Lecture 1 Flashcards
Who oversees the financial system?
The central bank and the prudential supervisor.
The roles of the financial system are:
– To permit the flow and efficient allocation of funds
throughout the economy.
– To provide sufficient economic and financial information.
– In general: The financial system allows the flow of funds
from Surplus Spending Units (SSUs) to Deficit Spending
Units (DSUs).
FIs are market makers, what does this mean?
provide a place where buyers and
sellers can meet.
What are the six ways FIs transform funds?
The 7th is the payment system.
- Denominator divisibility-divisibility and flexibility in borrowing and lending.
- Currency transformation
- Credit risk diversification
- Information more effective
- Maturity transformation
- Liquidity
What does a financial instrument acknowledge and represent?
a financial commitment
and represents an entitlement to future cash flows.
Financial instruments may be divided into 3 broad categories:
- debt
- equity
- dirivatives
In a financial market who is the main contributor of savings?
Households
In a financial market who is the main user of user of savings?
Businesses
Who issues financial instruments and who receives them?
issues=borrowers
receivers=lenders
What does DSUs & SSUs stand for?
- Deficit Spending Funds
- Surplus Spending Funds
After purchasing direct claims from DSUs FIs do what with them?
transform them into indirect claims and sell them
to SSUs.
What are the types of financial markets?
-Primary Vs Secondary Markets
-Organised and Over-the-counter Markets.
-Other Markets
– The futures market
– The options market
– Foreign exchange markets
– International markets (for example, Eurocurrency
and Eurobond markets
What are primary financial markets?
Suppliers of funds supply them directly to users of funds.
What are secondary financial markets?
Holders of previously issued financial instruments sell these marketable securities to surplus entities.
What 2 major categories of Financial Markets sorted into?
- Money Markets
2. Capital Markets
A certain typed of financial claim are traded in money markets, what is it?
Wholesale short term to maturity (less that 12 months).
Why do banks and businesses borrow and lend in the short term money market?
To adjust their liquidity positions.
RBA conducts money on what financial market?
Money market
What characteristics do money markets have?
very similar to money:
high liquidity and low default risk. (eg, Treasury Notes,
Commercial paper, Commercial bills, Negotiable certificates of
deposits, secured and unsecured notes)
What are commercial papers?
unsecured promissory note (IOU) of a large businesses.
What instrument is the largest component of money markets?
Commercial bills
What is a commercial bill?
- Bank accepted
* Non bank
What types of instruments are traded in money markets
- Commercial paper
- Commercial bills
- Negotiable certificates of deposits
What are Negotiable certificates of deposits?
-promissory note in denominations of $100k or more
• Resold in secondary market and are issued by banks rather than large corporation.
Capital Markets are markets where what type of securities are traded?
longer term (greater than 12 months ) securities are traded.
On capital markets, capital goods are financed with stock or….
longer-term debt instruments
Are Capital markets instruments more or less marketable than money market instruments?
Capital markets instruments are less marketable.
Are Capital markets instruments more or less marketable than money market instruments?
Capital markets instruments are less marketable.
Difference between capital markets instruments and money market instruments?
Capital Markets are longer term (greater than 12 months ) securities are traded.
Capital markets are financed with….
stock or longer-term debt instruments.
Instruments traded on the capital market include:
- Common stock
- Corporate bonds
- Government bonds
- Mortgages
Australian Financial Sector Structure comprises of:
-Reserve Bank of Australia (RBA),
-banks (ADIs) ,
-non-bank financial institutions (NBFIs)
and
-other financial institutions (FIs)
ADIs in Australia financial sector are?
Australian-owned banks; foreign bank
subsidiaries and branches of foreign banks
What are the non-bank financial institutions (NBFIs) in the Australian
Financial Sector?
permanent building societies, credit
unions, authorised money market dealers, money market
corporation and finance companies
Other financial institutions in the Australian Financial Sector are?
life offices and
superannuation funds, trusts and friendly societies.
In the Australian Financial Sector, in addition to domestic institutions there are a number of important international organisations, including?
- The Bank of International Settlements
- The World Bank (Not a bank per se, rather an agency of the United Nations )
- The International Monetary Fund (established under UN)
- The Asian Development Bank (Multilateral development bank)
In the Australian Financial Sector, in addition to domestic institutions there are a number of important international organisations, including?
