Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-1 PART 4 THE AUSTRALIAN FINANCIAL SYSTEM Chapter 8 Financial institutions APRA Banks NBFIs RBA ASIC

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-2 The financial system and its functions Financial institutions in Australia – Banks Banking industry history and structure Non-Bank Financial Institutions (NBFIs) Financial markets The Reserve Bank of Australia: structure and functions Lecture Plan

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-3 Defining the Financial System The financial system consists of those institutions and arrangements that have developed to provide – Individuals and businesses with a place to safely store savings – Advice on financial transactions – Assistance in the settlement of debt, and – On-lend deposited funds

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-4 Facilitating transactions Enabling funds to be transferred between savers and borrowers Assisting investors to balance risk, liquidity and returns Therefore: The financial system consists of financial institutions and financial instruments that are used to carry the financing task The Functions of the Financial System

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-5 Financial Institutions in Australia Reserve Bank of Australia (RBA) – The central bank Banks (accounting for nearly 50% of total assets of financial institutions) Non-Bank Financial Institutions (NBFIs) – Finance companies – Building societies – Credit unions – Money-market operations

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser : Bank of New South Wales/Current Westpac For most of the 19th century, Australia had a deregulated banking sector Following the depressions of the 1890s and 1930s: increased government intervention, with virtual Reserve Bank control over the operation of banks in the 1960s and 1970s Deregulation of bank activities since the 1980s Banking: A Brief History

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-7 Changes to Bank Activities in the 1980s Rationalisation (to exploit economies of scale and to raise productivity) By late 1984, 16 foreign banks were invited to set up operations in Australia More of a ‘user pays’ approach with some ‘cross- subsidisation’ Offshore expansion (e.g. ANZ/Grindlays Bank)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-8 New products: ATMs, EFTPOS, telephone banking New financial instruments: swaps, options, Internet banking, home equity loans etc. New players in the financial service market – Mortgage originators (Aussie Home Loans) – Australia Post payment services Further off-shore expansion (NAB, Westpac) More competition for deposits in the form of superannuation and other such funds Decline in interest margins forced reduction in costs with corresponding decline in employment Changes to Bank Activities Since the 1990s

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-9 Banks’ Major Liabilities and Assets Liabilities: Deposits Bill acceptances Foreign currency borrowings Assets: Loans Advances Commercial bills

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-10 Overdrafts: – An extension of a line of credit to a bank customer Commercial bills: – Source of short-term finance up to 180 days Fully drawn advance: – A fixed-term loan up to 10 years Main Instruments of Business Finance

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-11 Retail thrifts: – Cooperatives, owned by their members, offering deposit and loan services Finance companies: – Currently provide a range of financial services to both consumers and business Building societies: – Provide mortgage finance (<30) Non-Bank Financial Institutions (NBFIs) (cont.)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-12 Credit unions: – Restricted membership; normally operated on a non- profit basis; fewer than 300 Money market corporations (merchant banks): – About 80 (1998); operate in the short-term wholesale finance market Mortgage companies: – Mortgage originators and securitisation vehicles Non-Bank Financial Institutions (NBFIs) (cont.) (cont.)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-13 Distinction Between NBFIs and Banks NBFIs do not require bank licences Do not need to comply with RBA controls Were not afforded RBA guarantees regarding the safety of depositors’ funds (e.g.1989 Pyramid saga) Smaller range of services than banks 1992: Australian Financial Institutions Commission (AFIC) started regulation and supervision of building societies and credit unions 1999: Australian Prudential Regulation Authority (APRA) took over responsibility for the supervision of building societies, credit unions and friendly societies

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-14 Total Assets of Financial Institutions, June 2004 A$ billion Financial InstitutionsA$ billion% of total RBA Banks Building societies Credit cooperatives Money market corporations Finance companies Life insurance offices Superannuation funds Other managed funds Other financial institutions TOTAL Source: Adapted from RBA Bulletin, June 2004.

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-15 Financial Markets Involves the purchase and sale of financial assets (e.g. shares, bonds, securities and foreign exchange) The primary market is where new issues of government bonds or shares are purchased for the first time A secondary market involves traders buying and selling these bonds and shares

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-16 The Reserve Bank of Australia (RBA) Australia’s central bank RBA was established in 1959 by the Reserve Bank Act (prior to 1959 central banking functions were performed by the Commonwealth Bank) RBA has five divisions: – Financial markets – Financial system – Research – Central bank services – Administrative services

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-17 RBA Performs Five Major Functions Control of currency note issue Banker to the government Banker to the banking system Foreign exchange (forex) transactions Information services

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-18 APRA (Australian Prudential Regulation Authority) Was established on July 1, 1998 ‘To undertake the prudential supervision of deposit- taking institutions, Life and General Insurance Companies and Superannuation Funds’ Treasury Press Release 0027, 17 March 1998 Prudential supervision: a set of standards designed and administered by APRA in order to safeguard the safety of depositors’ funds and the stability of the financial system

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-19 Instruments of Prudential Supervision Prudential requirements – Non-callable deposit (NCD): 1% of total bank liabilities – Capital adequacy requirement (CAR): 8% of the value of a bank’s risk-adjusted assets

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-20 ASIC regulates a wide range of financial services (e.g. superannuation, life insurance and banking products) in order to protect consumers who use these financial and investment products ASIC aims ‘to promote the informed and confident participation of investors in the financial system’ and ‘to improve the performance of the financial system’ The Australian Securities and Investments Commission (ASIC)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 8-21 Management of Australian Financial System RBA: monetary policy, system stability, payments system APRA: prudential regulation, institutional licensing ACCC: administration of competition law ASIC: market integrity, consumer protection and licensing of advisers