Changes in the Financial System - Essay Example

Changes in the Financial System Name Institution Changes in the Financial System Introduction The financial regulation reform in Australia provides a valuable case study of analyzing the interaction that occurs between the level of development of ideas, commercial realities, and political constraints. Globally, Australia was one of the countries that embraced financial deregulation in the 1970s and in the mid 1980s, the country had already liberalized most of its financial markets. Nonetheless, the premise of the step was based on the assumption that both the capital and product market would generate effective, reliable, efficient, and stable financial system. The country failed to examine whether the necessary preconditions for such outcome existed globally (Davis & University of Melbourne, 2001). The official regulation was not replaced through adequate market monitoring and capital market discipline; the management systems and practices of governance were inadequate for the newly established competitive environment. With increased credit expansion, the asset price bubbled, the corporate borrowing became excess, and minor crises arose in the late 1980s. The increment in development focused on strengthening the existing regulatory infrastructure while ensuring adequacy in the information, incentives, and accountability with an aim of ensuring effective operation of market mechanisms. Australian Financial Deregulations The deregulation of the financial sector occurred during the time of the Campbell Report. Throughout the years, the report has been able to transform the Australian financial sector. Most importantly, the shift brought liberalization of the market, which in turn removed the initial artificial rigidities, associated with the interest rates, exchange rate pricing mechanism, and the control over capital allocation (Treasury: Financial System Inquiry, 2016). Such restrictions had initially played critical role in impairing the efficient operations within the financial sector. However, financial deregulation managed to prompt events that improved the operations of the financial sector especial intensification of the competition rate between the financial institutions while responding to the complexities associated with interaction with the quickly developing interest rates, equity markets, and foreign exchange. In addition, deregulation provides foreign bank entry into the financial market leading to stiff competition within both the wholesale financial markets and retail markets. The beneficiaries from the development of the investment banking sector are the retail consumers (Fitzgibbons, 2014). Over the last years, globalization in the financial markets and advancement in technology and deregulation of the financial sector has been able to alter radically the nature of the financial sector. There is a close connection between these factors; for instance, improvement in the communication highly assisted market globalization, which made it possible to remove various barriers to the international capital flows. The major factor that prompted financial deregulation was the threat associated with financial market globalization. The major objective of the financial sector deregulation was to ensure adequate improvement within the financial sector and lifting the economic performance of the country. In Australia, through the authorities, financial sector was subject to control in the 1970s, which the country perceived to be the major cause of the rampant operational shortcomings. Moreover, the financial sector never had the freedom of operating in vital areas; notably, it was neither allowed to set prices nor the volume of the credit within the economy independently. There was tight regulation of the retail interest rates and high control of the yields on the securities of the government and quite insensitive to various market forces. Moreover, the bank lending was subjected to different credit guidelines and controls besides the control through the resource base of the banks (Treasury: Financial System Inquiry, 2016). Particularly, heavy constrain occurred between bank allocation of the credit between the private sector and the government which means that these two entities were inhibited from their important capital allocation within the country. In Australia, the relative significance of the banks within the financial sector occurred within the long term decrease and other non-bank financial institutions such as the finance businesses, merchant banks, and building societies seemed to operate outside the regulation of the government: proliferation. Consequently, this lead to the formation in the backdrop in the inquiry undertaken by Campbell in 1981 and led to the determination of the key issues that the inquiry needed to address: regulation against deregulation of the financial sector. However, these factors led to emergence of consensus within the financial community on the appropriateness of deregulation, which was considered an essential course of action. The government managed to adopt the recommendations of the inquiry over the decades, which has seen literal transformation of the financial sector. Initially, the investment banks were considered important and played critical role in effecting such changes through taking direct role within the sector while at the same time influencing and shaping the behavior of the other financial institutions. However, it was not to transform the sector. The transformation had significant challenges associated with the costs within both the economy and institutions such as investment