Comparison Of Financial Institutions And Funding Sources In Australia

Life, General, and Health Insurance Companies

The issue that has been presented in this question is that five groups of financial institutions have been asked to identify. Moreover, the amount of assets that have been owned by these financial institutions have been discussed. Furthermore, an overview into the proportion of lending to the different sectors by the commercial banks and the areas from which the commercial banks source their funds have been further discussed (Parsons 2015).

The five financial institutions that have been chosen for the purpose of the study are as follows:

• Life insurance companies
• General insurance companies
• Health insurance companies
• Superannuation and approved deposit funds
• Public unit trusts

The size and proportion of lending to these different sectors by the commercial banks have changed over the years. This can be evidently stated with the help of the proper reviewing of the data in relation to the financial institutions in Australia (Parsons 2015). In order to carry out a proper comparison the data in regards to the last five financial years have been compared.

The lending proportions by the commercial banks to the financial institutions have been discussed with the help of the graphs in relation to the same.

The above table shows the percentage of financial leverage that has been acquired by the chosen financial sectors on the basis of an industrial average. The further analysis of the trends show that the commercial lending by all the financial sectors has followed an increasing trend over the years. The graphs below further show the trends in relation to the individual financial sectors. Here, it must be noted that the general insurance companies graph follows a decreasing trend.

A commercial bank refers to a financial institution that essentially helps the common public of the economy to open savings account or current for the purpose of profitably managing their money. Commercial banks are the primary tools in the hands of the government for controlling the economy in terms of inflation, deflation and other economic conditions. The primary features served by the banks are that they act as lending institutions, deposit taking institutions and also provides transfer and withdrawal of the funds (Ellis and Littrell 2017). The various sources from where the commercial banks source their funds are as follows:

• Saving deposits – the major source from which a commercial bank lends money is the savings deposit. The saving deposits refer to the different deposit accounts that are registered by the different individuals who are the customers of the banks and keep their funds in the bank in the form of savings for enjoying the advantages of security and a fixed rate of interest (Chattha and Archer 2016).
• Reserve funds – the reserve fund refer to the funds that is built along with the deposits. The reserve fund of a bank is equal to its capital and is a major source of fund for the commercial banks (Chattha and Archer 2016).
• Shareholder’s capital – The commercial banks that can avail the facility of trading in the stock exchange. The profit that the bank acquires from such activities is directly derived from the shareholder’s capital and forms a major source of funds for the commercial banks (Chattha and Archer 2016).
• Retained Earnings – Retained earnings of the bank is another form of earnings that the commercial banks earn in the form of fees for funding the business. This forms another potential source of business(Parsons 2015).

The funding structure of the commercial banks has changed over time. Over the past five years, the average annual net capital inflow has amounted to $55 billion. The major bank deposit rates have also changed over the years. The below graph aims to give a proper insight into the matter (Parsons 2015).

Superannuation and Approved Deposit Funds

The two arguments that the banks should be allowed to fail are based upon the fact that the banks being one of the major financial institutions of the economy are too big to fail but the losses incurred by these financial institutions have been nationalized. Here it must be noted that the managements of the banks are of the opinion that if they fail, they will be left out by the public. This means that the particular fear of getting bailed out leads to public anger. Therefore, in order to remove the fear of the banks of getting bailed out by the tax payers of the economy, the banks should be invariably allowed to fail (Wendt 2015).

Moreover, another argument in favor of the proposition that the banks should be allowed to fail go against the resolution fund that is being thought to be set up to help the banks in distress. This particular states the facts that in order to facilitate the exclusion of the moral hazard, in order to identify the bodies majorly responsible for the risk of loss and to make the banking system along with the economy more stable and self sustaining in nature, the banks should be allowed to fail (Wendt 2015).

The financial crisis that had hit the world economy in the year of 2008-09 had revealed the fact that the world’s largest financial institutions have been connected by a network of short term loans, terms of guarantee of credit and other financial components. This indicates the certain fact that the failure of a financial institution in one part of the world is likely to affect the entire global industry and may as well result in another financial crisis. The fear of the public in regards to the fact that the financial institutions were no longer able  to safeguard their funds had been ensured by numerous similar events like the bankruptcy of the well known financial institution of Lehman Brothers. Moreover, failure of the banks affect the entire economy in a negative way resulting in hindrances in regards to the different sectors of the economy. Therefore, the experts are of the opinion that the banks should not be allowed to fail (Omarova 2018).

Another potential argument in the favor of the fact that the banks should not be allowed to fail states the fact that the banks should be supported at the time when their capital has been written down in regards to the bad losses. Moreover, the banks should be nationalized momentarily with the aim to finally sell them in the following financial years to come. The experts in favor of the proposition that the banks should not be allowed to fail further state that the banks if allowed to fail will unnecessarily result in the piling up of the bad loans that will in turn result in the increase in the amount of net loss in regards to the global credit system. Moreover, these kind of loans are not static. This means that these kind of loans are dynamic in nature resulting in the further loans to go bad. Therefore, it is concluded that enough initiative should be taken in order to ensure the fact that the banks do not fail (Omarova 2018).

The objectives of the Royal Commission can be listed down as follows:

• A royal commission has been launched into the banking sector in order to investigate the financial planning scandals by the major banks of Australia (Douglas 2017)
• The Royal Commission has been launched by the parliament in order to look into the nation’s banks, wealth mangers, providers of superannuation services and insurance companies in order to identify any kind of discrepancy in the operations of these financial institutions (Douglas 2017)

References

Behlul, T., Panagiotelis, A., Athanasopoulos, G., Hyndman, R.J. and Vahid, F., 2017. The Australian Macro Database: An online resource for macroeconomic research in Australia.

Bongini, P., Nieri, L. and Pelagatti, M., 2015. The importance of being systemically important financial institutions. Journal of Banking & Finance, 50, pp.562-574.

Chattha, J.A. and Archer, S., 2016. Solvency stress testing of Islamic commercial banks: Assessing the stability and resilience. Journal of Islamic Accounting and Business Research, 7(2), pp.112-147.

Douglas, C.B., Scott, W., Tapley, R., Handasyde Duncan, H., Cooper, C., Hanson, R., Waterhouse, G., Torrens, R., Henry, J., Wyatt, W. and Mayo, G., 2017. History of Royal Commissions in SA. Monday 6 March 2017, 6pm to 8pm, p.36.

Ellis, L. and Littrell, C., 2017. Financial Stability in a Low Interest Rate Environment: An Australian Case Study. In RBA Annual Conference Volume. Reserve Bank of Australia.

Omarova, S., 2018. Central banks, systemic risk and financial sector structural reform.

Parsons, L., 2015. Regulating Australia’s Financial Stability in the National Interest. In Australia’s Trade, Investment and Security in the Asian Century (pp. 251-269).

Wendt, F., 2015. Central counterparties: addressing their too important to fail nature (No. 15-21). International Monetary Fund.

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