vy RESERVE BANK OF AUSTRALIA

Speech

Bagehot and the Lender of Last Resort - 150
Years On

Brad Jones
Assistant Governor (Financial System)

36th Australasian Finance & Banking Conference
University of New South Wales, Sydney - 14 December 2023

Good morning. This event is a highlight on the academic conference circuit so I thank the Institute of
Global Finance for the invitation to offer some remarks today.

This year marks the 150th anniversary of Walter Bagehot's immortalised Lombard Street, where he
spelt out the terms by which central banks should act as the 'lender of last resort' to help stabilise
the financial system. As the banking turmoil offshore earlier this year demonstrated, policymakers
continue to wrestle with the issue 150 years later.

I will begin today with a brief history of the origins of emergency central bank lending, internationally
and in Australia. I will then discuss how the application of last resort operations has evolved around
the world in more recent times. Finally, I will conclude with a review of how these wider
developments have been reflected in aspects of the Reserve Bank's own framework.

Financial stability and the lender of last resort -a
brief history

Maintaining financial stability has been a cornerstone responsibility for central banks for as long as
they have been in existence. Why so? Because financial stability is a public good and central banks
occupy a unique position at the heart of the financial system, reflecting their ability to create safe
liquid assets on demand. But how central banks have discharged this responsibility has evolved and
been subject to much debate, right up to present times. Their role as lender of last resort - nested in
a wider set of financial stability responsibilities - has long featured in this discussion. !2!

The earliest direct reference to the lender of last resort concept was traced to Sir Francis Baring
following a wave of bank runs in 1797, when he argued for the Bank of England (then financing war
against the French) to furnish stressed institutions with liquidity as private sources were exhausted.

Henry Thornton progressed these ideas further in 1802 when setting out the considerations,
including moral hazard, that central banks must balance and that still resonate today:

4 The relief should neither be so prompt and liberal as to exempt those who misconduct their
business from all the natural consequences of their fault, nor so scanty and slow as to
deeply involve the general interest. {31 9

But it was not until 1873 that Bagehot counselled that to avert panic, central banks should lend early
and freely to solvent firms, against good collateral and at 'high' rates. [*1 This prescription was
motivated by the financial panic that followed the collapse of London's biggest bill broker, Overend &
Gurney, in 1866 - a panic that was only contained by the Bank of England's provision of liquidity to
the financial system after its initial refusal to support the broker. Central to Bagehot's axiom was the
idea that public confidence could be enshrined, and an unnecessary credit contraction averted, by a
conditional commitment from the central bank to provide liquidity insurance in a crisis. By the end of
the 19th century, the Bank of England had become well practised in last resort lending.

On the other side of the Atlantic, the establishment of the Federal Reserve System in the shadows of
the First World War was a direct response to the liquidity crisis that engulfed the American financial
system in 1907. Up until such time, it had been left to private financiers like JP Morgan to coordinate
rather ad hoc responses to runs on financial institutions. '°! A century on, the global financial crisis
saw the Federal Reserve invoke emergency lending powers - allowing it to lend to non-bank
institutions like Bear Stearns and AIG - for the first time since the Great Depression.

If the Federal Reserve system was in large part born out of the 1907 liquidity crisis in the United
States, the lineage of today's Reserve Bank of Australia can be traced to the two major financial
upheavals of the 1890s and 1930s. Domestically, the former was even more devastating than the
latter. The deposit base of trading banks collapsed by 20 per cent during the 1890s crisis and more
than half of Australia's trading banks of note issue were forced to suspend payment - a third of
whom never reopened. !°! Partly as a result, the 1911 Act establishing the Commonwealth Bank
(what would later become the Reserve Bank) was a compromise between those pressing for a central
bank with expansive powers over private banks and those seeking to nationalise the banking

sector. [7] And in the aftermath of the Great Depression, when the Commonwealth Bank was
critiqued in some circles for failing to extend emergency liquidity assistance, the 1937 Royal
Commission into the Monetary and Banking Systems highlighted the case for a central bank with last
resort lending powers:

4 When the crisis was imminent, prompt and decisive action by a central bank might
have ... gained time for others that were sound to rearrange their affairs in an orderly
manner without suspension. [21 9

But in contrast to a number of other countries, last resort lending has been conducted sparingly in
Australia. Australian banks received last resort loans from the Bank of England on numerous
occasions prior to Federation, though this was a period where the Australian banking and exchange

rate systems represented an extension of their British counterparts. Since Federation, last resort
loans have been extended only to the Primary Producers Bank in 1931 and to three banks supporting
illiquid building societies in 1974 and 1979. In a different context, the Reserve Bank also provided a
liquidity facility to support the orderly takeover of the Bank of Adelaide in 1979. !°1

It is beyond the scope of these remarks to delve too deeply into why last resort lending has been
deployed sparingly in Australia, but I will briefly touch on three elements.

