Background and overview of the bill
The bill proposes that an ARDB be established as a third board of the Reserve
Bank of Australia (RBA). In this chapter, the committee outlines the current
role and functions of the RBA and its two boards, before examining the role of
the previous Commonwealth Development Bank and the proposed ARDB.
Current role of the Reserve Bank of
The Explanatory Memorandum indicates that the RBA already has the
necessary regulatory framework, powers and relevant duties legislatively
assigned to be able to constitute the ARDB as a third Board within the Reserve
Bank of Australia.
The RBA is Australia's central bank, and is responsible for:
Australia's monetary policy;
maintaining the stability of the financial system;
ensuring the stability, efficiency and competitiveness of the
providing certain banking services to the Australian government,
overseas central banks and official institutions;
designing and issuing Australia's banknotes;
managing Australia's gold and foreign exchange reserves; and
providing specialised banking services to the Australian government,
various government agencies, and a number of overseas central banks and
The Reserve Bank Act provides that the RBA is to act as a central bank
and, subject to that Act and the Banking Act 1959, the RBA 'shall not
carry on business other than as a central bank'.
Section 8 of the Reserve Bank Act outlines the RBA's general powers, which are
The Bank has such powers as are
necessary for the purposes of this Act and any other Act conferring functions
on the Bank and, in particular, and in addition to any other powers conferred
on it by this Act and such other Acts, has power:
- to receive money on deposit;
- to borrow money;
- to lend money;
- to buy, sell, discount and re-discount bills of
exchange, promissory notes and treasury bills;
- to buy and sell securities issued by the Commonwealth
and other securities;
- to buy, sell and otherwise deal in foreign currency, specie,
gold and other precious metals;
- to establish credits and give guarantees;
- to issue bills and drafts and effect transfers of
- to underwrite loans; and
- to do anything incidental to any of its powers.
The RBA currently has two boards that, between them, are responsible for
determining the RBA's policies on the matters entrusted to the bank. These
boards are the Reserve Bank Board and the Payments System Board. The Reserve
Bank Board is responsible for the RBA's monetary and banking policy and the
RBA's policies on all other matters except for its payments system policy,
which is the responsibility of the Payments System Board.
The Reserve Bank Board is chartered with ensuring, within the limits of
its powers, that the RBA's statutory powers, other than those that relate to
the safety and stability of the payments system, are exercised in such a manner
as will best contribute to:
the stability of the currency of Australia;
the maintenance of full employment in Australia; and
the economic prosperity and welfare of the people of Australia.
Within the limits of its powers, the Payments System Board is charged
with ensuring that the RBA's payments system policy and the exercise of its
statutory powers that relate to the payments system are exercised in a way that
will best contribute to:
controlling risk in the financial system;
promoting the efficiency of the payments system; and
promoting competition in the market for payment services,
consistent with the overall stability of the financial system.
In relation to the RBA's powers and functions under Part 7.3 of the Corporations Act
2001 that address the licensing of clearing and settlement facilities, the
Payments System Board is required to exercise these in a way that will best
contribute to the overall stability of the financial system.
Both boards are required to ensure, again within the limits of their
powers, that the policies they develop are 'directed to the greatest advantage
of the people of Australia'.
Commonwealth Development Bank and the RBA's former role in rural credit
In his second reading speech, Senator Xenophon stated that the proposed
ARDB would, 'in a sense', be similar to the former Commonwealth Development
The following section provides a brief outline of the history of the
Commonwealth Development Bank and the RBA's former role in rural credit.
History of the Commonwealth
Between 1960 and 1974, the main function of the Commonwealth Development
Bank was to provide finance related to primary production and industry
undertakings (particularly small undertakings). In 1974, the bank was allowed
to provide finance for tourism development projects. In 1978, the lending
activities of the bank were widened further to cover business activities
generally, with a focus on small business.
Lending would occur in cases where the provision of finance was desirable and
the finance was not otherwise available, either in full or in part, on
reasonable and suitable terms and conditions.
The legislation also provided that the Development Bank should have regard
'primarily to the prospects of the operations of that person becoming, or
continuing to be, successful' and not necessarily 'the value of the security
available in respect of that finance'.
