Evolving Structure Of Australian Financial System

Assets owned by each of the different groups of financial institution in the Australian financial system

Discuss about the Evolving Structure Of Australian Financial System.

The different groups of financial institutions of Australian financial system selected are life insurance companies, general insurance companies, public unit trusts, cash management trusts and superannuation and approved deposit funds. The assets owned by all these groups in Australian dollars are shown in the following table. The given table reflects the financial institutions’ funds and amount which will be required in the particular time.

Looking at the insights of the above table, one thing is very clear that the assets held by the groups being general insurance companies, public unit trusts, cash management trusts and superannuation and approved deposits have all increased sufficiently except a declining trend observed in case of the life insurance companies. The increase in asset holding in case of superannuation and approved deposits is more than 50% and almost even doubled. The holding position though rising yet not much speedily has been pinpointed for cash management trusts. The life insurance companies however admit a serious decline as on March 2018 end of more than 50% of the asset position as at the end of June 2014 (Edey, & Grey, 2016)

In the above table lending to government includes lending for public sector securities and credit cards on an aggregate basis. This will be determined on the basis of lending amount to the particular persona and entity. Similarly the lending to persons is an aggregate figure for lending made for the purpose of housing, investment, fixed loan and revolving loan purposes. It will also include several landings such as Commercial lending conglomerates lending for financial intermediaries and business sector.

Banks being the saviour of the whole economic system are highly required to maintain a parity and balance in the lending proportions to different sector of economy as per the need of the on-going scenario. A normal perspective of the above table does not highlight much difference in the lending pattern over the years. A certain scenario is being followed.

However, it is observed that the lending had been highest when it comes to lending to persons because of alarming prices of housing in Australian cities. Although that calls for higher risk for Australian banks, yet the lending in the same is high after considering certain risk alleviating measures. The capital requirements for the housing mortgages have been increased. Around 60% of the total domestic lending accrues to housing lending (Tomak, 2013).

The size and proportion of lending to the different sectors by the commercial banks

The structure of bank funding is important to be known to devise the funding costs that the banks incur. This becomes an important part to understand as the whole rate that the banks charge on different kind of loan or credit extended by it to different sectors depends largely upon the cost of funding incurred by it. The main components that comprise bank funding sources include deposits, wholesale debt and equity. The dependency of different banks on these sources vary at independent level, yet every commercial bank have shown a trend of moving towards deposits from retail customers as it tends to be more stable since the global financial crisis. The same is sought as a stable funding option after observance of results of several risk assessment techniques applied after the global crisis shattered the economy (Turner, & Nugent, 2015)

Deposit funding has increased steadily over the five years that followed the global crisis. With the ramified global economic changes, each and every organization needs to use the charge creation activities to raise the funds form the market. The share of funding undertaken by deposits has been doubled almost. The most stable share seems to be of equity. The total cost that commercial banks used to incur on account of funding has declined by 4 basis points over 2017 approximately. This again has been able to take place because of lower funding cost as far as the deposit costs are concerned. Though the cost patterns vary over the deposits depending upon the time horizon for which the deposits are made and the degree of risk involved in the same (King, 2013).

The banks must be allowed to fail because there is no purpose of running the most trustworthy monetary institutions of the economy when the whole management system fails and there is no scope of recovery for them. There stands a credit crisis when the banks are ailing and that if cannot be solved on a continuing basis needs to be resolved as early as possible. No bank is ever too big to fail as the economy stands to be unpredictable and uncertain and there tends to be certain flaws too in the complete governing structure of a bank (Barth, Prabha, & Swagel, 2012)

Secondly, the bailout programs generated through keeping the taxpayers’ money at stake brings them at a high risk position. The same creates financial pressure on government too. The bank failure shall only promote the banks to cope up more efficiently. These bailouts lead to moral hazards as the money of public shall not be accepted by them to be strained on such ineffectiveness (Pais, & Stork, 2013)

Funding of commercial banks

The trust of whole economic system lies of the system of banking of a country. The more they perform efficiently, the more the economy foster and cultivates. The big business houses work with the collaboration of the banking institutions. Any downfall on their part leads to severe economic breakdown. Not only the single business house dealing with bank suffers but all its clients, suppliers, customers etc. face the turbulence (Bramer, & Gischer, 2013)

Moreover, the banking institutions generate employment and serve a large customer base. The failure of them leads to a disastrous outcomes ruining the lives of not only a few big businesses but a large number of people at a glance. The snatched employment shall also run from the failed business houses that flew because of bank failures (Bongini, Nieri, & Pelagatti, 2015)

The Royal Commission was established by the Governor General on 14 December, 2017. After establishment the Terms of Reference for the commission were finalised and the former High Court Justice Kenneth Hayne was appointed as the chairman of the commission. The Terms of reference granted supreme powers to the commission, relating to its objectives, to investigate, interview and obtain sensitive documents. Any person who fails to follow the requests made by the Royal Commission is supposed to face an outcome leading to civil or criminal penalties. (Eburn, & Dovers, 2015)

Royal commission is empowered to take evidences and summon witnesses. In order to gather all the evidences in case of any suspicion regarding hiding of evidences or their mutilation or destruction, the commission can issue search warrants.  This will be the main imperative outcomes which needs to be undertaken by the banks and related operations to mitigate the issues.

Certain Financial Service Entities have been defined that include, authorised deposit-taking institutions (ADIs), insurers, financial brokers, registered superannuation entities, a licensee of registered superannuation entity and the persons acting as intermediaries between borrowers and lenders. These are the entities that might have showed certain misconduct and the commission is empowered to investigate about the same. It does not mean that every incidence of misconduct shall be enquired. The commission needs to strategizes and prioritize the events that might not result in a greater neither harm if nor addressed immediately.

Reference

Edey, M. & Gray, B. (2016). The evolving structure of the Australian financial system. Reserve Bank of Australia.

Eburn, M. & Dovers, S., (2015). Learning Lessons from Disasters: Alternatives to Royal Commissions & Other Quasi?Judicial Inquiries. Australian Journal of Public Administration, 74(4), pp.495-508.

Barth, J.R., Prabha, A.P. & Swagel, P., (2012). Just how big is the too-big-to-fail problem?. Journal of Banking Regulation, 13(4), pp.265-299.

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

Brämer, P. & Gischer, H., (2013). An assessment methodology for domestic systemically important banks in Australia. Australian Economic Review, 46(2), pp.140-159.

King, M.R., (2013). The Basel III net stable funding ratio & bank net interest margins. Journal of Banking & Finance, 37(11), pp.4144-4156.

Pais, A. & Stork, P.A., (2013). Bank size & systemic risk. European Financial Management, 19(3), pp.429-451.

Tomak, S., (2013). Determinants of commercial banks’ lending behavior: Evidence from Turkey. Asian Journal of Empirical Research, 3(8), pp.933-943.

Turner, G. & Nugent, J., (2015). International linkages of the Australian banking system: Implications for financial stability. JASSA, (3), p.34.

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