The Stability of the Financial System

It is an honour to be here today at the University of Sydney delivering the eighteenth R.C. Mills Memorial Lecture. It is customary to start a Memorial Lecture by paying homage to the person in whose memory the lecture is held, but I would like to break with tradition and do that a little later where it fits in more naturally. On nearly every occasion when I speak before an audience such as this, I talk about some aspect of monetary policy. That is what is expected of me because people – very naturally – associate central banks with monetary policy. Monetary policy’s major task is to contribute to sustainable economic growth through maintaining low inflation, as we have been doing with some success during the 1990s. I have talked about this at length elsewhere, and I am sure that informed people are well acquainted with the current monetary policy regime in Australia, which is based on an inflation target, an independent central bank and a floating exchange rate. As a result, I do not wish to take up any more time going over old ground. The subject of financial stability does, however, call for some public explanation. For a start, a lot of people are unsure of exactly what it means. Additionally, there are those who are unsure of what its relation is to central banking, which, as I have just said, they usually associate with monetary policy. In the remainder of my lecture I would like to cover both these topics, plus two other issues: what does the Reserve Bank need to do to fulfil its financial stability responsibilities; and whether the changes we have seen in the structure of financial systems over recent decades have made the system more or less stable.