Along with the Commonwealth Bank of Australia (CBA), the Commonwealth
Development Bank was converted from a statutory authority into a public company
The Development Bank was made a subsidiary of the CBA.
Following the sale of the Commonwealth of Australia's last holding in the CBA,
in July 1996 the fully privatised CBA purchased the Commonwealth of Australia's
remaining shares in the Development Bank. The Development Bank was
absorbed into the CBA's business banking division.
RBA's former role in rural credit
In addition to the role previously performed by the Commonwealth
Development Bank, the RBA also had a former role in the provision of rural
credit. The RBA provided the following history of this function:
In the past, the RBA (and prior to 1959, the Commonwealth
Bank) has had a broader role in the rural sector. Between 1925 and 1988 the
Rural Credits Department (RCD) provided seasonal credit for periods of up to
one year to statutory marketing authorities and rural cooperative associations
to facilitate the marketing, processing and manufacture of primary produce.
It also extended research grants and fellowships for projects associated
with the promotion of primary production.
The RCD was created when the size of the rural sector meant
that its demand for seasonal finance was very large relative to the capacity of
private financial markets. By the 1980s, however, the commercial banking system
had become the primary source of rural credit, and bank lending techniques had
become well suited to the variable financing needs of rural producers. A major
part of RCD advances had started moving to the financial markets in 1979, when
the Australian Wheat Board began issuing commercial paper. Interest rates on
RCD loans had also become more closely aligned with commercial rates and, by
mid-1984, all were at fully commercial rates.
Treasury noted that the 1981 Campbell Committee inquiry into the
financial system recommended the phasing out of the RBA's Rural Credits
Department 'with the view that private markets were well equipped to meet
rural financing needs'.
The proposed ARDB
In his second reading speech, Senator Xenophon advised that the
bill was intended to provide a means to 'overhaul' rural policy by establishing
a body with 'the power to make a real, long term difference'. Senator Xenophon
argued that 'government grants and programs were no longer enough':
Rural and regional Australia is struggling. We have heard
over and over again the challenges communities are facing, and how they are
trying to survive. In recent years, they have borne the brunt of extreme
weather events, a high Australian dollar, and a lack of support from State,
Territory and Federal Governments...Rural and regional areas are, in many ways,
the lifeblood of our country. Certainly, our farmers play an incredibly
important role both in our economy and our food security. Without their
produce, we are all vulnerable. People living in rural and regional areas face
challenges on almost every front. In terms of healthcare, of education, of aged
care, and of employment, they have to fight to be counted. If rural and
regional communities do not receive the support they so desperately need, the
impact on the rest of Australia will be significant, in both economic and
Senator Xenophon concluded:
We cannot ignore this problem any longer. Australians living
in rural and regional communities deserve better. They deserve security, and
they deserve to know the Government is taking meaningful steps to fix this
problem. The measures in this bill will bring about real and long lasting
change. And that change will not only benefit rural and regional communities,
but the rest of Australia as those communities flourish.
Purpose of the bill
The ARDB would be 'a specific entity tasked with examining, reconstructing
and improving the financial status of the Australian agricultural sector and
its associated industries and infrastructures'.
According to the Explanatory Memorandum, the ARDB activities would relate to
agriculture and associated industries and infrastructure and help to develop:
the resilience, capabilities and ongoing financial viability of
Australia's food and natural fibre systems;
a profitable farming sector exercising good stewardship of the
resources associated with production;
effective ways to mitigate the impacts of adverse events,
particularly those associated with natural disasters, market failures and
inadequate commercial financial arrangements; and
the capability of agriculture to contribute more fully,
responsibly and reliably to the economic prosperity and welfare of the people
of Australia and the peoples of other nations.
The bill seeks to empower the ARDB to do this by determining and giving
effect to the RBA's 'rural reconstruction and development policy'. The rural
reconstruction and development policy would relate to the following three
The 'facilitative task'—to aid better financial decision making
by businesses—involves researching, reporting on and helping to develop the
resilience, capabilities and ongoing financial viability of Australia's food
and natural fibre systems, as well as any other Australian industries or
sectors that need, or may need, reconstructing or development. The bill would
require that this task must be conducted in a 'timely' way.