The first is that the Australian financial system entered the largest international crises of the past
century - the Great Depression and global financial crisis - with fewer vulnerabilities than elsewhere.
But this resilience was forged out of the earlier stresses of the 1890s and the early 1990s
respectively, including the regulatory responses that followed. !1°] Take the 1890s crisis, which left in
its wake a lasting, cautionary impression on a generation of bankers and regulators. And so just three
banks failed in Australia during the Great Depression, compared with more than 9,000 in the United
States. !11] Decades later, the distress experienced by some Australian lenders in the period from the
late 1970s to the early 1990s, coupled with substantial regulatory reforms, led to a restructuring of
the Australian financial system. This played some role in the system avoiding the worst of the credit
quality problems experienced internationally during the global financial crisis. More generally, it is
notable that no Australian bank depositor has lost money since Federation, with the exception of
depositors at one small bank in the 1930s who lost just 1 per cent of the value of their deposits. {121

A second explanation for why last resort lending has rarely been used in Australia can be traced to
the numerous instances where private sector liquidity support has been extended as an alternative to
direct official support. !+?] Examples can be found during the Great Depression, the 1970s and 1990s
recessions, and again during the global financial crisis. '*41 A related lesson is that the private sector
is more likely to find solutions to its own problems when prospective suitors have a firm
understanding of the risks they are taking on (a task usually made easier in more homogenous
banking systems). As the Lehman episode illustrated, complex business models and opaque risks on
the balance sheet of troubled institutions can serve as a strong deterrent to potential buyers.

A third explanation relevant to recent decades relates to the Reserve Bank's willingness to flexibly
deploy its open market operations (OMOs) during episodes of system-wide liquidity stress, as a
means of forestalling larger problems. I will return to this later.

Last resort lending to banks as a public good -
the traditional framework

In the normal course of events, the liquidity operations of central banks are prosaic affairs. Dealing
rooms stand ready to supply eligible institutions enough liquidity against high-quality collateral
(through OMOs) to ensure the demand for cash can be met at the target cash rate. !°] A number of
central banks, including the Reserve Bank, also maintain standing liquidity facilities to ensure
institutions can complete their daily payments without disruption.

But last resort lending by central banks is fundamentally different. It involves the dire circumstance
where stability of the financial system is in question. For most of history this has meant lending to

banks, reflecting the pivotal intermediation role they play in the economy and the liquidity risk
inherent in a business model where illiquid long-term loans are funded with deposits that are
redeemable on demand ('runnable'). We have long accepted that liquidity and maturity
transformation of this sort is economically and socially valuable - requiring banks to fully self-insure
against liquidity risk by holding only the most liquid assets (as per the 'Chicago Plan' and 'narrow
banking') would undermine their ability to extend credit and see credit risk concentrated in less
regulated institutions.

However, while depositors and money markets might do a decent job of discriminating sound banks
from less sound ones in normal times, solvency concerns or liquidity stress at one institution can
quickly spread in a panic. Because banks are highly leveraged, there need only be a question over
the value of some assets to affect perceptions of solvency and set off a run on deposits. If the
withdrawal of liquidity turns indiscriminate, overwhelming pressure can bear down on institutions that
were healthy just a short time earlier. A self-fulfilling panic can ensue as banks are left to raise
liquidity through asset fire sales, further depressing asset values and threatening the solvency of
previously sound institutions. This scenario has the hallmarks of a market failure; left unaddressed, it
risks harming the broader financial system and economy at large.

Enter the central bank. Only it can act as the backstop provider of emergency liquidity insurance to
fundamentally sound institutions in bad states of the world. In such circumstances, last resort lending
can spare society from the severe (but otherwise avoidable) disruptions to the economy associated
with bank failures.

