Financial Stability Review – March 2004 Foreword

As part of its longstanding responsibility for the stability of the Australian financial system, the Reserve Bank has periodically outlined its assessment of the state of the financial system, including in its Annual Report. This Financial Stability Review is the first occasion on which a more detailed assessment has been published in a stand-alone publication – a practice that will be continued half-yearly from now on.

In publishing the Financial Stability Review, the Reserve Bank has joined a growing number of central banks that are addressing their stability mandates through publishing a formal report. In some cases, including that of Australia, the introduction of such reports partly reflects changes in the structure of financial regulation that have thrown the role of central banks in safeguarding financial stability into sharper relief. In Australia's case, the supervision of individual financial institutions was transferred to the Australian Prudential Regulation Authority (APRA) in 1998, with the Reserve Bank maintaining its responsibility for the overall stability of the financial system.

The Financial Stability Review will be tabled at the March and September meetings of the Council of Financial Regulators, and published shortly thereafter. The Council, which is chaired by the Reserve Bank, was established in 1998 to promote co-operation between the main financial regulators in Australia – the Reserve Bank, APRA and the Australian Securities and Investments Commission. Its charter was revised in June last year to provide for a stronger focus on stability issues, including the promotion of co-ordination arrangements between regulators for handling any episodes of financial instability. At the same time the Commonwealth Treasury became a member of the Council.

This inaugural issue of the Financial Stability Review has three main parts. The first provides an assessment of the macroeconomic environment in which the financial system is currently operating, concentrating on the balance sheets and net income flows of the household and business sectors. The second provides a reading on the strength of the financial system itself. The third summarises some of the initiatives underway in Australia and overseas to improve the regulatory infrastructure of the financial system. The Review also contains two articles.