How the Financial Markets Compare with Other Countries - Essay Example

Australian financial markets by [Name] [Course] [Professor’s Name] [Institution] [Location of the School] [Date] Introduction For the last two decades, the Australian financial system has gone through major changes. These changes were as a result of financial deregulation that was initiated by the Campbell Inquiry. Notably, the various financial institutions that operate in the financial market have gained relative importance while the intermediation between the various institutions has increasingly evolved along with the growing financial markets (Creighton, Gower & Richards 2007, p4.). This paper focuses on such developments with focus on the institutional structures and operations, how the financial markets compare with other countries as well as how they might develop in the next 15 years. Discussion 15 years are now gone since Australia completed the process of financial deregulation. The process had a gradual beginning in the 1970s by gradually removing controls over the interest rates offered by banks but it later picked momentum in the beginning of 1980 (Valdez & Molyneux 2012, p.46). There were notable steps that marked the process like removing controls on banks, removal of interest rates on bank securities, exposing the banking system to external competition and floating the exchange rate. The impact of deregulation on the financial system cannot be easily determined considering that the financial system was affected by other factors such as economic and technological growth (Henry 2010, p.5). This paper focuses on some of the four key financial changes that could have come up in the last 15 or so years. Growth in financial markets For the last 15 years, it is undisputed that the Australia’s financial market has experienced tremendous growth. The major market sectors have had their turnover increase by 20 percent in every year; this is the same as to say the turnover has grown three times the rate of nominal GDP growth. The markets patterns have shown that the market growth has been balanced, fixed interests, foreign exchange and money markets have been increasing in almost similar rates over the last 15 years. The growth feature is unique since it is not always usual because most countries have lopsided markets developing (Battellino 2000, p.3). The balance growth portrays Australia’s economy as lacking regulatory incentives. Further, this development can be attributed to the fact that the market is mainly developed to support the local economy which is generally large and diversified. However, the domestic corporate bond market is one market component that experienced slow growth until recently when it experienced major growth (Henry 2010, p.6). The slow growth was attributed to stiff competition from the euro market and the rising inflation. The growth in market economy has been as a result of improved market infrastructure. Notably, Australia’s settlement systems comply with high international standards ensuring that they support wholesale transactions and funds flow (Battellino 2000, p.4). Growth of financial activities The holding of financial assets more than the national income by the community has tremendously grown. The ratio of financial assets to GDP in the periods of 1960 and 1970s used to be small. During that time, quantitative controls were used as measures to control access to financing; such a measure was clearly meant to stop the growth of the financial system (Henry 2010, p.7). Following deregulation, the ration of financial assets to GDP has increased to more than 250%; community holding of financial assets has been growing at an average rate of 12 percent years since the 1980s (Battellino 2000, p.6). The growth of financial assets at rate higher than the income is experienced mainly in many developed economies especially those with deregulated markets. It is an indicator of how the economy has accumulated wealth as well as specialized in the financial system (Liao & Rice 2010, p.117). Disintermediation The current financial system provided an opportunity for lenders and borrowers to face each other instead of the traditional intermediaries. The expansion in financial system witnessed in Australia has not been felt by all the sectors in the financial system. Non-bank financial institutions or intermediaries like building societies and credit unions have witnessed negative growth since the competitive advantage they had has been waved after banks started to be deregulated (Liao & Rice 2010, p.118). The banks response to deregulation was immediately felt with expansion in financing in 1980s. The community holding of financial assets in banking sector has continually grown more than the income. Direct holding of financial assets has also tremendously grown. A survey recently conducted by the Australian Stock Exchange indicated that 54 percent of Australian adults hold asset shares directly or by accounts that they personally manage, the rate was at 22 percent in 1991 (Battellino 2000, p.7). The shift of assets has been witnessed from the intermediaries towards funds managers and individual direct holdings; the shift is from the demand as well as the supply side. Expansion in superannuation has been of major influence to the current shift. Superannuation benefits are now received by all permanent employees, only 45% of the employees received such benefits 15 years ago (Liao & Rice 2010, p.120). The diverting of savings to funds managers instead of the traditional intermediaries has created demand for securities and allowed borrowers a chance to approach the market directly instead of borrowing from the intermediaries. This is further supported by the growth in market infrastructure such as rating agencies, settlement facilities and information systems which have enable borrowers and lenders to interact directly with each other (Gizycki & Lowe, 2009, p.181). Falling margins and cost reductions Deregulation was expected to increase the level of competition though it took longer time than expected. The slow pace was as a result of high inflation and interest rates. When the inflation and interest rates started to fall in the 1990s, various lenders started to emerge resulting to the reducing margin of the interest rates. The current interest margins are now 40 percent lower than they were in the 1980s. The operating income has since gone low to 4 percent from 5.5 percent in addition to increasing income from fees (Gizycki & Lowe 2009, p.183. This has resulted to more housing borrowers and small businesses growing. The fall in bank’s operating income is associated with low operating costs. The high level of competition among banks has led to reduction of costs instead of fall of profits (Valdez & Molyneux 2012, p.71). How the financial system compare to those of other countries The financial trend of Australia’s financial system is much similar to those of some industrialized nations. When the financial market size is measured in terms of turnover, Australia is above its economic size in both equity and fixed-interest markets. Australia is at a similar level with countries like Japan and Canada in terms of size of the financial assets relative to nominal GDP but is low than developed European nations and of course the United States (Valdez & Molyneux 2012, p.77). Most countries have balance between intermediary-based financing and capital market-based financing apart from the US and Germany which have extreme cases. Australia is in this group of countries with 60 percent of the funding being provided by intermediaries. 30 percent of funding in the US is provided by intermediaries. Smaller European countries like Sweden and the Netherlands have adopted the US model and Australia is keen to shift to this direction the future (Henry 2010, p.5). Forecast of the financial system in the next 15 years The current financial markets in Australia looks like there is some financial work pending if compared to the world spectrum. The financial sector has witnessed growth; however its size is still far below the US. This suggests that the market is at a leading edge of financial growth and innovation. It is hard to predict the financial development of a market considering the strong performance of share markets (Valdez & Molyneux 2012, p.79). A comparison with the America’s financial system is a better option by assuming that where the current financial market is in terms of size is where the US was 15 years ago, it can be assumed that Australia will have reached a similar position as that of the US in a similar duration of time (Henry 2010, p.9). Whether Australia’s economy will have reached the US level depends on rate of growth of assets and the national savings. The financial system will depend on whether the community will continue to acquire assets in the same rate as it was in the past and if the assets increase at a rate of 3 % per annum which is practically possible based on the past (Liao & Rice 2010, p.124). References Battellino, R, 2000, Australian Financial Markets: Looking Back and Looking Ahead. Retrieved from http://www.rba.gov.au/speeches/2000/sp-ag-250200.html on 19/11/2013. Creighton, A., Gower, L., Richards, A, 2007, The impact of rating changes in Australian financial markets. Pacific-Basin Finance Journal, Vol.15, no.1, pp 1–17. Gizycki, M & Lowe, 2009, The Australian Financial System in the 1990s. Sydney: Reserve Bank of Australia, pp 181-215. Henry, K, 2010, The Australian financial system —emerging from the global financial crisis. Canberra. Liao, T. & Rice, J 2010, Innovation investments, market engagement and financial performance: A study among Australian manufacturing SMEs. Research Policy, Vol.39, no. 1, pp 117– 125. Valdez, S & Molyneux, P, 2012, An Introduction to Global Financial Markets, Melbourne: Palgrave Macmillan. Read More