BAFI 3272 Monetary Policy & Credit Ratings: Case study Analysis (2022-2024) | Assessment 2, Singapore

Format:

This is a case study style of report where students are given a particular topic or issue and they respond in the style set out in Assessment details on Canvas.

The following structure is required for each case study for your report:

• Statement of problem or issue
• Interpretation and critical analysis
• Results of the research/recommendations
• Reference list

The rubric and the weighting for each Case Study are available on Canvas and follow the structure outlined above. The questions are prompts to guide the type of issues/analysis to address.

Case Study 1: Monetary policy (1500 words & 3 charts)

Description

Statement of problem or issue (Must only be year 2022 – 2024)

• The RBA charter is central to providing the context of this case study.
• What are the objectives of monetary policy in Australia?
• Source: https://www.rba.gov.au/monetary-policy/about.html
• What has been the main challenge for the Reserve Bank of Australia over the previous three years (2022-2024), and how did the bank deal with this?

Marking Rubrics: (15 marks) Identifies and demonstrates understanding of all the main issues in the case study and extends their analysis to identify and justify issues and problems beyond the expected main issues.

Interpretation and critical analysis (Must only be year 2022 – 2024)

• How does the Reserve Bank of Australia deliver changes in monetary policy?
• What indicators does the Reserve bank use to make policy decisions about the setting of monetary policy?
• How does the RBA make these decisions?
• What is the role of Open Market Operations in achieving the targeted cash rate?
• What are the mechanisms of monetary policy channels and the reasons for the movements in interest rates.
• Income (wages) and wealth (change in asset prices) effects and changes in consumer and business sentiment which affects spending and investment patterns.

Marking Rubrics: (20 marks) Demonstrates an ability to appraise and define problems in different contexts.

Results of the research/recommendations – Must be related to Interpretation and critical analysis

• What is the future direction for monetary policy?
• Students should provide a clear view of the direction and magnitude of cash rate movements in the future by the RBA to meet their objectives.
• Discussion should include a discussion of current and future changes in key indicators that will influence the RBA’s decision about the future cash rate. This discussion can include, but is not limited to, discussion of:
  • The current and prospective level of inflation.
  • The current state of the labour market in Australia, the level of unemployment, employment growth and the participation rate.
  • Conditions in the domestic housing market.
  • Conditions in the financial markets including the equity, currency and bonds.
• Importance of the role of trade-offs

Marking Rubrics: (10 Marks) Shows advanced thinking in providing solution/hypotheses. Considers history of problem, reviews logic/reasoning, examines feasibility of solution, and weighs impacts of solution(s).

Reference list: Recommended, 4 references

• Reserve Bank of Australia, ‘RBA Statement of Monetary Policy”
• Textbook references: Viney et. al. and/or Kidwell – (Highly recommended)
• Video “Role of the Cash Rate” by RBA Governor
• Any other relevant source from academic, RBA or non-RBA articles

Case Study 2: Credit Ratings Agencies (CRA) – 1500 words, 3 charts

Statement of problem or issue

• What issues emerged for the CRA’s during the Global Financial Crisis?
• Students should provide a brief overview of the circumstances of the Global Financial crisis, including, but not limited to:
  • The asset bubble in the US and UK housing markets
  • Asset quality issues for financial institutions and poor risk management practices and cheap financing and risk (e.g. low FICO scores for borrowers).
  • Market greed and psychology of profits at all costs.
  • Poor lending practices by lenders in those markets
  • The role of securitisation in facilitating asset price inflation
  • The role of the CRA’s in providing inaccurate ratings for securitisation structure
• CRA’s had:
  • A significant proportion of their income contributed to rating securitisation transactions before the GFC.
  • Used flawed rating models e.g. the “copula formula”, for rating securitisation structures.

Interpretation and critical analysis (it must be related)

• The analysis is to focus on the inherent conflict of interests of CRA’s, explaining this conflict. Students should analyse this point with empirical or anecdotal evidence.
• What are conflicts of interest, when might these conflicts of interest arise for CRA’s and how might they mitigate these risks? Discuss the effectiveness of the mitigants.

Results of the research/recommendations (it must be related to Interpretation and critical analysis)

• There is no single clear solution to the issue of CRA conflict of interest and we expect a range of responses.
• Student responses may pose a variety of solutions including, but not limited to:
  • A different model for rating remuneration e.g. investors should pay for the completion of the rating.
  • Government controlled CRA’s.
  • Regulators provide an independent assessment of the quality of ratings.
  • Financial penalties for significant errors in ratings
  • Duty of care legislation for CRA’s and Boards of CRA’s
• What role could regulators play in the future in addressing conflicts of interest for CRA’s?

Reference list: Recommended, 4 references

• Text book references: Viney et. al. and/or Kidwell – (Highly recommended)
• Any other relevant source from academic literature.

