Australian Financial Services Industry - Essay Example

A Report on Australian Financial Services Industry To: Prepared by: Date: Australia is one of the well known countries for its effective financial system. The country has three primary types of financial institutions notably Non-ADI financial institutions, authorized deposit-taking institutions and insurers and fund managers. The authorized deposit-taking institutions consist of banks, building societies and credit unions. The banks are supposed to provide a broad range of financial services to every sector of the economy. Building societies on the other hand are supposed to raise funds basically through acceptance of deposits from households as well as provision of loans and payments (Rudo, 2008). Credit unions are usually mutually owned organizations which provide personal loans, deposit and payment services to its members. As at March 2009, assets of the banks amounted to AD2, 638 billion while the total value of assets of the building societies amounted to AD21.3 billion. Besides, the total value of assets held by credit unions amounted to AD 45.8 while the total assets of Reserve Bank of Australia were valued at AD118.7 (Reserve Bank of Australia, 2009). Non-ADI financial institutions consist of money market organizations, finance organizations and securitizers. The money markets usually operate in wholesale market where it borrows from and lends to governments agencies and giant corporations. Besides, the money markets offer advisory services regarding capital markets, corporate finance and foreign exchange. On the other hand, finance companies primarily provide loans to households and small and medium scale business organizations. Moreover, securitizers are responsible for issuing securities backed by assets of entities. As at March 2009, the total assets of money market corporation and finance companies and general financiers amounted to AD106.8 billion and AD128.5 billion respectively (Reserve Bank of Australia, 2009). Insurers and fund managers consist of five categories of financial institutions notably life insurance companies, general insurance companies, superannuation and approved deposit funds, public unit trusts, cash management trusts, common funds and friendly societies. The life insurance institutions provide accident, disability and life insurance, investment, annuities and superannuation products. General insurance provides property insurance, motor vehicle insurance and employer’s liability insurance. As at December 2008, the value of the total assets of life insurance and general insurance corporations amounted to AD164.9 billion and AD 132.8 billion respectively (Reserve Bank of Australia, 2009). On the other hand, superannuation fund takes and manages employers and employees contribution to give out income benefits for retirement. The public unit trusts usually pool funds of investors into certain types of assets such as equities, properties and cash. Cash management trusts confine investments of individual investors to financial securities which are usually available via the short-term money market. Besides, common funds pool funds from general public to invest in certain types of assets. Lastly, friendly societies are cooperatives which are mutually owned to offer benefits to its members via a trust like structure. As at December 2008, the value of total assets of public unit trusts, cash management trusts, common funds, friendly societies and securitization corporations amounted to AD268.7 billion, AD45.2 billion, AD11.5 billion, AD4.0 billion and AD229.1 billion respectively (Reserve Bank of Australia, 2009). The Legal Framework of Australian Financial Institutions There four separate agencies on which the responsibility for supervision and regulation of Australian financial institutions is vested. These agencies include Australian Prudential Regulation Authority, Australian Securities and Investments Commission, Reserve Bank of Australia and the Australian Treasury. All these four agencies are coordinated by the Australian Council of Financial Regulators (APRA). The Australian Prudential Regulation Authority is responsible for the regulation of deposit-taking institutions such as banks and credit unions among others. The APRA is responsible of establishing administrative procedures and practices which balances efficiency and financial safety as well as fair competition the financial markets. In order to support depositors’ interests, the agency ensures those companies which take deposits hold assets in Australia equal to its liabilities (APRA, 2009). The major objective of the Australian Securities and Investments Commission (ASIC) is to promote fairness and honesty in the financial market through disclosure of adequate market information in time. The ASIC administers and enforces various legislative provisions regarding to financial markets, products as well as intermediaries. This agency is responsible for licensing and monitoring compliance of stakeholders in the financial markets. In this regard, the company controls the minimum capital which an entity should have to provide banking services (ASIC, 2009). Besides, the Reserve Bank of Australia is responsible for ensuring stability in the financial market through establishment and enforcement of effective financial policies. The Reserve Bank