The Australian Financial System - Case Study Example

Running Head: The Australian Financial System The Australian Financial System Name of Student Institution Date Introduction Between the period of the world war two and the late 1970s, the Australian financial system can be viewed as being a heavily regulated one. During this period, there were a number of controls over a great number of aspects of finance externally and this was in respect to a managed exchange rate system as well as the regulation of the foreign bank entry and foreign exchange and domestically due to the regulation of the type, quantity and the pricing of the banking services. Despite these, there was a rapid change from the 1980s there was a major change and this led to the redirection of the policy and the financial system, in the country was deregulated. The Campbell Inquiry was seen as the major backbone of the financial reform, the inquiry marked the beginning of a deliberate program, that was aimed at introducing comprehensive reforms and the final report offered a consistent case to enhance extensive deregulation and this was based on the various benefits that were to be gained from increased levels of competition as well as efficiency in the free market. This paper sets out to discuss the changes in, and structure of the Australian financial system that led to the deregulation of the financial system in the 1980s. Discussion Changes in Australian financial system The financial system all over the globe seems to be undergoing a number of changes a small snapshot of the system tends to reflect the influence of the past development and that of the forces for change which are now acting upon the system. The changes in the Australian financial system occurred in three main aspects and they include the structural change in the financial markets, globalization as well as the increasing technology and innovation. Structural change can be said to be having a major effect and at the same time it is also altering greatly the shape of the Australian financial markets in addition to the markets on the global scene. It can be noted that since the Wallis inquiry, the markets have been more competitive, integrated, complex and global. This creates a number of opportunities in that there are more opportunities for investments and also for raising capital and the high level of competition that is experienced is effective in that it have a great potential when it comes to driving downs costs and at the same time drive up the standards of services offered (Australian Securities & Investments Commission, 2014). It is also essential to note that there was also a great shift when it came to the market-based financing and this was mainly driven by aspects such as the increased banking regulation and the growth in terms of the superannuation as well as growth that were experienced in the pensions sector. There was also emergence of some new types of market based financing and some of these include crowd funding and also the peer to peer lending. While these kinds of changes have brought about new opportunities they have also created risks in relation to market resilience (Bell, 1997). The other change was in relation to innovation and technology. It is crucial to note that under this point none of the changes that were experienced at the time could have occurred or would have been achieved successfully with innovation and technology. The technology change that took place over the years has led to numerous and considerable benefits to the consumers of various financial services that were offered in Australia over the last two decades. Technology was also effective and it also played a major and leading role when it came to offering more potential in that it offered the consumers with a wide range of choice to choose from and at the same time of offered room for new entrants (Lewis & Wallace, 1993). Despite the positive change the change also had a disadvantage in that the technological a development raised a number of risks and challenges for the financial stability and regulation. Thus, regulations in the financial system need to ensure that they do not in any way impose unnecessary burdens on the innovative technologies in addition to the nontraditional market entrants. However, it can also be noted that at a higher level there have been an increase in risks and more so the ones that are associated with cybercrime. This in way posses major challenges when it comes to the cross border enforcements. Another change that have occurred and which is of great significance is related to globalization. The Australian financial markets can in a way be said to be more integrated with the international markets and this is when it is compare to the time that the Wallis Inquiry occurred. By encouraging further forms of integration there would be major economic benefits to the country of Australia and people the people who make great use of the financial system in the country. A major area that most of the immediate potential benefits are the in the Asian region. Globalization has also in a great way challenged the regulations when it comes to ensuring that they are at par with the various international standards. Failure of the system to keep pace with the most essential and relevant international regulatory standards would lead to certain risks in that the Australia’s regulatory system could not in any way be assessed as being adequately equivalent, and the entry to markets being closed off to certain market participants (Harper, 1985). Structure of the Australian financial system The strength of Australian financial system and more so in the banking sector, has been a significant factor when it comes to cushioning Australia and its people from the effects of the global financial crisis. It can be noted that the Australia’s financial system also continued to function well all through the global financial crisis. In general, the Australia’s institutions were profitable and well-capitalized as compared to the other countries, and this in a way enabled them to continue to lend right through the crisis. Even so, intermediated credit from the banking sector was seen as being more expensive and it was also subject to tighter conditions. Some of the borrowers and more so the particularly large and medium-sized businesses rose funds from the equity and debt capital markets so as to add-on their bank funding. But there were some businesses which were at the losing end and this was due to the fact that that they lacked access to the various financing alternatives and they were affected greatly by the tightening in conditions for intermediated credit (Edey & Gray, 1996). The Australian financial systems entails a number of arrangements that covers the lending and borrowing of funds as well as the transfer of ownership of the financial claims in Australia (Carew, 1991). The Australian financial system have undergone numerous changes over the years the changes have been marked in terms of the relative importance of the various institutions that operates in the financial systems but also in the nature of the financial intermediation in addition to increasing