Australian Financial Services Industry - Example

Australian Financial Services Industry Customer Inserts His/her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 14/07/ 2011 The Australian financial services industry came to be highly recognized due to the financial crisis that affects the economy of Australia. Banks and non-bank financial institutions of Australia are among the strongest in the world. Due to this fact, during the financial crisis Australian banks were not restricted to borrowing or raising funds from overseas as with other banks found in many other countries (Head 2008). Consequently, they continued to make profits even with the downfall of the world economy. In addition, Australia has prudent and responsible regulation system that governs the financial markets. On the other hand, Australia has deep and liquid financial markets and is recognized as a regional leader in investment management and in areas such as funding for infrastructure and structured products. Therefore, due to the financial stability depicted by Australia investors look at its financial services sector for investment opportunities. According to evaluation done on world’s major economies, Australia has been assessed as having the third best regulations of securities exchange and the fourth soundest banking system in the world (Head 2008). Furthermore, Australia provides global financial services institutions chances in a rapidly growing domestic market and an ideal location for servicing marketing in other region outside. In order to establish Australia as a strong financial center, the government of Australia is committed through establishment of legislation related to operations of financial services sector as well as taxation. Taxation is a major instrument in achieving competition in the financial services sector. a).The Structure of Australia Financial Institutions Australia’s financial institutions are categorized into bank and non-bank financial institutions. These are regarded as the main providers of financial services. The banks play a critical role in the financial services sector of Australia. So as to attain the title of a bank, a financial institution must obtain a license from the relevant Australian body. On the other hand, banks are classified as ‘Authorized Deposit-taking Institutions (ADIs). Banks provides services such as: depositing, creation of credit between lenders and borrowers and making of payments. In addition to these, they provide their customers with professional services such as: dealing with securities, foreign currency exchange, making lease arrangements, provision of risk management services, wealth management, financial planning and provision of advice related to business, finance and corporate among others (Adadevoh, 2010). The four largest banks within Australian banking system are: ANZ Banking Group, Commonwealth Bank of Australia, National Australian Bank and Westpac Banking Corporation (Adadevoh, 2010). These banks hold around $1.4 Trillion of total assets equivalent to over 140 per cent of GDP. All Australian-owned banks are listed in the Australian Stock Exchange which can be direct or indirect through their parent. On the other hand, there are 39 foreign-owned banks operating in Australia which collectively account for 20 per cent of domestic banking system assets. In addition to banks, other types of ADIs are the credit unions and building societies which collectively account for 2 per cent of domestic financial system assets. However, the rapid growth in the number of banks and expansion of banking activities is associated with the numerous conversions of building societies into banks. Non-banking financial institutions are such as the Registered Financial Corporations (RFCs) and those categorized as Managed Funds (MFs). RFCs include: money market corporations and finance corporations, while MFs include: unit trusts and super funds. Due to this, the financial services industry is the third largest sector in the economy of Australia coming after manufacturing and business or property services. According to the results provided by the Australian Bureau of Statistics in June 2003, the financial services sector accounts for 8 per cent of Growth Domestic Product (GDP) (Head 2008). Hence, it is among the fastest growing sector in the economy and one of its largest contributors to GDP. A factor that contributes to this is the industry’s ability to maintain a responsible approach towards its operations so as the provider firms remain safe and transparent. Types of Service Provider Assets (A$ Billion) Share of Total (%) Growth for the past five years (%) Reserve Bank 65.1 2.8 32.6 Banks 1158.3 49.1 86.3 Other ADIs Building Societies Credit Unions 14.1 30.2 0.6 1.3 14.6 57.3 TOTAL ADIs 1202.7 51.0 84.1 RFCs Money Market Corporations Finance Companies 83.9 76.5 3.6 3.2 27.5 15.6 TOTAL RFCs 160.4 6.8 21.5 Managed Funds MFs -    Life insurance offices -    Superannuation funds -    Public unit trusts -    Cash management trusts -    Other 166.0 342.8 147.1 29.9 13.2 7.0 14.5 6.2 1.3 0.6 6.7 66.2 78.5 44.4 -5.0 TOTAL MFs 699.0 29.7 45.9 Other Financial Institutions General Insurance Offices Securitization vehicles 88.2 142.3 3.7 6.0 40.0 259.3 TOTAL 2357.7 100.0 66.5 Assets of all financial Institutions in Australia- December 2003 (Australian Bankers Association 2004) As highlighted in the table above, the banks accounts for roughly a half in the financial services sector with assets worth $1,200 Billion while the RFCs have assets worth $160 Billion and MFs’ assets are worth $700 Billion. Another valuation shows that at the present Australia financial services providers account for assets worth $2.4 Trillion. At the same time, the assets were worth $1.4 Trillion five years ago. Consequently, this shows a 6 per cent growth for the past five years which is faster than the rate of growth of the economy of Australia as a whole. b).The legal framework of Australian financial institutions, with a focus on banks The main regulators of financial institutions in Australia include: Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA), Payments System Board (PSB), Financial Sector Advisory Council (FSAC) and Australian Securities and Investment Commission (ASIC) (Adadevoh 2010). Each of these regulatory bodies has a specific area of responsibility as the regulator or supervisor. The Reserve Bank of Australia (RBA) plays a pivotal role in the financial services sector. It is the principal regulator of the operations of the financial institutions. RBA is the central bank of Australia and shares responsibility with other agencies for the efficiency and safety of the payment system and overall stability of the financial system. In addition, RBA offers specialized banking services to the government of Australia, government instrumentalities and a number of overseas official institutions and