The 'development task'—to help ensure that needed development
funds are offered from appropriate sources in ways that support capital
formation and reduce risk—involves developing and offering financial
arrangements, and reviewing financial arrangements, to contribute to the
development of Australian agriculture, associated industries and
The 'reconstruction task'—to assist financial
transactions—involves 'fairly, reasonably and effectively' reducing or
eliminating the debilitating effect of those financial arrangements related to
financial arrangements that, because of certain specified circumstances, reduce
or threaten the ongoing viability or sustainability of enterprises in
Australian agriculture or associated industries.
The ARDB would be required to ensure, within the limits of its powers,
that the rural reconstruction and development policy was 'directed to the
greatest advantage of the people and industries of Australia'.
The ARDB would also be required to ensure that the RBA's powers were exercised
in a manner that best fulfilled the three set tasks in ways that were timely,
equitable and transparent, and with due regard to economic responsibility.
The bill proposes that to give effect to the policy, the ARDB would have
the power to use the capital the RBA holds as Australia's central bank.
Section 28 of the Reserve Bank Act would be amended to allow the capital held
by the RBA for its functions as a central bank to also be used for the RBA's
rural reconstruction and development policy (a policy that the bill would, if
passed, require the ARDB to establish).
Reserve Bank Reserve Fund
The RBA's capital includes the Reserve Bank Reserve Fund.
In its most recent annual report, the RBA described the primary purpose of the
Reserve Fund as providing 'a capacity to absorb losses when it is necessary to
In October 2013, the government announced a grant of $8.8 billion to
strengthen the position of the Reserve Fund. The Mid-Year Economic and
Fiscal Outlook released in December 2013 provided the following information
on the types of losses the Reserve Fund needed to absorb in recent times
and the reasons for the government's decision to make a grant to the Fund:
The strong and sustained appreciation of the Australian
dollar from 2009 caused the RBA to record large financial losses in 2009–10 and
2010–11 as the value of its foreign currency assets declined in Australian
dollar terms. This coincided with global interest rates declining to historical
lows, reducing the RBA's underlying earnings.
The resultant losses were absorbed by the Reserve Bank
Reserve Fund (RBRF), reducing the balance to significantly below the level now
considered prudent by the Reserve Bank Board based on its most recent
assessment of the risks to the RBA's balance sheet...
The low level of the RBRF has not posed an immediate risk to
the solvency of the RBA and has not impaired its operations. Nevertheless, on
current projections, it would take many years to build the RBRF to the level
deemed prudent by the Board—15 per cent of assets at risk—through the usual
channel of retaining profits, leaving the RBA financially exposed in an
uncertain global environment.
The Government has therefore decided, following consultation
with the Reserve Bank Governor, to provide a one-off $8.8 billion grant to the
RBA to strengthen its financial position. The grant safeguards the credibility
and independence of the RBA, putting beyond doubt its ability to perform its
key functions at the heart of Australia's financial system and to meet any
challenges that may lie ahead in a volatile global economy.
It should be noted that if a policy determined by the Reserve Bank Board
and a policy determined by the ARDB are inconsistent, the Reserve Bank Board's
policy prevails and the ARDB's policy has effect as if it were modified to
remove the inconsistency. The Treasurer would resolve any disagreement between
the Reserve Bank Board and the ARDB as to which of the Boards would be
responsible for determining the Bank's policy on a matter.
The bill does not contain a financial impact statement.
The membership of the ARDB would consist of nine members, including the
RBA Governor, a member of the Reserve Bank Board or an RBA staff member
(the RBA's representative), and seven other members appointed by the
Of the seven members, the Treasurer would appoint for a specified period not
exceeding five years—an economist; an accountant; a banker; a representative of
the States and Territories; and a farmer. They would be required to have rural
and agricultural experience.
Relationship with Parliament
Under proposed subsection 10BB(5), a House of the Parliament, a
committee of a House, or a joint committee of both Houses may request the
to take a matter into account in performing the Board's
to report to the House or committee on a matter relevant to the
While the provisions of the bill are straightforward in articulating the
intention to establish the ARDB, the implications of establishing such an
entity raised some concerns. In the following chapter, the committee examines
the perceived need for the establishment of the proposed ARDB.
Navigation: Previous Page | Contents | Next Page