The evolution in last resort operations - the
international experience

Bagehot's prescription - that to avert system-wide panic, central banks should lend without limit to
solvent firms against good collateral at penal rates - might seem straightforward enough. But on
closer inspection it provides only the most general counsel. Since 2008, central banks have had to
confront a range of issues that were not addressed or foreseen in Bagehot's time. Some of these
have presented significant governance and operational challenges. Others have connected to deeper
questions about the limits to public institutions insuring society against bad states of the world and
whether extending assistance to some individual institutions and not others risks undermining the
principles of capitalism. !*°1

There is no uniform approach to tackling these issues, reflecting differences in the legal authority of
central banks and the distinctive features of domestic financial systems. Nonetheless, it is possible to
trace out areas where a degree of commonality has emerged in the last resort operations of central
banks over recent years (Table 1).

Table 1: Stylised Evolution of Last Resort Operations

Governance and
operational arrangements

Communication

Connection with
prudential regulation

Moral hazard concerns

Eligible counterparties

Eligible Collateral

Scope of last resort
operations (beyond OMO)

Stigma

Lending to insolvent
financial institutions

Pre-Global Financial Crisis

Unclear, ad hoc

'Constructive ambiguity'

Minimal

Significant

Mostly banks

Mainly government securities and
limited transparency over haircuts

Mainly bilateral, with outright
market interventions mostly
confined to FX

Not addressed

Now

Formal frameworks and clear playbooks

'Constructive clarity'

Integrated with recovery and resolution plans
Somewhat less acute (tighter regulation,
possible replacement of executives, equity

holders written down)

Banks, non-bank lenders and financial market
infrastructures

Wider range of assets and more transparency
over haircuts

Bilateral and sector-wide facilities, alongside
outright intervention in more markets
Remains problematic (but partly mitigated by

disclosure on a lagged and/or aggregate basis)

Not permitted

(or only with a government indemnity)

In my assessment, the most consequential development has been evident in central banks
formalising, and more openly communicating, their framework for last resort operations.

Prior to (and even during) the global financial crisis, arrangements for last resort lending were often

hastily compiled without the benefit of formally articulated frameworks, nor were they well
communicated; less than half of the central banks in advanced economies had publicly released

statements on their emergency lending policies, some of which were deliberately vague. !+"! While

retaining elements of flexibility, clearer frameworks have since become standard. Moreover, the
previous regime of 'constructive ambiguity' has given way to 'constructive clarity' in public
communications. This reflects a few considerations:

¢ It facilitates the recovery and resolution plans now required by prudential regulators that were
mostly absent prior to the financial crisis. [+®!

¢ It acknowledges that the ad hoc approach of yesteryear was unhelpful for decision makers and
could exacerbate market uncertainty.

¢ The issue of moral hazard has become somewhat less vexed, reflecting tighter prudential
liquidity requirements and severe, well-telegraphed consequences for the leadership of (and
equity holders in) mismanaged institutions that require public support.

Another feature of the evolution in last resort operations has been to encompass a wider set of
institutions, collateral and asset markets.

For a start, bilateral lending to banks is no longer the only form of emergency lending envisaged -
most central banks now explicitly incorporate liquidity facilities for key financial market
infrastructures. And some, like the US Federal Reserve and Bank of England, have gone further by
establishing sector-wide liquidity facilities for specific investment vehicles, like money market funds
(US) and pension and insurance funds (UK). This recognises the key intermediation role these
entities now play in the US and UK economies and the country-specific features of their operations
that can leave them vulnerable to liquidity stress. It is worth noting here that in obtaining access to a
public liquidity backstop, these entities have had to substantially uplift their liquidity risk management
capability. !191

Collateral management practices have also changed. A wider set of collateral has been accepted in
emergency liquidity operations (and OMOs) compared with the pre-global financial crisis era. And to
assist institutions with recovery planning, central banks have increased publicly available information
on valuation haircuts.

Furthermore, central banks have displayed a greater preparedness to expand their operations beyond
emergency secured loans to include intervening (in outright terms) as a 'buyer/market maker of last
resort' during periods of dysfunction in key markets. This recognises the potential for market
dysfunction to destabilise the financial system and disrupt the flow of credit to the economy, which
can impact real activity and price stability, and therefore the attainment of central banks' monetary
policy goals. Previously, this type of activity in key financial centres was rare - the Bank of England's
intervention in the market for bills of exchange at the onset of the First World War, and the Federal
Reserve's purchases of Treasuries at the onset of Second World War, were among the more notable
examples.