plays a major role in ensuring that banks as well as other financial institutions maintain required liquidity and capital for the purpose of maintaining the stability of the financial system. In order to attain this, the Reserve Bank sets a limit for cash-deposit ratios of which the banks can not go beyond. Moreover, the banks are required to deposit a certain potion of all customers’ deposits with the Reserve Bank (Reserve Bank of Australia, 2009). The Australian Treasury is responsible for giving advice to the government on issuing pertaining financial stability as well as legislative and regulatory framework underpinning the infrastructure of financial system. This agency provides important advice to the government of Australia concerning policy processes as well as reforms that embrace secure and stable banks and other financial institutions. Besides, the agency provides advice to the government to implement sound financial institution practices so as to meet the interests of all financial system stakeholders. Besides, the agency provides advice to the government concerning the most effective policies to remove unfair competition in the financial market (Reserve Bank of Australia, 2009). Challenges Faced by Australian Banks Challenges in banking sector are enormous especially on these days when the global economy has been hit by financial crisis. The Australian banks faces challenges brought about by financial crisis, globalization and also stricter regulatory policies issued by the four regulatory agencies in Australian financial system. To start with, globalization has brought out increased competition in the financial market. The local banks in the economy are forced to compete with giant international financial institutions. Increased competition is one of the critical factors which can render a bank uncompetitive if proper strategies are not established and implemented. Increased competition in the banking sector has enabled banks to share the market thus reducing the revenue of the local banks (Lindsay, 2008). In order to maintain the effectiveness of financial market, the regulatory authorities in Australia have established strict policies which affect the operations of banks negatively. For instance, increase of Interest rate by Reserve Bank by 0.25% to 7.25% in the year 2008 was a huge blow to the banking institutions. The banks are forced to raise their interest rates thus shunning customers away. The frequent changes of financial regulatory policies pose challenges to banking institutions since they have to keep revising their strategies (John, 2008). Global financial crisis poses major challenges to banking institutions in Australia. Though banks in Australia have been affected by global financial crisis slightly, it is evident that the banks are feeling the heat. This is portrayed by the fact that the profitability of the banks in the financial year 2008 dropped by about 2% as compared to that of 2007 (Australian Bankers’ Association, 2009). As noted by chief executive officer of the Australian Bankers Association, David Bell, the financial year 2007 and 2009 are difficult years in which the country is experiencing worst global financial crisis since 1930s. However, it is evident that the impact of the global financial crisis has not immensely affected the profitability of banks operating in Australia (Lindell, 2008). It is evident that banking sector in Australia has not been affected much by global crisis as compared to many countries across the world where banks are making abnormal losses thus being supported by taxpayers’ funds. The Australian banks have performed well as compared to other banks operating in other countries such as England and America. Despite the global financial crisis, the Australian banks continues to provide critical banking services such as making loans and operating accounts as usual. However, it is evident that the banks operating in Australia are supposed to come up with effective strategies to mitigate the effects of financial crisis. It is not clear when the prevailing global crisis will end thus the banks must be prepared with effective strategies to mitigate future negative effects (Australian Bankers’ Association, 2009). References APRA, 2009, About APRA Home, viewed on 27 May 2009, < http://www.apra.gov.au/aboutApra/>. ASIC, 2009, About Us, viewed on 27 May 2009, < http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Our%20role>. Australian Bankers’ Association, 2009, Australian Banks Perform Well Despite the Global Financial Crisis, viewed on 27 May 2009, . John, D 2008, Reserve Bank lifts interest rates, viewed on June 7, 2009, http://business.smh.com.au/business/reserve-bank-lifts-interest-rates-20080304-1wrk.html Lindell, R 2008, Australian Banks not Immune to Financial Crisis Analysts Warn, viewed on 27 May 2009, . Lindsay, T 2008, ‘A Study on Financial Service Trade between Australia and China’, Economic Papers, vol. 27, no. 1, pp.57-69. Prime Minister of Australia, 2008, Global Financial Crisis, viewed on 27 May 2009, . Rudo, K 2008, ‘Prime Minister of Australia Kevin Rudo Holds a News Conference about the Global Economic Summit’, FDCH Political Transcripts, vol.1, no.1, pp. 1-5. Reserve Bank of Australia, 2009, Financial System Stability, viewed on 26 May 2009, < http://www.rba.gov.au/FinancialSystemStability/> Read More