financial markets. The structure financial system can also be said to have been experiencing a change in the institutional structure. Although it can be noted that a distinction between a number of the financial institutions have over a period of time become blurred the structure of the financial system a financial system in most instance is usually characterized based on the various institutions that operates in it and this includes the authorized deposit-taking institutions, superannuation, payments systems and the financial markets (Carew, 1989). On that basis it can be noted that there are four major developments in terms of the structure of the financial systems that strongly standout. The first development is the increase in terms of importance of banks and based on these the banks currently accounts for almost half of the total assets that are there in the financial system,. When viewed from a group wide level bank have for a considerable amount of time become more prominent and they have also diversified into funds management and also to insurance. The second developments relates to the development in terms of the increasing importance of the aspect of securization. The third aspect is the marked increase in terms of the shares of assets that are managed through the managed funds and the superannuation funds and this ion a way reflects the changes that have occurred in the retirement income arrangements. The fourth aspect relates to the decline in terms of the relative importance of the credit unions finance companies, merchant societies and this shows that such institution grew strongly in the earlier decades and this can be greatly attributed to the regulation that occurred in the banking sector (Australian Financial System Inquiry (1982b). Banks in Australian play an essential role in the Australian financial system in that it holds majority of the financial system assets. Additionally, when compared to the traditional retail deposit taking and lending activities the banks tends to be more involved when in a number of facets of the financial intermediation including stock broking, financial markets, business banking, insurance and the funds management. The rapid expansion of the banks domestic balance sheets tend to reflect a situation where both the demand and the supply factors and more so in the housing lending markets. The decline that was experience in the early 1990s as a result of inflation and the lower interest rates that were offered in a way boosted the demand for the housing finance. There was also an increase in competition among the banks and their intermediaries in the deregulated business environment and this in a way lowered the costs and also increased the flexibility of the housing finance. The increase in assets in the banking system is also as a result of the fact that a great number of the building societies have been converted into banks (Australian Financial System Inquiry, 1982a). The other component of the Australian financial system is the authorized deposit taking institutions. In addition to the banks there exists other two types of authorize deposit taking institutions that operates in Australia and they include the building societies and the credit unions. The institutions mainly focus on the provisions of the retail banking services and likely most of the banks they are also supervised by the APRA and at the same time they are also subject to the same regulatory requirements as the banks (Australian Financial System Inquiry, 1981). In addition to the building societies and credit unions and the bank there also exists other financial institutions which tend to be act as intermediate between the borrowers and the lenders in the Australian Financial system and they are termed as the registered financial corporation’s but they are not in any way authorized to accept any kind of desists. Though they are not in any way supervised by the APRA they are subject to the same disclosure regulations and conduct that are applied by the Australian Securities and Investments Commission to the non-financial corporate sector. These corporations make use of the short-term borrowing so as to finance the loans to the business, financial and the fund investments and the bulk is what is termed as the debt securities. The finance companies on the contrary tend to have larger proportion of most of their assists in terms of housing sectors and the business (Australian Financial System Inquiry, 1980). Conclusion In conclusion, the financial system all over the globe seems to be undergoing a number of changes a small snapshot of the system tends to reflect the influence of the past development and that of the forces for change which are now acting upon the system. The changes in the Australian financial system occurred in three main aspects and they include the structural change in the financial markets, globalization as well as the increasing technology and innovation. Additionally, I can also be noted that the strength of Australian financial system and more so in the banking sector, has been a significant factor when it comes to cushioning Australia and its people from the effects of the global financial crisis. It can be noted that the Australia’s financial system also continued to function well all through the global financial crisis. In general, the Australia’s institutions were profitable and well-capitalized as compared to the other countries, and this in a way enabled them to continue to lend right through the crisis. Even so, intermediated credit from the banking sector was seen as being more expensive and it was also subject to tighter conditions. References Australian Financial System Inquiry (1980). Interim Report. Canberra, AGPS. Australian Financial System Inquiry (1981). Final Report. Canberra, AGPS. Australian Financial System Inquiry (1982a). Commissioned Studies and Selected Papers, Part 1 Macroeconomic Policy: Internal Policy. Canberra: AGPS. Australian Financial System Inquiry (1982b). Commissioned Studies and Selected Papers, Part 2 Macroeconomic Policy: External Policy. Canberra: AGPS. Australian Securities & Investments Commission (2014). The biggest changes to the financial system since the Wallis Inquiry. Retrieved from http://download.asic.gov.au/media/1322323/Biggest-changes-to-the-financial-system-since-the-Wallis-Inquiry.pdf Bell, S. (1997). Ungoverning the Economy: The Political Economy of Australian Economic Policy, Oxford: Oxford University Press. Carew, E. (1989). The Experience with Financial Market Deregulation., in The Good Fight: Essays in Honour of Austin Stewart Holmes 1924-1986. Sydney: Allen & Unwin. Carew, E. (1991). Fast Money 3: the Money Market in Australia. Sydney: George Allen & Unwin. Edey, M. & Gray, B. (1996). The Evolving Structure of the Australian Financial System. In The Future of the Financial System: Proceedings of a Conference. Sydney: Reserve Bank of Australia, Economic Group. Harper, I.R. (1985). Why Financial Deregulation? ANU Discussion Paper, No. 132, October. Canberra: Australian National University. Lewis, M.K. & Wallace, R.H. (1993). The Australian Financial System. Cheshire, Melbourne: Longman. Read More