Useful links:

• The Credit Rating Controversy | Council on Foreign Relations
• Understanding Credit Ratings | S&P Global Ratings
• Market price effects of agency sovereign debt announcements: Importance of prior credit states – ScienceDirect

Compliance with report requirements (#AoL 2a Connected) (Case studies 1 and 2)

• Demonstrates an ability to effectively exchange information and shape ideas through the written word (Meaning is clearly and effectively communicated through consistent and sophisticated use of academic or appropriate style, unambiguous language and correct and appropriate grammar, vocabulary, punctuation and spelling for the intended audience).

FAQ

1. What is the structure of the report?

• Executive Summary
• Case study 1: Monetary policy
  • Statement of problem or issue
  • Interpretation and critical analysis
  • Results of the research/recommendations
• Reference List
• Case Study 2: Credit Ratings Agencies (CRA)
  • Statement of problem or issue
  • Interpretation and critical analysis
  • Results of the research/recommendations
• Reference list

2. What is the word limit?

• 3000 Words +/- 10%
• About 1500 words on each case study
• 3 charts/graph minimum on each case study

3. How many case studies do we need to address?

• Case study 1: Monetary Policy
• Case study 2: Credit Ratings Agencies

4. Do we need to write an introduction, executive summary, and conclusion?

• The statement of the problem or issue will serve as the introduction.
• Results of the research/recommendations will serve as the conclusion.
• You do not need to write separate introductions and conclusions.
• You may write an Executive Summary for your entire report if you would like but this is not required, will not be graded and will not count towards the word count for this assignment.

5. Which referencing style should we use?

• Please use the RMIT Harvard/Harvard referencing style.
• There are links to this on Canvas on the “Assessment Task 2: Individual Research Report” page.

6. How do you link assessment guidance with the rubric?

• Please follow the guidance to answer all requirements in the rubric. The guidance has been designed to reflect the rubric.

7. Do we need to do any research to make our answers better?

• Yes, I strongly encourage students to undertake their own research to answer these case studies in line with the rubric and guidance.

8. Can we use graphs or numerical benchmarking?

• Yes, Strongly encourage using graphs and any other quantitative datasets to substantiate, demonstrate and better explain your answers in the case study.
• 3 Graphs/Charts on each case minimum, 2 cases study = 6 charts/graphs total.

Extra information

1. What are the objectives of monetary policy in Australia?

The overarching objective of the Reserve Bank, as established by the 2024 amendments to the Reserve Bank Act 1959, is ‘to promote the economic prosperity and welfare of the people of Australia both now and into the future’. In relation to monetary policy specifically, the Act specifies that this is best achieved by the Board setting policy in a way that, in the Board’s opinion, best contributes to:

1. price stability in Australia; and
2. the maintenance of full employment in Australia.

Since the early 1990s, these objectives have found practical expression in a target for consumer price inflation, of 2–3 per cent per annum, while also balancing the RBA’s employment objective. Controlling inflation is important because if preserves the value of money and, in the long run, is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.

This approach to monetary policy in Australia commenced in the early 1990s. The earliest references to it were contained in speeches by the then Governor in August 1992 and March and August 1993.

Source: https://www.rba.gov.au/monetary-policy/about.html

2. How does the Reserve Bank of Australia deliver changes in monetary policy?

The Reserve Bank of Australia (RBA) delivers changes in monetary policy primarily through the cash rate target, supported by additional tools when needed. Here’s how the process works:

1. The Cash Rate Target
   • The cash rate is the interest rate on overnight loans between banks in the cash market.
   • The RBA sets a target for the cash rate, which influences interest rates throughout the economy.
2. Managing the Cash Rate Target
   • The RBA influences the cash rate through the policy interest rate corridor:
     • Deposit Rate: The RBA pays banks an interest rate slightly below the cash rate target on their Exchange Settlement (ES) balances.
     • Lending Rate: The RBA lends ES balances to banks at an interest rate slightly above the cash rate target.
     • Effect: Banks are incentivized to trade within this corridor, keeping the cash rate close to the target.
3. Controlling Liquidity (Supply of ES Balances)
   • The RBA manages the supply of ES balances to maintain the cash rate target.
   • Before the COVID-19 recession, the RBA conducted open market operations (repos) to adjust liquidity.
   • Since COVID-19, a large increase in ES balances has led to the cash rate trading closer to the lower bound of the corridor.
4. Unconventional Monetary Policy Tools (Since COVID-19)
   • Forward Guidance: Communicating future monetary policy intentions.
   • Government Bond Purchases: Targeting interest rates on longer-term bonds to reduce borrowing costs.
   • Term Funding Facility (TFF): Providing low-cost funding to financial institutions to lower lending rates.
5. Future System of Monetary Policy Implementation
   • In March 2024, the RBA announced a plan to move to an “ample reserves” system, where banks will hold more ES balances, reducing the need for daily liquidity management.

For more details, refer to the full RBA Explainer here or review your uploaded document

Source: https://www.rba.gov.au/education/resources/explainers/how-rba-implements-monetary-policy.html