further cost-effective control of both domestic and international settlement risks. On the other hand, the CFSC should be responsible for regulation of financial exchanges in these matters.

Apart from settlement risk, financial system instability may also have its origins in generalised disruption to financial and other markets. Confidence in some financial market participants may plummet and this may generate a broader market crisis. The policy responses to such developments will vary with their particular circumstances but may include the provisions of emergency funds (i.e. liquidity) to markets generally or to particular sectors. These should remain the responsibility of the RBA (in consultation with the Treasurer), in its role as both monetary authority and manager of systemic risk.

Increased competition in the payments system is possible without jeopardising systemic stability. A new institutional framework is necessary to achieve this. Existing arrangements should be dissolved and a new Payments System Board (PSB) should be formed within the RBA to regulate payments with a view to increasing efficiency and competition. It should set performance benchmarks for these goals and its membership should reflect this. The RBA's regulatory activities in these areas should be clearly separated from its commercial activities, such as acting as main banker to governments.

In regard to specific reforms to increase competition and efficiency, the right to issue cheques in their own name should be extended to all licensed DTIs. The ACCC and the PSB should monitor the delivery fees charged on credit and debit cards while the ACCC should monitor the rules of international credit card associations to ensure they are not overly restrictive. Access to final clearance for financial transactions should be liberalised, its efficiency upgraded, and the Trade Practices Act 1974 should continue to apply to it. Access to ESAs with the RBA should be liberalised, while non deposit-taking institutions should be able to directly settle consumer electronic and bulk electronic payments through an ESA.

In regard to increased financial system security, RTGS benchmarks should be established, the PSB should issue payments system approvals and the PSB and the APRC should establish close coordination arrangements, while holders of 'stores of value' for payments instruments such as traveller's cheques and smart cards should be subject to prudential regulation. High-value settlement providers should be regulated to international standards.