One aspect of last resort lending that has seen less change relates to the stigma institutions tend to
associate with emergency borrowing from the central bank. Some fear a Northern Rock episode,
where knowledge of their intent to access emergency central bank liquidity leaked and made a bad
situation worse. Continuous disclosure requirements for banks can be a related complication in their
decision to request emergency assistance. !*°! In an effort by central banks to meet their public
accountability obligations while not making a liquidity run worse, some have resolved to disclose
emergency loans only on an aggregated and lagged basis. But balancing the various trade-offs
remains a challenge for stressed institutions and central banks alike.

Moreover, while much has changed in the past 15 years in the emergency liquidity operations of
central banks, it would be remiss not to acknowledge that one guiding principal has remained
unimpeachable - central banks should not lend to insolvent institutions. Admittedly, assessments of
solvency are not always clear-cut in stressed conditions. But the principle is close to an 'iron law' in
central banking, and there are good reasons why the doctrine has stood the test of time since at
least the days of Bagehot.!211 First, the decision to support a fundamentally unsound institution is a
distributional one most appropriately made by elected officials. Second, it would risk overstepping the
legal authority of the central bank. Third, even just the prospect of solvency support from a central

bank could exacerbate moral hazard risks. And fourth, it would likely worsen the stigma problem. If it
is accepted that the central bank will lend to insolvent institutions, those that are fundamentally
solvent but experiencing a temporary liquidity shortage will be disincentivised to request central bank
support if they feared such information could leak into the public domain. !22!

The contemporary framework for emergency
liquidity operations in Australia

The framework for emergency liquidity operations in Australia (and OMOs more generally) has been
refined in a number of respects over recent years, reflecting lessons from abroad and more specific
developments in the domestic financial system. I should emphasize that a number of these
refinements should be seen in the broader context of an ongoing effort by the Council of Financial
Regulators (CFR) to further strengthen crisis preparedness arrangements in Australia. [231

In periods of generalised stress, the Reserve Bank stands ready to quickly and significantly boost
system-wide liquidity through OMOs with eligible counterparties. !2*1 There is considerable flexibility
in these operations:

e They can be introduced at short notice and conducted on weekly, daily or intraday basis.
e Lending maturity terms can be readily adjusted.

e Requirements on collateral eligibility can be adjusted, including to allow a broader pool of
securities.

e The amount of liquidity provided at each operation can be expanded.

The elastic supply of liquidity in periods of market-wide stress can help to forestall systemic risk by
dampening the cost of liquidity and reducing uncertainty about its availability. This liquidity can in
turn flow from eligible counterparties to other financial institutions that cannot borrow directly from
the Bank.

This said, where liquidity pressures are confined to an individual institution, or in parts of the
financial system where OMOs are less well suited, the Bank can consider providing 'exceptional
liquidity assistance' (ELA) directly to eligible institutions. {2°1

In recent years the Bank has continued to refine its ELA framework and, to support financial stability,
publicly communicated its key elements to assist financial institutions in their recovery and resolution
planning. '2°1 Detailed information is readily available on the Bank's website in relation to eligible
counterparties, as well as eligible collateral for OMOs (which would also be acceptable for ELA) and
valuation haircuts. APRA also recently published its proposed prudential guidance in relation to ELA,
with the aim of ensuring authorised deposit-taking institutions (ADIs) in Australia have the right
systems and information in place to enable them to apply for ELA in short order. [*7! And as is also
now common elsewhere, the Bank maintains a detailed ELA execution playbook that sets out the
processes to be followed by CFR agencies if a request for assistance is made.

As the Reserve Bank's public guidance in 2021 set out, in the rare circumstances where an eligible
counterparty experiences acute liquidity difficulties, but is solvent, the Reserve Bank may provide ELA
if it is judged to be in the public interest. Provision of ELA and associated terms are at the absolute
discretion of the Reserve Bank, though a baseline expectation is that ELA would be provided on a
secured (repo) basis for a short period of time. Entities would also be expected to:

e Inform their regulator immediately of any liquidity concerns and their intention to request ELA,
prior to approaching the Reserve Bank.

e Have already made reasonable efforts to access private sector sources of liquidity.

e Present evidence of their solvency, including an attestation of positive net worth.

