Business of Banking and Regulatory Regime - Essay Example

Business of Banking and Regulatory Regime Name Institution Course Date Business of Banking and Regulatory Regime Introduction The financial sector is considered the biggest contributor of the output of approximately 11 per cent of the overall output in Australia. Australia was ranked the fifth country with leading financial systems in 2010. Total assets of banks in Australia were over $2.7 trillion. The country has four domestic banks responsible for the provision of service retail and commercial lending. Australia also has foreign banks focussed on commercial banking and other capital market practices and sometimes takes part in the retail banking market. The banking institutions face competition from non-bank sectors such as finance companies, credit unions and building societies that provide financial assistance to the Australians (Tyree and Weaver, 2006). There are regulatory regimes that are set to control all matter based on banking and non-banking businesses in order for an effective and sound banking system to be established for the interest of the customers of the financial institutions and the economy as a whole. This paper will establish the traditional meaning of the “business of banking”. It will then highlight primary banks and non-banks financial institutions found in Australia and the regulatory regimes that these institutions operate on. Traditional meaning of “business of banking” The traditional meaning of “business of banking” differs from one nation to another. Various English Common Laws define business of banking as common law and not statute. However, the statutory definition of business of banking is the process of receiving finances on deposit or current account. In addition, it can mean the collection and payment by use of cheques by customers or drawings pay-outs by customers to clients (Alan and Beatty, 2000). Business of banking comprises of additional activities prescribed by the Authority in regard to the Australian Banking Act. The traditional business of banking can also entails paying the agents by conducting checking and clearing of the client’s current accounts, collecting cheques to clients’ accounts or paying cheques drawn on the bank. Additionally, it also entails financial institutions conducting customer payments by using other payment approaches including ATM, telegraphic transfer to name a few (Alan and Beatty, 2000). The traditional meaning of business of banking can also involve borrowing money by accepting finances and capitals deposited on current account and borrowing money by issuing debt securities such as bonds. Simultaneously, the financial institutions make advances by lending money to their customers on current account. Such business process and activity is attainable by making instalment loans and profitable investment in debt securities. Also, borrowing money by a customer overdraft from a financial institution and lending money by a financial institution entitles banking business. Another case describing clearly the tradition business of banking is State Savings Bank, Commissioners of the State Savings Bank of Victoria and Co Ltd (Weaver and Kingsley, 2001). In the case, the primary characteristics of the business of banking were utilization of the funds collected by means of getting deposits on loan by lending it again in required amounts. Nevertheless, the 1966 Banking Regulations have been reviewed in an aim of extending the existing business concept and resulted to confusion due to unclear theoretical concept for “purchased payment facilities” (Weaver and Kingsley, 2001). Regulations of the financial institution activities have been divided between two parties: Australian Prudential Regulation Authority and the Reverse Bank of Australia. The APRA is responsible for regulation of immunities issued for executing any banking business and the RBA operate by means of Payment Systems Board and is responsible for carrying out critical payment system (Tyree and Weaver, 2006). However, the spilt of responsibility between RBA and APRA has not been thrilling since it has resulted to overlap of banking operations since payments and baking activities have been undividable since the original goldsmiths began handing out receipts now used as money. Statutory Regime of Banks Australia is known to have a well-capitalized and effective banking industry (Sturm and Williams, 2004). Its financial and banking institutions are considered large by international standards with strong retail support, well developed wealth organisation services, and profitable financial services, corporate advisory strategies covering the region. Australia has a number of banking financial institutions such as the Reverse Bank of Australia, and the National Australia Bank. Reverse Bank of Australia was instituted on 14 January 1960 (Sturm and Williams, 2004). It is a government agency that was specifically established as the central bank of Australia. Reverse Bank of Australia has the responsibility of offering services to the government in addition to offering services to the other central banks and formal institutions. The bank today is made up of Payment System Board with the responsibility of coordinating the payments structure processes and policies of the bank. In addition, RBA also consist of Reverse Bank Board with the duty of supervising all the banking and monetary policies (Wentworth, 2007). The Boards entails individuals from the Treasury, Australian government members, managers from other institutions, and the Bank participating in the financial system. A number of articles including the 1959 Banking Act1, the 1998 Financial Sector Act2, the 1959 Reverse Bank Act3 etc., founded the Reverse Bank of Australia (Weaver and Craigie, 2003). For example, 1959 Reverse Bank Act4 contributed to the change of name from Commonwealth Bank of Australia to Reverse Bank of Australia. Even with the change of name, the Bank still operated the same way it did earlier. Also, the Commonwealth Banks Act contributed to the formation of a new entity known as Commonwealth Banking Corporation. With