RDP 2016-11: Identifying Interbank Loans from Payments Data 2. The Australian Payments System and IBOC Market

This section is based on RBA Bulletin articles that analyse Australia's high-value payments system and IBOC market (Baker and Jacobs 2010; Gallagher, Gauntlett and Sunner 2010; Fraser and Gatty 2014), and information available on the RBA website (RBA 2009a, 2009b, 2012, 2015b, 2015c, 2016). Readers familiar with the Australian payments system and IBOC market may skip this section.

Australia's high-value payments system is the Reserve Bank Information and Transfer System (RITS). RITS is used by banks and other approved institutions to settle payment obligations on either a real-time gross settlement (RTGS) basis or periodically on a multilaterally netted basis. RITS is open on days when banks are generally open for business in Sydney or Melbourne.

RTGS transactions are entered into RITS either directly (known as ‘cash transfers’) or indirectly via external feeder systems (either the SWIFT Payment Delivery System or Austraclear). The Austraclear system provides settlement facilities for wholesale debt securities and money market transactions. The SWIFT system is predominantly comprised of payments between banks' customers and the Australian dollar leg of foreign exchange transactions.

Market liaison suggested that the majority of IBOC loans were executed using cash transfers, but that some participants preferred to use Austraclear. Due to the large number of SWIFT transactions (91 per cent of all RTGS transactions during 2009/10 – see Gallagher et al (2010)), and market liaison suggesting that this payment system was unlikely to be used to settle IBOC loans, our research only uses RTGS transactions entered either directly or via Austraclear.^[4]

RITS transactions are settled using Exchange Settlement Accounts (ESAs). These are accounts ‘held at the Reserve Bank of Australia by financial institutions to settle financial obligations arising from the clearing of payments’ (RBA 2009b). ESAs are mandatory for all Australian-licensed banks and for other authorised deposit-taking institutions with RTGS transactions of at least 0.25 per cent of the total value of RTGS transactions. Financial institutions that do not meet these requirements may also be eligible for ESAs. For simplicity, this paper will refer to any financial institution with an ESA as a ‘bank’.

The IBOC market is used by banks to manage their liquidity. ESAs must remain in credit at all times; banks borrow in the IBOC market to ensure they satisfy this requirement (as the cost of overnight borrowing from the RBA is 25 basis points above the target cash rate). The RBA pays daily interest on ‘surplus’ ESA balances at 25 basis points below the target cash rate.^[5] This below-market rate provides an incentive for banks to lend surplus ESA balances in the IBOC market.

The RBA offers banks interest-free intraday liquidity via repurchase agreements. This provides an incentive for banks to conduct their IBOC activity towards the end of the trading day, when uncertainty about their end-of-day ESA balance positions is at its lowest.

A bank with aggregate RTGS transactions that constitute less than 0.25 per cent of the total value of RTGS transactions may execute its RTGS transactions using an agent, rather than using its own ESA. IBOC loans with banks that use a settlement agent are explicitly excluded from the RBA's IBOC Survey. However, since our algorithm identifies IBOC loans via their corresponding RITS transactions, agent activity may cause overestimation of agent banks' IBOC market activity (this is also a potential problem noted in international studies – see, for example, Furfine (1999) and Armantier and Copeland (2015)) and may confound comparisons between the IBOC Survey and algorithm output. That said, with use of an agent restricted to banks that constitute a small fraction of RTGS transactions, and with IBOC loans typically used to manage liquidity needs that result from RTGS transactions, we do not think agent activity is likely to cause material errors.

Footnotes

Ex ante exclusion of some transactions improves the efficiency of the algorithm and reduces the frequency with which the algorithm mistakenly identifies IBOC loans. [4]

Prior to November 2013, any positive ESA balance was defined as a ‘surplus’. The system of standing facilities operated by the RBA, and the definition of a ‘surplus’, changed in November 2013 to accommodate the settlement of direct entry obligations after the IBOC market has closed. Details of these changes are beyond the scope of this paper; see Fraser and Gatty (2014) for more information. [5]