Banking and Non-banking Financial Institutions in Australia - Coursework Example

Banking and non-banking financial institutions in Australia Student’s name Institution Introduction Banks and non bank financial institutions are very crucial in any economy all over the world. They mainly help individuals to save, provide risk free income customers who entrust them with deposits, help to channelize savings into productive capital and facilitate productive use of surpluses to generate employment and promote economic growth. Banking financial institution accepts customer deposits and also offers other services such as bank accounts and lending loans. Non-banking financial institutions on the other hand do not accept any cash deposit from customers but offer all the other banking services (Pickersgill, 2012). Traditional meaning of the business of banking It is very difficult to give the exact definition for the term business of banking. There are many statue laws in Australia that help in understanding the business of banking. Under section 51 of the Banking Act 1959 it defines the business of banking as that of accepting deposits from customers, for the reasons of lending it to other customers and investment, deposits of money. This definition was adapted by the case law of commissioners of the state savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19CLR 457. Judicially it has been recognized that it is very difficult to define the business of banking, it was previously noted by the Privy Council that the meaning sometimes changes with time and in different cultures: Bank of Chettinard v Commissioner of Income Tax, Colombo [1948] AC 378 (HAYNE, 2014) The Banking Act section 5(1) gives a clear definition of the business of banking. The business of banking means a business that consists of banking within the meaning of paragraph 51(xiii) of the constitution or a business that is carried by a corporation to which paragraph 51 (xx) of the constitution applies. It consist the business of taking money on deposits and making advances of money or any other financial activities allowed by law. There are other statutory definitions for ‘banking’, ‘banker’ and the ‘business of banking’ although none of them provide much insight. For instance, The Bills of Exchange Act 1909 and The Cheques Act 1986 have some provisions that are important to bankers but not helpful in defining the business of banking. The judicial system in Australia is sometime forced to consider the matter when defining the business of banking. The reason for this is because the definition of the business of banking according to the Banking act is not exhaustive. In many occasions the courts are guided by previous judicial decisions on the correct meaning of the term. For example, The High Court in Australia considered the question in Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83. In Australia the banking system consists of a few large banking corporations that have many branches that facilitate business. In recent years, it has been observed that Australian banks have closed bank branches in those areas that are less profitable due to the recent difficulties in doing business. To cut cost banks have adopted the model of agency. Agents are recruited to carry on the business of banking agent and not the business of banking: PP Consultants Pty Ltd v Finance Sector Union [2000] HCA 59 (Moradi, Valadkhani, & Saleh, 2014) Banking financial institutions in Australia The banking financial institutions in Australia are; banks, building societies and credit unions that are licensed to carry on the business of banking under the Banking Act 1959. Bank A bank can be defined as an institution that accepts deposits from customers and provide other financial services that include offering credit, bank accounts among others (Roesch, & Scheule, 2014). Examples of banks in Australia include, the commonwealth bank, the national bank of Australia, Westpac banking corporation and the Australia and New Zealand Banking Group (ANZ). Following the great depression that occurred in the year 1920, it brought the bank to a string which resulted to its failure. Australian banking industry, therefore, became tightly regulated. In 1980s, it was not easy for foreign banks to operate their banking business activities in Australia. As a result, the number of banks in Australia became very smaller compared to other developed countries such as the United States, China, Japan, England and Hong Kong (Pickersgill, 2012). Regulation In Australia, banks are regulated in a detailed and an extensive manner. The regulation is mainly split into the Australian prudential regulation authority and the Australian security and investments commission. These kinds of institutions help bridge the gap that ensuring the unethical behaviors does not take place. Banking financial institution is regulated under the Australian prudential regulation authority which was established by the APRA Act 1998. It can be observed to a large extent industries that are supervised by APRA fund it. The institution is authorized to supervise all the institutions that are allowed to take deposit as well as non-operating holding companies (NOHCs) and currently it supervises institutions holding $4.5 trillion in assets for some Australian depositors, fund members and even policyholders. The institution directly protects depositors, for instance, if an ADI faces financial trouble it is the responsibility of the APRA to appoint an administrator to take charge of the struggling institution. In particular, all building societies, banks and credit unions. The Australian prudential regulation authority has issued capital adequacy guiding principles for all financial institutions that are dependable on the base two guidelines. All banking institutions under the APRA are supposed to present their reports to the APRA after every specified period of time. All the banking institutions are also subjected by the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Thompson, 2008). Under this act, banks are supposed to monitor and identify their customers by using a risk-based approach. APRA always operate independently from the government of Australia, this is by devoting itself in ensuring that it realizes its mission of establishing and enforcing prudential standards and practices designed to ensure that financial promises made by financial institutions to its customers are supervised and met within a very efficient financial system (Deng, & Liu, 2014). The Banking Act 1959 gives power to the APRA to establish and enforce prudential standards designed to enable it to fulfill its prudential supervision over the ADIs. The ADIs under section 5 of the Banking Act 1959 are defined as the ‘body corporate in relation to which an authority under subs 9(3) is in force’ this refers to institutions that are allowed to take deposits from customers for the purposes of carrying on business. Besides the supervisory role that it plays, APRA also has other functions. It is involved in collecting statistical information under the Financial Sector (collection of data) Act 2001 from all ADIs. All ADIs, NOHCs and their subsidiaries are required under this Act to give all the required financial information. For example, general reporting forms requires to provide data relating to exposures, impaired assets, liquid assets, commercial property and securities held, securities issued and financing agreements(APRA,2012 ). Building societies The Building Societies