Topic 1 - Financial Institutions in Australia Flashcards
Role of Bank
Support the operation of the payments system
Play major roles in the various clearing systems and the debit and credit card systems
Assist in the movement of notes and coins throughout the economy
The primary function of financial markets
The primary function of financial markets is to facilitate the flow of funds from surplus to deficit economic units
This can occur through director indirect finance `
direct finance
In direct finance, funds flow directly from surplus to deficit units (with or without the assistance of brokers or dealers)
For example, shares and bonds
Indirect finance
Indirect finance (also known as financial intermediation) occurs when a financial institution acts as a financial intermediary, borrowing from the surplus economic unit and lending to the deficit economic unit
Bank deposits and banks loans are examples of borrowing and lending that occur through an intermediary
Financial Intermediation Advantages
Advantages to lenders
Risk reduction and diversification
Provision of liquidity
Advantages to borrowers
Asset value transformation
Maturity transformation
Advantages to both borrowers and lenders
Specialist skills
Economies of scale
The Australian financial sector comprises
- 2.1The Reserve Bank of Australia
- 2.2Commercial Banks, and Non-Bank Financial Institutions (NBFIs), which the RBA divides into: 1.2.3Non-bank financial corporations, and
- 2.4Other financial institution
RESERVE BANK OF AUSTRALIA
The RBA’s role as Australia’s central bank clearly distinguishes it from the commercial banks
As well as being a regulator, the RBA is responsible for the implementation of monetary policy
COMMERCIAL BANKS
Major Australian banks – ANZ, CBA, WBC, NAB These banks have a widely-distributed retail branch network and a nationwide presence
They control 78.6% of commercial bank assets
Other Australian banks
There are another 30 Australian-owned banks, controlling 10.2% of commercial bank assets
Many of these are retail banks which were formerly building societies or credit unions;
e.g. Bendigo and Adelaide Bank, Police Bank
Foreign subsidiary banks (e.g. Citigroup & HSBC) There are banks that operate solely within Australia, but are subsidiaries of foreign banks
There are 7 such banks controlling 3.4% of commercial bank assets
Branches of foreign banks
There are 44 foreign banks with branches in Australia, controlling 7.9% of commercial bank assets
E.g. The Banks of China, Taiwan & India
NON-BANK FINANCIAL CORPORATIONS
Permanent building societie
which take deposits and make loans for housing and other retail purposes
Credit unions
There are 52 credit unions, which accept deposits and lend money for personal finance
This subject will focus on banks, building societies and credit unions, collectively referred to as Authorised Deposit-taking Institutions (ADIs)
Money market corporations (0.4% of total assets) These are typically referred to as merchant banks or investment banks
They provide a range of services, including:
Short-term deposit facilities Provision of loans to companies Provision of financial advice Underwriting facilities Funds management
Finance companies (1.9% of total assets)
OTHER FINANCIAL INSTITUTIONS
Life insurance companies (2.3% of total assets)
Superannuation funds (28.3% of total assets – increasing every year –24% last year)
Managed Funds
Whatmainfunctionsdobanksplayinthefinancialsector?
Banks fulfil three main roles: they help operate the clearing/payments system; serveasfinancialintermediariesbytakingdepositsandmakingloans;andofferoffbalancesheetactivitiessuchasderivatives,guaranteesandothercreditsubstitutes.
Distinguish between funding through open financial markets and funding throughfinancialintermediaries.Explainwhythereisaroleforbankseventhoughtheinterestcostoffundsistypicallymuchhigherforfundingthroughfinancialintermediariesthanforfundingthroughopenfinancialmarkets.
Fundingthroughopencapitalmarketsoccurswhenasurplusunitlendsdirectlytoadeficitunit. This usually involves a contract or financial instrument defining the terms of the loan. Frequently facilitators (brokers or dealers) create and issue standardised debt or equity contractsonbehalfofthedeficitunits,forissuetothesurplusunits. Funding through a financial intermediary involves a surplus unit lending to a financialintermediary(deposits),theninaseparatetransactionthefinancialintermediarylendsthe fundstoadeficitunit. Theinterestcostoffundsistypicallymuchhigherforfundingthroughfinancialintermediaries thanforfundingthroughopenfinancialmarkets,howeverintermediarieshaveacontinuing rolebecausetheycreatevaluefortheircustomers.Depositorsbenefitfromthequickeasy access to their funds when held in very low risk deposits. Borrowers benefit from intermediaries’skillsincreditriskassessment.Depositorsandborrowersbenefitsincetheir search costs are minimised in finding desired contracts (e.g. desired size, maturity, risk,structure),andtheeconomygenerallybenefitsfromtheroleplayedbybanksascreatorsof money.
Describewhatsurplusunits,deficitunits,shareholdersandbankregulatorswantfrom bankmanagement.Arethesewantscomplementaryorconflicting?
Surplusunitsprimarilyrequirebankstoprovidesafedepositfacilities,arangeofdeposit productstomeettheirneeds,includingeasyaccesstotheirfundsthroughbranches,electronicaccess,etc.,andahighreturn
Deficitunitsprimarilyrequirebankstoprovidearangeofloanproductstomeettheirneeds, includingaccesstofunds,flexibilityinrepaymentschedulesandaminimumcost. Shareholders’primaryconcernisshareholders’value.Thisreflectsaconcernforhighreturns butatanacceptablelevelofrisk. Bankregulatorsareconcernedwiththeviabilityofthefinancialsectorandwiththesafetyof depositors’funds.Itisgenerallyacceptedthattheoptimallevelofriskfromthisperspective willbelessthanthelevelofriskthatwouldbeacceptabletoshareholders.Consequently, regulatorsfocusonthelevelofriskundertakenbybanks. Shareholders’interestsconflictwiththeobjectivesoftheotherparties,whileregulatorsand depositorshavecommoninterestsintermsofthelevelofbankrisk.