central banks. Specifically, the government of Australia together with its departments is the principal banking customer of Reserve Bank of Australia. In addition, RBA provides transactional banking services and facilities to various Australian Government agencies. These include: deposit and cheque processing, bank account facilities, processing and dispersing of bulk electronic credit and debit transactions, overseas payment services, paper based and electronic collection services cheque reconciliation, repository and verification services among others (Head 2008). In addition, RBA assists in monetary policy and liquidity management for the government and its agencies. The Australian Prudential Regulation Authority (APRA) is responsible for the prudential supervision of authorized deposit-taking institutions, super funds and life offices. APRA is given the power to regulate issues related to asymmetric information by setting and enforcing standards of prudential behaviour on all institutions in areas of deposit taking, insurance and superannuation. APRA supervises activities and operations of ADIs, general or life insurance companies, superannuation and approved deposit funds (ADFs) and other friendly societies. Another regulatory body is the Australian Securities and Investment Commission (ASIC). ASIC is given the power to regulate the integrity of the financial market and protect consumers with an aim of promoting market fairness and attain the confidence of the consumers (Head 2008). ASIC supervises non-ADI financial intermediaries which include: cash management trusts, public unit trusts, finance companies, money market corporations. Finally, the Payments System Board (PSB) principal responsibility is to supervise the payments system among financial institutions, while the Financial Sector Advisory Council (FSAC) that advices the treasurer regarding the policy and development information within the financial services sector. Consequently, the financial sector framework in Australia covers banks, other deposit-taking institutions, investment banks, collective investment managers, securities and foreign exchanges among others. The Australian legal framework has moved from an industry-based to one which is divided between prudential regulation of financial sector institutions on one side and financial market integrity and investor protection on the other (The Structure of the Australian Financial System1, 2006). c). Challenges faced by Australian banks The challenges faced by Australian banks are highly associated with the global financial crisis and the European Sovereign Debt crisis. These two crises result into devaluation of the Australian (Dollar) currency as well as the currencies of other major economies such as the European (Currency) Euro. Nevertheless, the four big Australian banks have had large write-downs which led to worsening local implications of the financial meltdown that began in the United States. Since the begging of 2008, every has seen fresh indicators that the financial crisis is having an increasingly serious impact on the living conditions of working people, and that broad sectors of the Australian economy are already in recession, despite the massive profits still being enjoyed by the big mining and energy companies (The Structure of the Australian Financial System1, 2006). In addition, this has led to the decline of consumer confidence over the financial service industry. On the other hand, the level at which the Australian banks were lending to businesses has continually being declining due to the financial crisis. The retirement funds made by the employers to the Australian banks have also experienced losses more so with the government’s order of 1992 to make superannuation payments a compulsory for all banks. Since these funds have been used for shares, property and in financial markets, the financial statements at the end of the year show a loss of more than 6 per cent (Adadevoh 2010). Though there is a boom with the mortgages held within the Australian Banks, loans made by businesses and in real estate for commercial purposes have been deteriorating. Furthermore, the Reserve Bank of Australia is concerned on the possibilities the economy of Australia overheating due to the rise in the prices of goods and services and investment operations. Another challenge to the Australian Banks is with regard to their regulators such as APRA and ASIC. This relates to the impact globalization has on the financial markets. This is because there is need for international cooperation among all international regulators so as to improve and achieve effective regulation in domestic markets of Australia since much of Australia’s financial market behavior and disclosure regulation is affected by international issues such as operations of global financial institutions in Australian markets, complex cross-border ownership structures and policies related to international regulatory standards (Saunders and Cornett 2011). Nevertheless, the Australian Chamber of Commerce and Industry (ACCI) see the global financial crisis and the European Sovereign Debt crisis as a great opportunity for Australia to attract foreign capital and support the provision of finance to local businesses. This is because these crises have resulted into instability in overseas financial markets. References ‘Financial sector supervision’, making transparency transparent: an Australia assessment, pp. 2- 5. Retrieved on 14/07/ 2011 from http://www.treasury.gov.au/documents/178/PDF/ch7.pdf Mike Head, 2008, ‘Australian bank debt write-downs reveal deepening economic problems’, world socialist website, Retrieved on 14/07/ 2011 from http://www.wsws.org/articles/2008/aug2008/econ-a04.shtml Kodjo Adadevoh, 2010, ‘Current issues faced by various Australian and New Zealand industries’ helium, Retrieved on 14/07/ 2011 from, http://www.helium.com/items/1807074-australia- and-new-zealand 2010, ‘the European Sovereign Debt Crisis Is No Basis For Restricting SME's Access To Finance’, Australian chamber of commerce and industry, Retrieved on 14/07/ 2011 from http://www.acci.asn.au/Research-and-Publications/Media-Centre/Media-Releases-and-Transcripts/Economics-Industry/The-European-Sovereign-Debt-Crisis-Is-Not-Basis-Fo?feed=ACCIResearch The Structure of the Australian Financial System1, 2006, reserve bank of Australia, Retrieved on 14/07/ 2011 from, http://www.rba.gov.au/publications/fsr/2006/mar/html/struct-aus-fin-sys.html Australian Bankers Association, 2004, ‘Financial Services Sector’, Retrieved on 14/07/ 2011 from http://www.bankers.asn.au/Default.aspx?ArticleID=618. Saunders,A and Cornett, M., 2011, Financial Institutions Management: a Risk Management Approach, 7th Edition, McGraw-Hill Irwin, Sydney. ‘Welcome to the website of Australia’s central bank’, reserve bank of Australia, Retrieved on 14/07/ 2011 from www.rba.gov.au Read More