regard to Subsection 10(2) of the Reverse Bank Act, the Bank is given a responsibility of ensuring the success of the economy and the wellbeing of the entire population (Weaver and Craigie, 2003). For this, it should be noted that the RBA is liable for formulating and implementing monetary and banking policy but is not a section of State. All licenced banks are entirely controlled and coordinated by the Reverse Bank of Australia and thus the bank is a Commonwealth constitutional body that reports to the Treasurer (Tyree, 2005). Another major banking institution in Australia is the National Australia Bank. NAB is considered one of the biggest Australian banking institutions with regard to customers and market capitalization. The National Australia Bank carry out its operational procedures in 10 countries serving more than 8.3 million customers and banking clients and approximately 2.3 million management clients. NAB is guided by the Banking Act, s. 115 (Blundell, Atkinson and Lee, 2008). This bank expanded faster in the 1970s and instituted a branch in Singapore. It also initiated minority welfare in local commercial banks. During the 1893-banking crisis NBA closed down but re-emerged as a public limited company. The National Australian Bank is steered up by the privacy policy and programmes for customers’ personal information. This bank respects the rights of privacy of the customers as guided by the Commonwealth Privacy Act 19886. In addition, the NAB also is guided by the 1974 legal requirement under Financial Corporations Act7 (Schich and Kikuchi, 2004). Specifically, National Australia Bank is established as an organisation that holds Australian Financial Service Licence. The primary regulator of this bank is the Australian Prudential Regulation Authority that provides a number of financial services through subsidiaries (Tyree and Weaver, 2006). Statutory Regimes of Non-banks There is a good number of Non-banks financial institutions established in Australia. Examples of major Non-financial institutions include Credit Unions and finance Companies. Credit Unions engage in retail industry through deposit taking and consumer credit. Various Credit Unions allocate commodities in units such as health insurance in order to offer beneficial member value. Australia has over 900 Credit Unions (Schich, 2008). One of the largest Credit Union in the country is Cuscal that take part in transactional banking and liquidity management commodities. The organisation motivates the customers to participate in the existing financial services industry in the economy by providing Australian capital markets, payment systems and ATM networks. Cuscal is Authorized Deposit-taking Institution guided by APRA. For this, it is a well-respected financial institution in Australia. The organisation is also guided by SSAs and AFIC. SSA is responsible for regulation of credit unions whereas AFIC is responsible for setting up standards and control the Credit Union Schemes (Schich, 2008). Finance companies are primary Non-bank financial institutions. Finance organisations provide capital for general insurance. They are founded under Corporation Act 20018 (Weaver and Kingsley, 2001). An example of effective financial company in Australia is CGU Insurance. CGU Insurance has over the years maintained living standard by provision of exclusive commodities such has commercial, personal and employees’ compensation insurance needs. CGU is one of the country’s largest intermediary insurers (Worthington, 2004). Insurance companies such as the CGU insurance are guided by the 1973 Insurance Act9 that regulate and coordinate the productivity of general insurance businesses. In addition, the 1995 Life Insurance Act10 regulates the insurance industry through registration ordination (Schich, 2008). Consequently, Corporation Act regulates insurers and brokers as well as the agents. Similarly, APRA is responsible for overseeing the Insurance Act and Life Insurance Act implementation. Conclusion According to this paper, traditional definition of business of banking differs significantly from one nation to another. Business of banking is the process of receiving money, paying in cheques, paying the agents, banks paying clients through payment processes such as ATM to name a few. Statutory regulation regime has been divided between RBA and APRA. Examples of banks situated in Australia include RBA and NAB. RBA is regulated by various Acts such as 1998 Financial Sector Act and 1959 Reverse Bank Act to name a few. NAB is regulated by Financial Corporation Act and APRA etc. On the other hand, examples of non-bank financial institutions include Cuscal regulated by APRA, SSA AND AFIC and CGU Insurance regulated by 1973 Insurance Act, 1995 Life Insurance Act and Corporations Act. References Alan, L. T. and Beatty, A 2000, The Law of Payment Systems, Sydney, Butterworth. Blundell-W. A., Atkinson, P & Lee, S.H 2008, ‘The Current Financial Crisis: Causes and Policy Issues’, OECD Financial Market Trends, vol. 2, p. 11-31. Schich, S and Kikuchi, A 2004, ‘The Performance of Financial Groups in the Recent Difficult Environment’, OECD Financial Market Trends, vol. 1, no. 86, pp. 63-81. Schich, S 2008, ‘Challenges related to Financial Guarantee Insurance’, OECD Financial Market Trends, Vol. 1, pp. 81-113. Sturm, J. E. and Williams, B 2004, ‘Foreign Bank Entry, Deregulation, and Bank Efficiency: Lessons from the Australian Experience’, Journal of Banking and Finance, vol. 28, no. 7, pp. 1775-1799. Tyree, A and Weaver, P 2006, Weerasooria’s Banking Law and the Financial System in Australia, 6th ed. Melbourne, Vic: Butterworths Tyree, A 2005, Banking Law in Australia, 5th ed. Melbourne, Vic: Butterworths. Weaver P & Kingsley C. D 2001, Banking & Lending Practice, 4th ed., Sydney, AIBF and Lawbook Company. Weaver, P & Craigie, T 2003, The Law Relating to Banker & Customer in Australia, 3rd ed.. Sydney, Thompson Lawbook Company.Victoria. Worthington, A.C 2004, ‘Determinants of Merger and Acquisition Activity in Australian Cooperative Deposit-Taking Institutions’, Journal of Business Research, vol.57, no.1, pp.47-57. Read More