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Some of the best RBA analysis going around – system stability

Christopher Joye
Sunday, October 03, 2010

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Twice a year, the RBA produces the Financial Stability Review (FSR), which is basically a health-test for Australia's financial system. To my eyes, it is probably a more difficult document to deliver – in certain respects – than the Statement on Monetary Policy since it is constantly trying to break new ground with the data and analysis it presents (and I am guessing that the team that works on it is smaller).

The FSR is overseen by Dr Luci Ellis, who is an impressive lady and will, I hope, soon be the central bank's first-ever female Assistant Governor. While I would never advocate pushing a candidate based on their identity, it is disappointing that the RBA has never had a female in this top job.

Another outstanding candidate for an Assistant Governor’s role has to be Dr Anthony Richards, who has pioneered a lot of critical analysis of Australia's housing market. Dr Richards is currently head of the RBA’s economic analysis group, and is analogous to its chief economist under Assistant Governor Lowe. Dr Richards has, I believe, also been one of the key advocates – alongside Stevens, Lowe and Kent – for a more activist role for monetary policy vis-à-vis financial stability risks. I covered this in great detail last week, and after considerable reflection have become more sympathetic to the Bank’s way of thinking, as Nicholas (brother of David) Gruen has noted with some disappointment.

Turning back to the FSR, it really is an amazing feat. I have excerpted below some of the more interest charts, but it is worthwhile reviewing the whole thing. Before discussing them, I would recommend you keep an eye out for Luci Ellis's speech next week. On this note, I hope she pushes the envelope and takes a leaf out of the book of the Bank of England's outstanding Andy Haldane. RBA speeches tend to be interesting, but rarely engaging or exciting. That is, they are unnecessarily dry. If nothing else, it is just good public relations maintaining a stimulating dialogue with the community (as opposed to a dialogue that turns folks away).

Off the top of my head, some of the more important subjects Dr Ellis could address include:

  1. What the heck do we mean by "financial stability" (ie. define it).
  2. Reference Rismark's work on the secular confusion between the riskiness of a diversified portfolio of housing as proxied by a broad-based house price index, and the economic risks borne by Australia's individual home owners, which, as we have demonstrated, are around five to six times more volatile than the three to four per cent per annum risk associated with our national hedonic index.
  3. Let's not dip back into self-aggrandizing policymaker speak about all the different initiatives they undertook to save the nation’s bacon. Let's be a bit more brave and emphasise the role of providence in Australia's recent success and the need, therefore, to be constantly vigilant about protecting our vulnerabilities.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Sunday, October 03, 2010

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