The Reserve Bank of Australia (RBA) says it has been able to cope with the liquidity crunch that has gripped the financial system since last year.

The RBA said its official cash rate had deviated from its target on just nine days during this financial year, and by no more than two basis points.

Demand for cash in the money market had ebbed and flowed, particularly since August 2007 when the effects of the global credit crunch were being felt.

The RBA had to adjust its exchange settlement balances simultaneously to meet demand for funds, with the balance averaging almost $3 billion in August and peaking at $6.9 billion in December.

“On the whole, the bank’s ability to gauge the extent of these fluctuations in demand has been successful as the cash rate has continued to trade at, or close to, the target,” RBA assistant governor for financial markets Guy Debelle said today in a Sydney speech on open market operations.

In 2006/07, the cash rate deviated twice, and by no more than one basis point.

In contrast, in 2002/03, the rate deviated 27 times.

The RBA has been working with the Australian Prudential Regulation Authority and market participants to strengthen arrangements for dealing with extreme market disruptions.

“In such circumstances, the bank would be willing if an institution is experiencing serious funding difficulties to provide funds against RMBS (residential mortgage-backed securities) collateral to which it is `related”,” he said.

“Reflecting that, both the bank and APRA have encouraged depository institutions to package residential mortgages they are retaining on their balance sheet into a securitised form, as a means of accessing contingent financing from the bank.”

Dr Debelle said eight institutions had created “self securitised” RMBS and a number more were in the process of doing so.

Throughout the past year, the composition of the RBA’s list of eligible collateral has altered significantly to include securities with a remaining term longer than 12 months, as well as RMBS and asset backed commercial paper (ABCP).

But Dr Debelle said the RBA’s holdings of RMBS and ABCP had been reasonably low since the last change was made in October.

“Outstanding repos (repurchase agreements) in these securities have never been more than $3 billion, compared to a total repo portfolio of between $30 billion and $60 billion,” he said.

“Largely, this is a function of how often these securities have been offered to the bank in its market operations.

“That is, the Reserve Bank is certainly no less inclined to lend funds against asset-backed collateral than against other asset types.”

Dr Debelle said that during the past year, the RBA had made little use of foreign exchange swap products to manage domestic liquidity.

This was in contrast to earlier years when it held significant amounts of foreign currency.

The assets were held to match large deposits placed with the RBA by the federal government and the Future Fund.

Recently, as government deposits again began to increase, the RBA had opted to match this with a wider repo portfolio.

“The reflects a conscious decision by the bank to provide an increased level of support to the domestic money market through the period of the turmoil,” he said.

“As a result, the bank’s repo portfolio is now larger than it has ever been and, approaching $60 billion, is almost double its size of a year ago.”
AAP