- The Bank of International Settlements
- The World Bank (Not a bank per se, rather an agency of the United Nations )
- The International Monetary Fund (established under UN)
- The Asian Development Bank (Multilateral development bank)
Why was Napier Royal Commission set up?
-inquire into the monetary and banking systems at present in operation in Australia in 1937.
What were the key recommendation of Napier Royal Commission?
- Licensing of banks
- Direct control of interest rates and the volume of credit;
What commission vested central banking powers in the Commonwealth
Bank of Australia?
Napier Royal Commission
What was the result of the Napier Royal Commission, effecting non-bank financial institutes?
Tight control of the banking system encouraged the growth
of non-bank financial institutions (NBFIs).
What were the characteristics of banks set up under the Napier regime?
-Highly regulated and tightly supervised, Non-bank financial sector taking advantage of this and offering lower interest rates.
What was the political/economic backdrop of the Napier Royal Commission?
Against the 1930’s depression a negative environment where soldiers returning from war were unable to borrow.
What was the object of Napier Royal Commission given the political/economic background?
To increase regulation in favor of the Australian people?
What were the duties of Commonwealth Bank suggested by Napier Royal Commission?
To act as the central bank and as a commercial bank.
What year did Common Wealth become a private enterprise?
Jan 1960
RBA came out of Commonwealth Bank
Second major financial sector investigation (1980s)?
The Campbell Committee (1981)
What was the political/economic backdrop of the The Campbell Committee?
Severe inflation and unemployment and the resulting dissatisfaction in the system that happened late 1970s.
What was the 4 major recommendations of the Campbell Committee?
- Changes affecting the mechanisms of macroeconomic management, including foreign exchange controls and the implementation of monetary policy;
- Abolition of direct controls on interest rates and portfolio composition;
- Strengthening of regulations aimed at preserving system stability;
- Removal of barriers to entry to financial system.
In the Campbell Committee what was the object to the recommendation “Changes affecting the mechanisms of macroeconomic management, including foreign exchange controls and the implementation of monetary policy;”
Removal of interest rate ceilings and the exchange rate fixing these were macroeconomics management mechanisms.
In the Campbell Committee what was the object to the recommendation “Strengthening of regulations aimed at preserving system stability”
deregulate so the market powers and supply and demand could fix exchange, interest etc. (more free market economy) but strengthen greatly the fundamental regulations underlying the system.
In the Campbell Committee what was the object to the recommendation “Strengthening of regulations aimed at preserving system stability”
deregulate so the market powers and supply and demand could fix exchange, interest etc. (more free market economy) but strengthen greatly the fundamental regulations underlying the system.
In the Campbell Committee what was the object to the recommendation “Removal of barriers to entry to financial system”
Increase foreign competition to the Australian market
What Financial Sector Investigation allowed the entry of foreign banks?
the Campbell Committee
Under the the Campbell Committee what happened to the selling of treasury bonds?
tender system- buy the amount you are willing at the amount you are willing to pay
3rd major investigation to the Australian Financial Sector?
The Wallis Inquiry (1997)
What was the The Wallis Inquiry (1997) charged with providing?
a stock take of the
results arising from the financial deregulation of the
Australian financial system since the early 1980s
What was the core theme of The Wallis Inquiry (1997)?
prudential supervision
What were the forces driving further change at the time of the Wallis Inquiry (1997)?
technological development and globalization
What were the forces driving further change at the time of the Wallis Inquiry (1997)?
technological development and globalization
What were the objective of the recommendations from the Wallis Inquiry (1997)?
regulatory arrangements that would best ensure an efficient,
responsive, competitive and flexible financial system to
underpin stronger economic performance, consistent with
financial stability, prudence, integrity and fairness.
What was the political/economic backdrop of the The Wallis Inquiry (1997)?
Positive economic backdrop different to other two inquiries.
What was the political/economic backdrop of the The Wallis Inquiry (1997)?
Positive economic backdrop different to other two inquiries.
Re-organization was guided by 2 principles what were they?
- There should be a one-to-one relationship between regulatory bodies and causes of financial market failure;
- Regulation should be imposed in situations where the risk and consequences of market failure are sufficiently large.
What were the 4 organizations set up by and re-organized by the Wallis Inquiry and their responsibilities?
- Systemic Instability => RBA
- Prudential Supervision => APRA
- Market Integrity => ASIC
- Anti-Competitive Behavior =>ACCC