Act 1990, defines a building society as a financial institution that is registered and incorporated under this Act. Building societies are normally owned by members as a mutual financial organization. They can also be defined as financial institutions that are authorized to operate as a building society under the financial institution code 1992 and section 8 of the Australian financial institutions code. Such institutions offer various services such as provision of credit to customers by taking into account the range of factors it considers important to customers especially the ability to repay credit facilities. They are also Authorized deposit taking institutions (ADIs), meaning that they are allowed to open accounts to customers so that they may be able to deposit and withdraw their money. They mainly target the rural markets that are not covered adequately by commercial banks. APRA are very strict especially on the safety and capital to all financial institutions in Australia and the high standards must be observed. From 01 February 2012 the Federal government agreed to guarantee all the deposits in all ADIs up to $250,000. Any facility offered by a building society must be guaranteed. A guarantor under section 16 for the purpose of getting any financial benefit is a third party who must be an individual. Credit unions on the other hand are non-profit making organizations or cooperatives that allow their members to borrow funds from pooled deposits at considerable low interest rates than in other institutions (Goodhart, 2006). They are also often referred to as the 5th pillar in the banking and finance industry. Both building societies and credit unions fall under cooperatives and are governed by the same laws. Regulation All building societies are authorized to take deposits and there regulations are similar to all other commercial banks in Australia. The regulation is offered by the Australian Securities and Investment Commission (ASIC) under the Corporation Act 2001, and by the APRA under the Banking Act 1959. ASIC is a body established independently under the Australian Securities and Investments Commission Act 2001 (ASIC Act). The Act requires the regulator to play various roles that will benefit the consumer fully. Credit unions (co-operatives) A credit union is defined as a cooperative organization that is owned and controlled by its members. Its main purpose is to promote frugality, give soft loans and also provide other financial services to its members (Feinberg, Meade, & Park, 2013). Regulation Credit unions are regulated by the Australian Securities and Investment Commission (ASIC) under the Corporation Act 2001, and by the APRA under the Banking Act 1959. . In the year 2005, the board of governance started working towards preparing standardized provisions for jurisdictions for purposes of amending legislation and introducing a mutual recognition system (Dunnan, 2009). This was to make cooperatives replace the previous foreign corporative registration requirements and issue co-operative capital unit (CCU). The template law is known as the Co-operatives National Law which was released for public comments in December 2009. The Australian Co-operative Laws Agreement provides that jurisdictions should co-operatively preserve the legislation with adoption of uniform administrative procedures. The law also provides that co-operatives in any jurisdiction are able to conduct a business under any other jurisdiction given that the same law remains and administered as per the same policies and procedures. Non-banking financial institutions Non-banking financial institutions are institutions that offer other financial services but do not accept customer deposits. Some of the non banking financial institutions in Australia are; the Money market corporations also known as merchant banks, Finance companies and Securitizes companies (Lipscombe & Pond, 2002). The money market corporations (merchant banks) The Corporation Act 1974 defines merchants’ banks as a financial institution that takes few deposits from domestic depositors and much business is advice to corporations and lending to corporations. Such services really attract many customers since individuals would want to acquire knowledge concerning how they can maximize their utility through the borrowed funds. (Pickersgill, 2012). Finance companies Finance companies are registered under the Corporation Act 2001 and mainly provide loans to small and medium business and individual households. These companies raise finances from extensive markets to lend to their customers. They also raise those funds by taking unsecured notes and debentures from the retail investors (Klein, 2006). Regulation of the non-banking financial institutions in Australia Non-banking financial institutions do not operate under the authorized deposit taking institutions (ADI). These institutions are therefore not licensed or regulated under the Australian banking act and are therefore not subjected to the authorized prudential regulation authority. However, they may at times be required to acquire licenses under the corporation act 2001 depending on the characteristics of their intended business activities in the country. The Australian security and investments commission (ASIC) regulatory board, therefore, is responsible for protecting customers’ rights and the market integrity with guidelines of these institutions (Leaf, 2012). Conclusion Financial institutions must take care of its customers because customers are the main pillars of any successful institution. Both the banking and non-banking financial institutions are regulated in Australia. the regulatory body that is subjected to the banking institutions is the Australian prudential regulation authority (APRA) and the Australian corporative national law while that responsible for non-banking institutions is the Australian security and investments commission (ASIC). Regulation is, therefore, important to all financial institutions. There must be rules to govern individuals in every action they take especially in dealing with funds. References Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 Deng, X., & Liu, L. (2014). The Bank Lending Channel: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 8(2), 71-87. Department of Australian Prudential Regulation Authority 2012, Authorisation Guidelines for Authorised Deposit-taking Institutions, APRA, viewed 16 September 2012, from: http://www.apra.gov.au/adi/Pages/adi-authorisation-guidelines.aspx Dunnan, N. (2009). Banking. Englewood Cliffs, NJ: Silver Burdett Press. Feinberg, R. M., Meade, D., & Park, C. (2013). Economic Benefits of the Credit Union Tax Exemption. Goodhart, C. A. (2006). The business of banking, 1891-1914. London: Weidenfeld and Nicolson HAYNE, K. (2014). Mills v Commissioner of Taxation [2012] HCA 51. Klein, G. (2006). The business of banking. London: Methuen. Lipscombe, G., & Pond, K. (2002). The business of banking (4th ed.). Canterbury: Chartered Institute of Bankers. Moradi-Motlagh, A., Valadkhani, A., & Saleh, A. S. (2014). Rising efficiency and cost saving in Australian banks: a bootstrap approach. Applied Economics Letters, (ahead-of-print), 1-6. Pickersgill, M. (2012). Emerging structural trends in the non-bank sector. Caulfield East, Vic.: Roesch, D., & Scheule, H. (2014). Systemic Risk in Commercial Bank Lending. Available at SSRN 2402063. Thompson, G. (2008). Risk-Based Supervision of Pension Funds In Australia. Washington, D.C.: The World Bank. Read More