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The RBA governor has officially commenced his position as chair of the Committee on the Global Financial System, which monitors international financial markets and contributes policy recommendations to support the stability and efficiency of these markets.
Mr Lowe will be leading the committee for the next three years, replacing retiring chair William C. Dudley, who chaired the committee since January 2012. Mr Dudley also retired from his position as president and CEO of the Federal Reserve Bank of New York this month.
The Committee on the Global Financial System, established in 1971, mandated a Working Group to examine global trends in bank business models, performance and market structure over the last decade, as well as their implications on the stability and efficiency of financial markets globally.
In its Structural changes in banking after the crisis report, the committee’s Working Group provided recommendations for financial markets and policymakers, suggesting they:
- remain attentive to gaps in the flow of credit, which is expected to slow down in countries like Australia;
- act early in addressing problems associated with non-performing loans;
- monitor the evolution of risk-taking within the banking sector and financial system more broadly; and
- better use and share data to enhance surveillance of systemic risk, including using data to assess the role and implications of fintech and the transferring of activity and risk to the non-bank sector.
Last month, the new chair of the Committee on the Global Financial System cautioned that the build-up of debt and bad loans in China over the last decade is highly risky to Australia because, historically, such circumstances have “almost always” led to a slowdown in GDP growth or a financial crisis.
“Among the largest economic risks that Australia faces is something going wrong in China,” Mr Lowe said, noting that China is Australia’s largest trading partner, accounting for nearly one-third of exports and around one-fifth of imports.
“As the economic relationship between our two countries broadens and deepens, developments in China are having a material impact on more and more Australian industries: it is more than just about resources.”
He added that the risk to Australia is compounded by the “complicated” nature of China’s financial system: due to centralised controls, businesses have restricted access to credit from state-owned banks, resulting in them sourcing funds from non-bank financial institutions with higher interest rates and riskier terms.
However, contrary to outsider scepticism towards China’s willingness to address economic vulnerabilities, Mr Lowe remained “optimistic” about the nation’s ability to reform its financial system, saying that authorities are responding to the risks as a priority before it becomes a financial crisis.