banks. Nevertheless, the net impact associated with the change was unmistakably beneficial. There are emphasis that financial deregulation was not only the factor in such regard, but was also an important catalyst. Globalization and improvement in technology played an important role. It is reasonably argued that these factors might have inevitably lead to financial deregulation although in a manner considered less organized and orderly. Generally, the external forces might have propelled the government to focus on deregulation, and Campbell’s inquiry made a way of managing the responses that were considered the least disruptive. There is somewhat similarity with the current inquiry in placing the financial sector within the best possible position with an aim of taking advantage of the ongoing impact associated with such factors (Davis, 2001). While the inquiry of Campbell seems to represent an important point within financial deregulation, the deregulation process had evolved slowly in the previous years. Nonetheless, there have been long-term paradigm shift in the common intellectual thinking and philosophical methodology to the policy of the government in favoring various market driven solutions with the current inquiry playing important role in the present continuum. The current focus is on t ensuring efficiency in the competition within the financial sector as a way of developing the sector and improving the economic contribution. Deregulation and Impact on the Financial System Deregulation of the Australian financial sector within the economic and legislative contexts means various events that occurred in the mid 1980s due to the implementation of the recommendations contained within the Final Report of the Campbell Committee in the Australian Financial System. Based on the economic and legal context, deregulation means moving away from regulation of several financial services directly with an aim of achieving the monetary policy, public sector financing, and sectoral assistance goals (Westpac Banking Corporation, 2013). However, the Australian government adopted the approach through allowing the banks and other financial institutions had much freedom of responding to the signals and customer needs within the competitive market, subject to meeting the minimum prudential standards developed with an aim of protecting the depositors and ensuring effective maintenance in the stability of the financial system. However, it is important to gauge the success of the past deregulation against the objective of the inquiry to have efficient and competitive financial system, provision of the choice of consumers, and proper maintenance of the overall system’s stability and integrity. The relevant issues relates to fairness and equitable treatment of different users of the financial system. Before deregulation, the Australian government sought to use the banking system as method of achieving the desired monetary policy considered favorable for the country. The banks imposed several restraints including controlling the interest rates which allowed the banks to offer their deports while charging some loans especially those for houses; limiting the maturity of the deposits which the banks could pay interests, and limiting the imposed from to time on the general growth of the balance sheets. These restraints had direct consequence such as rationing of the funds available for lending by the banks (Stokes, 2002). As a result, controlling the lending rates made the banks cheaper sources of funds compared to the finance businesses and building societies, which in turn led to increment in the demand of the potential bank borrower and exacerbation in the demand/supply imbalance. With such involvement, the low-income earners were excluded from the banks borrowing and forced to consider expensive alternatives; the housing borrower were enabled to acquire bank finance and forced to top up borrowing using expensive mortgages or personal loans from the banks and other financial institutions. Such involvement also led to the widespread of the depositors within the cross-subsidization of lending for different purposes. Ceiling the interest rates on the bank deposit meant that the potential customers had to seek the higher rates from the more risky financial institutions outside the banking systems. Nonetheless, the customers that needed greater security or had the cheque accounts never had the option but to keep their funds in either low or no interest bank deposits which indirectly subsidized the fortunate. However, with the emergence of deregulation of the financial sector, the rationing of the funds carried out by the banks ended which dismantling the cross subsidization between the potential customers emerged. In turn, this led to greater efficiency in the working of the financial system and ensuring that all the banks offer equitable treatment to the customers (Stokes, 2002). With the elimination of both the lending and interest rates, the customers of the banks were able to receive competitive market related rates on the deposits. Considering the interest rates were paid using the cheque accounts with the banks becoming more sensitive with the interest rates, there was occurrence in shift in the balances out of the accounts that traditionally paid zero or low interest rates compared to the higher yielding accounts. Consequently, the funds within the current accounts declined between 20.5% and 5.4% from 1980 to 1995 respectively. The removal of the lending controls enabled the banks to be in a position of meeting the needs and sharing the borrowing requirements of the ordinary Australians. On the other