Reserve Bank of Australia came into being on 14 January 1960 as Australia's central bank and banknote issuing authority, when the Reserve Bank Act 1959 removed the central banking functions from the Commonwealth Bank to it.
The Bank has the responsibility of providing services to the Government of Australia in addition to also providing services to other central banks and official institutions. It currently consists of the Payments System Board, which governs the payments system policy of the Bank, and the Reserve Bank Board, which governs all other monetary and banking policies of the bank.
Both Boards consist of members of both the Bank, the Treasury, other Australian government agencies, and leaders of other institutions that are part of the economy. The structure of the Reserve Bank Board has remained consistent ever since 1951, with the exception of the change in the number of members of the Board. The Governor of the Reserve Bank of Australia is appointed by the Treasurer and chairs both the Payment Systems and Reserve Bank Boards and when there are disagreements between both Boards, the Governor resolves them.
From the middle of the 19th century into the 1890s, the prospects of a national bank forming grew. In 1911, the Commonwealth Bank was established, but did not have the authority to print notes, which was a power that was still reserved to the Treasury. A movement toward reestablishing the gold standard occurred after World War I, with John Garvan leading various boards in contracting the money supply on the route to doing so, and the gold standard was instituted for both the British pound sterling and the Australian pound in 1925.
During the Great Depression, the Australian pound became devalued, no longer worth the pound sterling, and formally departed from the gold standard with the Commonwealth Bank Act of 1932. Legislation in 1945 led to regulation of private banks which H.C. Coombs was opposed to, and when he became Governor in 1949, he gave them more overall control over their institutions. When the monetary authorities implemented the advice of Coombs to have a flexible interest rate, it allowed the Bank to rely more on open market operations.
The float of the Australian dollar happened in 1983, around the same period of time that the financial system in Australia was deregulated. Administration of the banks was transferred in 1998 from the Bank to the Australian Prudential Regulation Authority and the Payments System Board was created, while the Bank was given power within the said Board in the same year. The current Governor of the Reserve Bank is Glenn Stevens, who has been the incumbent since 18 September 2006.
Roles and responsibilities
It is currently governed by the Reserve Bank Act 1959, which was approved by Parliament. The Reserve Bank Board's duty stated in the Act, within its outlined boundaries, is to ensure that the Bank's monetary and banking policy is used to help the Australian population. This should be accomplished through consultation with the Government and so in the Reserve Bank Board's opinion that its powers are used to help with:
“ (a) the stability of the currency of Australia
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
In practice the Reserve Bank concentrates on the first objective, that is to control inflation through monetary policy. The current objective is a policy of inflation targeting aimed at maintaining the annual inflation rate at between "2-3 per cent, on average, over the cycle". This target was first set in 1993 by the then Reserve Bank Governor Bernie Fraser and was then formalised in 1996 by the then Treasurer Peter Costello and incoming Reserve Bank Governor Ian Mcfarlane.
Governors and their role
The Governor of the Reserve Bank of Australia is the most senior position in the Reserve Bank of Australia. The Governor of the Commonwealth Bank of Reserve Bank of Australia was both an ex officio member of the Notes Board from 1920 to 1924 and of the eight directors of the Commonwealth Bank from 1924 to 1945. The Commonwealth Bank and Bank Acts in 1945 clearly stated the Governor's responsibilities of managing the Bank. In 1951, legislation established a 10-member board which the Governor is a member of. The Bank has maintained a similar structure ever since the 1951 legislation.
Payments System Board and the ACCC
The Reserve Bank Act 1959 allows the Payments System Board to decide the Reserve Bank's payment systems policy. This is done so it can command risk and to aid in competitiveness and balance in the financial system. The Bank's power through the Payment Systems Act 1998 allows it to regulate any payment system and can create binding rules for security and performance in the system. If members of a payment system are at odds over issues of market risk, admission, safety, and rivalry, the RBA can additionally administer arbitration with the consent of those involved. The Reserve Bank is also permitted to gather information from a payment system or participants thereof. The Bank was also given the power to regulate the competition of transactions in August 2001.
The Payment Systems and Netting Act 1998 gives the Board power in areas of the law that were previously uncertain. It removed the zero hour rule that allowed a court to date a bankruptcy the previous midnight and the Act made it so payments the same day could not be undone. Before the removal of the zero hour rule, the Real Time Gross Settlement system had been violated because payments in the system should inherently not be reverted. Some payments systems had previously agreed to pay and receive obligations to the whole system, rather than merely maintaining their own. But in the event of a bankruptcy, the bankrupt institution did not pay what it owed back to the solvent parties, while they had to pay their dues to the failed bank. This was later changed, when cheques were deemed void if the bankrupt institution doesn't have the funds to back them up, after the Cheques Act 1986 was amended in 1998. The Trade Practices Act 1974 generally does not allow competitors to make cooperative agreements, but if The Australian Competition and Consumer Commission (ACCC) is permitted to make exceptions for competitors making agreements among themselves. The ACCC and the Payments Systems Board are encouraged to work together regarding access and rivalry through the Payment Systems (Regulation) Act 1998.
Reserve Bank Board
The Reserve Bank Board consists of nine members in total. These members include the three ex officio members of the Board, consisting of the Governor of the Reserve Bank, who is Chairman of the Board, the Deputy Governor of the Reserve Bank, who is the Deputy Chairman of the Board, and the Secretary to the Treasury.
In addition, the Board is composed of six external members who are appointed by the Treasurer for a period of five years. According to section 17(1) of the Reserve Bank Act, members of the Board are not allowed to be a director, officer, or employee of an institution that is authorised to take in deposits. Excluding changes in the number of directors, the structure of the board of directors has remained unchanged since 1951.