ELA can also be considered by the Reserve Bank in circumstances where APRA deems temporary
bridging finance necessary to facilitate the orderly resolution of a solvent prudentially regulated
entity.

Consistent with international experience, the scope of the Reserve Bank's emergency liquidity
operations has also been broadened and clarified over the years.

During the global financial crisis, for instance, the Reserve Bank expanded the list of collateral eligible
for OMOs to include a wider range of bank paper, asset-backed commercial paper, residential
mortgage-backed securities and self-securitisations. [28 Self-securitisations, which are structured
pools of mortgages that enable ADIs to transform illiquid loans into cash via repos with the Reserve
Bank, became a key source of collateral for ADIs accessing the Term Funding Facility during the
pandemic, and could be considered (at the Reserve Bank's discretion) for use in ELA operations.

And while the historical focus of liquidity operations in Australia has been on system-wide support for
ADIs, ELA could be considered by the Reserve Bank in relation to a domestic clearing and settlement
facility (under broadly similar conditions and arrangements for ADIs). This includes during recovery or
resolution when extraordinary measures were being taken to ensure the facility did not pose a
systemic threat to financial stability.

In addition to lending to eligible institutions on a secured basis, the Reserve Bank has long been
prepared to support financial system stability in Australia by intervening directly in financial markets.
But as elsewhere, in the years before the global financial crisis this was most evident in foreign
exchange markets. More recently it has been seen in the outright purchases of government securities
during periods of extreme market dysfunction. !2°1 As mentioned earlier, this preparedness to
intervene directly in government securities markets to restore orderly functioning has become
standard practice among central banks. It recognises that dysfunction in these markets directly
affects key areas of central bank policy, namely monetary policy implementation, monetary policy
transmission and financial stability.

That said, the Reserve Bank has yet to see the case for lending directly to investment funds in the
way that has recently occurred in the US and UK after major dislocations there. The main reason is
that, historically at least, the Australian financial system has been less directly exposed to the risk of
systemically important liquidity mismatches associated with these funds. For instance, unlike the US

we don't have a large money market fund industry that is interconnected with the banking system.
Australian superannuation funds don't have runnable liabilities in the traditional sense and, relative to
their UK counterparts, are much more restricted in their capacity to borrow, have larger cash holdings
and most do not offer guaranteed returns to members. !?@1 Nevertheless, given the industry is an
important source of funding for banks and the events of 2020 showed superannuation funds can
experience liquidity-draining events (including margin calls on currency hedges), it is important that
their approach to liquidity risk management continues to strengthen in line with APRA's revised
guidance. {311

Concluding remarks

One overarching lesson from the global disruptions of recent years is that financial system
participants - banks and non-banks alike - need to conduct their affairs with the expectation that
large liquidity shocks will occur. Put simply, the next major shock is a matter of when, not if.

At the international level, the Financial Stability Board is working closely with the IMF, the Basel
Committee on Banking Supervision and other standard-setting bodies to guide regulatory responses
to the liquidity stresses affecting the global financial system over recent years. This said, I don't think
it is too premature to offer some preliminary reflections.

First, severe liquidity stress can emerge in a financial system even in an environment of abundant
central bank reserves. The distribution of liquidity across institutions matters, not just the aggregate
level.

Second, as we saw in the US and Switzerland in March, bank deposit runs can occur far more rapidly
in the digital era than envisaged when the Basel III requirements were initiated. I don't see this
strengthening the case for the straitjacket of 'narrow banking'. But it does point to ADIs probing
whether they have pre-positioned sufficient eligible collateral with the central bank that could be
exchanged for cash at very short notice in the event of a run. !32! As an efficient form of crisis
insurance, this 'contingent collateral' helps to ensure ADIs are operationally prepared in peacetime
and reduces their need to engage in fire sales of government securities to raise liquidity in periods of
stress. To the extent that contingent collateral comprises mostly self-securitised assets (backed by
high quality loan pools) rather than securities, it is also less distortive - the asset mix of ADIs would
continue to reflect their core economic function, which is to extend loans (not to hold bonds). In
Australia, prudential guidance on self-securitised assets as a form of pre-positioned contingent
collateral was strengthened last year, while other countries are now giving similar thought to the
issue in light of recent events. [331

Third, left unaddressed, systemic risk can emerge from liquidity stress experienced by bank and non-
bank lenders that are not considered systemically important by traditional metrics. I spoke about this
recently so won't labour the point here, other than to say that the concept of 'what is systemic' needs
careful consideration. !?41

Fourth, as an increasing share of activity in the global financial system is conducted outside of the
traditional banking industry, central banks will be prompted to revisit their framework for emergency

lending to non-banks and outright buy/sell operations in key markets. Ensuring these operations
operate as effective backstops (without worsening moral hazard) and don't interact with monetary
policy in an unhelpful way will similarly require ongoing consideration. This latter issue is a bigger
challenge when severe liquidity shocks require the central bank to expand its balance sheet at the
same time that it is tightening monetary policy. !3°!

