Lecture 3 Flashcards
What are the 3 main types of financial institutions in Australia?
- ADIs
- Non-ADI Financial Institutions
- Insurers and Fund Managers
Wholesale banking?
provision of services by banks to other financial institutions.
Includes:services offered to corporations and other large institutions, financial or otherwise.
What services fall under wholesale banking?
- Cash management services (acted as a broker rather than a dealer);
- Foreign exchange;
- Business-to-business payments;
- Trust services
- Custodial services (look after admin and document management)
- Commercial lending, and trade finance.
What is Retail Banking?
provision of banking services to individuals, focuses strictly on consumer markets (unlike wholesale banking); may extend to small & medium sized businesses
Non-ADIs FIs main supervisor/regulator?
ASIC
ADI main supervisor/regulator?
APRA
What do Finance Companies do?
Finance companies borrow mainly on financial markets, for example by issuing debentures.
•Lend to businesses:
•Commercial lending and covers
Who supervises public unit trusts and cash management trusts?
ASIC
What is a trust?
trusts pool investors’ funds, usually into specific types of assets
what is a Friendly society and who supervises?
APRA
Mutually owned co-operative financial institutions offering benefits to members through a trust-like structure
On what basis are commercial banks the largest and most diversified intermediaries?
are the largest and most diversified intermediaries on the basis of range of assets held and liabilities issued.
What are assets to banks?
•These assets consist of loans to consumers, businesses and governments.
What are liabilities to banks?
•Commercial banks’ liabilities consist of cheque and savings accounts, term deposits and bonds/bills.
Non-Bank Financial Institutions can be classified into 4 groups what are they?
- Building Societies
- Credit Unions
- Money-market Corporations
- Finance Companies
Can some NBFIs be ADIs?
Yes eg, Building Societies, Credit Unions
What are Building socities?
•Building Societies
•Listed entities or mutual ownership
•flourished before the 1980s, having a marked competitive advantage against the highly regulated banks
-example Bendigo Bank
What is a credit union?
Traditionally cooperatives in which membership is based on a common bond such as membership of a particular profession, a trade union, local community or religious group or working for the same employer (ie Unicredit, Qantas Staff Credit Union)
Who owns building societies?
organization owned by its members (rather than by external shareholders), which pays interest on deposits and lends money to enable members to buy their own homes.
Where does the money used in building societies come from?
•This money used to come exclusively from individual saving members who are paid interest
Why are building societies seen as community-based FIs?
they operate for the benefit of their depositors and borrowers and their community, unlike most non-mutual financial organisations, which work to maximiseprofits for shareholders through dividends.
What is the ethos of credit unions?
self-help
Formed to help the average Australian take control of their financial destiny, and to improve access to financial services for groups with a common bond or heritage
What are the characteristics of a mutually owned institution?
- Voting rights => 1 per member, regardless of financial commitment
- Ownership comes from membership which is based on acquiring a product or service from the organisation, rather than contributing capital
- Ownership can not be traded
- Established as co-operative, members pooling resources to achieve a specific objective
How is the profit of mutual ownership distributed?
•Profit distributed through bonuses or reduced premiums and charges or re-invested in the organisation
Can mutual ownership easily access other capital?
No
What was superannuation created to address?
Australia’s retirement income policies.
How does superannuation obtain funds and redistribute them?
•Funds obtained from employer and employee contributions during the employees’ working years and provide financial resources that can be used in a variety of ways in retirement
What was the important economic objective that superannuation addressed?
•The need for retirement income has been seen as an important national economic objective given the ageing population and low national savings rates.
What is the Superannuation Guarantee Charge?
Superannuation Guarantee Charge, which requires employers to contribute an amount equal to 9% of income into an approved superannuation scheme. (This has increased to 9.5% in July 2014.)
Result of Superannuation Guarantee Charge?
leads to remarkable growth in Super Funds in recent years
What are Conglomerates?
boundaries between institutions are blurring, institutions offering integrated financial services.
Example of Conglomerate?
Commonwealth Bank Group offers: •Retail banking; •Business banking; •Institutional banking; •Funds management; •Insurance; •Investment banking; •Broking services; •Finance company activities
Risks Faced By Financial Institutions?
◦Liquidity risk: ability to meet withdrawal
◦Interest rate risk: impact of i-rate on lenders/borrowers
◦Credit risk: repayment not be made (interest & principal)
◦Capital risk: asset value may decline
◦Others:
–Technological risk
–Operational risk
–ForexRisk (specific to international banking)
–Country/political risk
How do FIs manage risk?
◦Diversification of loans and investments
◦Careful credit analysis of borrowers
◦Careful monitoring of borrowers over time
◦The undertaking of appropriate ‘hedging’ strategies on the financial markets.
What is Liquidity Risk for FIs?
Arises when the FI is not able to fund financial needs of its liability holders.
-FIs have to sell assets at low or “fire sale” prices => Solvency problem
What is the Liquidity Ratio?
Short Term Security / deposits
◦A lower liquidity ratio indicates a more risky FI.
Why would FIs not want to invest in short term securites despire lowering liquidity risk?
Invest in short-term securities involves a sacrifice of greater profitability of long-term securities for the liquidity of short-term ones.
What is the Interest Rate Risk for FIs?
Movements in interest rate may result in changes in asset and liability return and values.
◦Potential negative effect on net cash flows and values
How can the interest rate risk to FIs be measured?
Can be measured by interest sensitive assets to interest sensitive liabilities ratio
what does it mean to FI if its interest sensitive assets to interest sensitive liabilities ratio is >1
the FI’s return will be lower if i-rates decrease or higher if i-rate increase
what does the interest rate risk ratio (Ratio = Interest Sensitive assets/Interest sensitive liabilities) reflect?
the risk the FI is willing to take that it can predict the future direction of interest rates
What is Canstar Cannex Ratings?
star ratings are a consumer-friendly benchmark that help consumers to find the best financial products based on rates and features.
Customers Evaluation of FIs what are the 7 high priority selection criteria?
- Loan deals => borrowers
- Service quality => borrowers & lenders
- Reputation & Soundness => implies safety => lenders
- Fee charged => borrowers and lenders
- ATM network => borrowers and lenders
- Accessed by phone/internet=> borrowers and lenders
- Branch network convenience => borrowers and lenders