hand, the potential customers benefitted from the enhancement in accessibility and the lowered cost of borrowing compared to the non-bank sources during pre-deregulation. Nonetheless, not all the borrowers had the opportunity of paying lower interest. Lessening the cross-subsidy for the borrowers from the depositors prior to deregulation made the borrowers fortunate of acquiring the controlled rates of bank loans prior to deregulation started paying the market rates (Westpac Banking Corporation, 2013). Such changes yielded significant improvement in the equitable accessibility to bank financing. The share of the banks’ lending compared to the other financial institutions increased between 1980 and 1995 from 58% to 77%. Nonetheless, it is important to note that increment in the share reflected the conversion of various building societies to banks and absorption of the money market corporations. Without such conversions and absorptions, the share of the banks’ lending would have remained stagnant at 58%. Deregulation also led to merging of the large banks in 1981. The major banks that merged are Commercial Bank of Australia and the Bank of New South Wales; National Bank of Australia and Commercial Banking Company of Sydney, which played significant role in the provision of the impetus for rationalization of the resource that, have occurred in the country since 1980s. Moreover, reduction in the margins, poor experiences associated with loan losses, and the recent disaggregation of the banking market that have been in place have been able to all work as inducement to the management of the banks for operational cost reduction and increment in efficiency (Fitzgibbons, 2014). During deregulation, the major banks have been able to reduce their management costs in different ways. Nonetheless, these banks managed to close about 15% of their branches between 1983 and 1994 especially in the areas considered to have insufficient revenues in justifying their intentions. Additionally, the major reduction happened between 1990 and 1994 that saw 12% of the branches closed with the process continuing to take place. Deregulation also affected the human resources. Within the retail operations of the banks, the staff numbers declined by approximately 5% between 1983 and 1994 despite increment in the volume of the transaction of 25% and the broader product. Conclusion The from the mid 1980s, many banks were free to set their defined interest rate on their lending considering that nothing unstrained their growth abilities in regards to increment in their market shares and balance sheets. In Australia, deregulation of the financial sector have been very successful considering that it has been able to bring considerable efficiency to the Australian economy, ensuring improvement in a range of services and pricing to the customers, increased level of competitiveness of the financial services market. In addition, deregulation also ensured maintained the stability o the financial sector (Davis & University of Melbourne, 2001).Nonetheless, for Australia, there is still more room for ensuring stability and flexibility of the financial sector. There would be an enhancement of the financial system through focusing on the efficient regulatory framework that is considered nationally consistent in application across different participation groups. The framework also needs to have the capacity of varying the extent of supervision and regulatory oversight depending on the level of risk involved and ensures limitation in increasingly building up regulations. In Australia, financial liberalization was critical in driving the provision of stimulus to the financial sector of the economy and improving efficiency associated with technical, allocative, and dynamism. Moreover, deregulation also provided various benefits to the economy and the necessary conditions for the country to be closely integrated into the global economy while accompanying various parallel policy changes, which aim to open the Australian economy to the global market. Even though deregulation of the Australian financial sector brought several benefits, analysis of the Australian experience suggests that there many synergies within the reform of different areas of policy and offer insight into the appropriate sequencing of such reforms. However, the major change experienced by the policy makers is the ability of keeping up with the market developments with an aim of ensuring that the regulatory environment continues to remain relevant and properly balanced. References Davis, K. (2001, May). Financial Reform in Australia. Retrieved December 19, 2016, from http://kevindavis.com.au/secondpages/acadpubs/2003/Financial%20Reform%20in%20Australia%20-%20May%202001.pdf Davis, K., & University of Melbourne. (2001). Financial reform in Australia. Melbourne, Vic: Dept. of Finance, The University of Melbourne. Fitzgibbons, A. (2014). The Financial Sector and Deregulation in Australia: Drivers of Reform or Reluctant Followers? Retrieved December 19, 2016, from https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=ACE2005&paper_id=74 Stokes, A. (2002). The limitations of financial deregulation in Australia in the 1980's and 1990's. Mount Lewis, NSW: Greenacre Educational Publications. Treasury: Financial System Inquiry. (2016). Financial Sector Post-Deregulation. Retrieved December 19, 2016, from http://fsi.treasury.gov.au/content/downloads/PubSubs/000146c.pdf Westpac Banking Corporation. (2013). Impact Of Deregulation On The Australian Financial System. Retrieved December 19, 2016, from http://fsi.treasury.gov.au/content/downloads/PubSubs/000090d.pdf s Read More