Finally, while prevention is always preferable to cure - and there should be no illusion that the
primary obligation of the industry is to manage its own risks prudently - recent international events
have highlighted the importance of clear response frameworks and public communication by
policymakers in periods of stress. Executed well, this can help to stop a financial panic in its tracks.
Rest assured that the Reserve Bank and CFR agencies continue to strengthen crisis preparedness
arrangements to ensure that the Australian financial system remains resilient far into the future.

Endnotes

[1] Thanks to Marc-Oliver Thurner for helpful discussions in the preparation of these remarks.

[2] The Reserve Bank seeks to promote financial stability in a variety of ways. They include: (i) setting monetary policy
consistent with price stability and full employment (through the Reserve Bank Board); (ii) effectively regulating and
supervising the payments system (through the Payments System Board); (iii) operating critical financial
infrastructure, including Australia's real-time gross settlement system, to ensure the final and irrevocable settlement
of payments in central bank money between regulated financial intermediaries; (iv) closely engaging with agencies
comprising the Council of Financial Regulators, including on financial stability policy formulation and crisis
preparedness; (v) publicly communicating its assessment of risks and vulnerabilities in the financial system,
including through the Financial Stability Review; and (vi) providing liquidity to eligible institutions in its capacity as
lender of last resort, and to ensure orderly functioning in markets important to the transmission of monetary policy.

[3] Thornton H (1802), An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, London. Thornton's
lack of emphasis on the need to raise borrowing costs to a level that deterred unnecessary borrowing may well have
been due to the continuing effect of the usury laws, in force until the 1830s, capping interest rates at 5 per cent
(see Goodhart C (1999), 'Myths about the Lender of Last Resort', International Finance, 2:3, pp. 339-360).

[4]  Bagehot W (1873), Lombard Street: A Description of the Money Market' London.

[5] _ This included liquidity provided through the private Clearinghouse and the imposition of temporary limits on
depositor withdrawals.

[6] Fora description of these events, see Cornish S (2010), The Evolution of Central Banking in Australia, Reserve Bank
of Australia, Sydney, and Kent C (2011), 'Two Depressions, One Banking Collapse: Lessons from Australia', Journal of
Financial Stability, Vol. 7 (3), pp. 126-137.

[7] I See Cornish, n 6. While Prime Minister Andrew Fisher put emphasis on central banking objectives, the eventual
legislation confined itself to the establishment of a government-owned bank with ordinary banking powers.

[8] Royal Commission into the Monetary and Banking Systems in Australia (1937), Report, Commonwealth Government
Printer, Canberra, pp100--101.

[9] See Fitz-Gibbon B and M Gizycki (2001), 'A History of Last-Resort Lending and Other Support for Troubled Financial
Institutions in Australia', RBA Research Discussion Paper No 2001-07. Following the development of the official short-
term money market in 1959, liquidity support was provided to authorised dealers. Although this support carried the

[10]

[11]

[12]

[13]

[14]

[15]

[16]

[17]

[18]

[19]

[20]

[21]

[22]

[23]

[24]

label of last resort loans, they were not directed at overall financial system stability but rather were regular loans
provided to the smooth the day-to-day functioning of the fledgling money market and the operation of monetary
policy.

See for instance, Cornish, n 6. One cannot entirely rule out some measure of good luck also contributing to the
relatively more favourable outcomes for Australia's financial system at different times over the past century.

These were two small trading banks (the Primary Producers Bank and the Federal Deposit Bank) and the
Government Savings Bank of NSW; see Fitz-Gibbon and Gizycki, n 9.

Fitz-Gibbon and Gizycki, n 9.

An important role for the central bank in these instances can be to overcome coordination and information
asymmetry problems by bringing banks together.

Prior to Federation, banking industry asso