T HE F INANCIAL S YSTEM

T HE F INANCIAL S ECTOR The financial sector consists of: Banks: Financial institutions act as intermediaries between borrowers and lenders. (Includes RBA, and Australian and foreign owned banks) Non-Bank Financial Institutions (NBFIs): Merchant banks, building societies, credit unions, finance companies, superannuation funds, Insurance and short-term money market dealers.

M ONEY Money is any commodity that is accepted universally as a medium of exchange for goods and services. Money has four functions: It is a medium of exchange Acts as a measure of value Is used to settle debts Is a store of value

M ONEY S UPPLY The Reserve Bank of Australia supplies the amount of money required to keep the financial sector operating (called liquidity) There are two measures of the supply of money in the economy. M3 = notes and coins held by the non-bank public plus any current and fixed bank deposits, made by the public Broad Money = M3 + net deposits of savings in Non-Bank financial institutions.

R ESERVE B ANK AND L ENDING The Reserve Bank of Australia prints money and is the lender of last resort to the financial sector if a financial crises occurs. The financial sector takes money from individuals, companies, funds, and lends it out to the 5 sectors of the economy. Lending allows consumption or investment in the economy – purchase now, pay back later

F INANCIAL S ECTOR AND L ENDING Without lending, individuals, companies and government would only be able to consume or invest when they have the cash available. For many this is not realistic, especially purchasing a house, a car, investing in a factory, building a highway. The economy will be much smaller without lending. Lending creates a multiplier effect in the economy – called credit creation.