Financial Institutions In Australia: Types, Assets And Lending Proportions

Types of Financial Institutions in Australia

Discuss about the Banking Royal Commission Operation And Governance.

In Australia, there are mainly three kinds of financial institution. They are Authorised Deposit-taking institutions (ADI), Non- FDI financial institutions along with Insurers and Fund managers. In this paper, the various groups of insurers and fund managers of the Australian economy have been considered. The five groups of financial institutions are as follows:

• Life Insurance Companies
• General Insurance Companies
• Health Insurance Companies
• Cash Management Trusts.
• Public Unit Trusts.

The details of the amount of assets of these financial institutions are given below in the form of table below:

Financial Institution	Assets in (Billion $) Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Main Regulator
Life Insurance Companies	173	APRA
General Insurance Companies	170.4	APRA
Health Insurance Companies	19.8	APRA
Cash Management trusts	34	ASIC
Public Unit Trusts	290.2	ASIC

Life Insurance companies have 173 billion $ in worth of assets, which substantiates that it holds a significant amount of assets in the Australian financial institution market under Insurers and Fund managers. These institutions provide various kinds of insurances like life, accident, disability etc as their prime range of products.  Its assets are managed with statutory funds on a trusty-beneficiary relationship basis, and are majorly invested in debt and equity securities. Companies of general insurance have 170.4 billion $ as its aggregate amount of assets (Reserve Bank of Australia, 2018). It assets and operations are managed by The Australian Prudential regulation Authority (APRA). It primarily has assets which help to look after providing insurance for property, motor vehicles, employers’ liability, etc. The assets of the companies are invested mainly in deposits and loans, government securities and equities. The health insurance companies have an aggregate of 13.8 billion $ worth of assets in the Australian financial institution market (Reserve Bank of Australia, 2018).  It provides products ranging from insurance for private health costs. The assets of these companies primarily are invested in government securities, deposits, loans and equities. Cash management trusts are those institutions which are mainly guided by trust deeds and they limit their investments to financial securities primarily available through short term markets. They are managed by Australian Securities and Investment Commission. It has an aggregate of 34 billion $ worth of assets. It has a very limited assets and influence in the Australian financial market.

The size and proportion of lending to different sectors by the commercial banks in Australia have been shown below:

Australia is one of the countries with a mortgage market which is dominated by variable rates. In contrast to other countries, the Australian variable mortgage rates are determined at the lender’s discretion and the various features of repayment are flexible when compared with other variable-rate mortgage products. Mortgage products, Housing loans, business loans and personal loans are some of the various sectors which are catered by the Australian banks (Reserve Bank of Australia, 2018).   The lending proportions of the various commercial banks in Australia for the last ten years are given below:

Asset Worth of Different Financial Institutions in Australia

As seen here, during the mid 2000s, the lending operations towards the housing owner sectors were substantially large and throughout the ten year period it has remained steady. The personal loans have seen a drastic fall since 2008 after the advent of the global financial crisis. The housing investor sector has been the growing steadily since 2006, which is a positive sign for the Australian banking sector (Pwc.com.au, 2018).The total credit had a fall 2010 and since then it has been on a steady route. It can be seen since the global financial crisis hit the world market, there has been a change in the proportion of lending since then.

The sources of banking funds of the commercial banks in Australia are varied in nature. The sources of funds between the major Australian commercial banks and the other Australian owned banks are mostly the same. The major banks such as NAB, CBA, ANZ as well as the other commercial banks source their funds from deposits, equities, short term debts, long term debts and securitization (Reserve Bank of Australia, 2018).

After the global financial crisis, the Australian commercial banks have seen a major change in their funds composition structure. There has been a major overhauling of the previous fund structure.  Particularly, a departure has been evident, from the usage of the wholesale debt securities, which includes securitization, towards domestic deposits. The financial crisis had compelled creditors, regulators and banks globally to assess the various risks associated with funds. Along with this, the banks in Australia have yielded to the incoming pressures by looking forward to more secure sources of funds (Moradi and Babacan 2015).  Deposit usage has become very evident across all the different types of banks in Australia. This has happened especially to the smaller Australian banks regional which used to depend heavily on securitisation.  Such kinds of banks have majorly increased their share of deposits as their main source of fund. Majority of Australian banks now have increased secure funding by using long term wholesale debt instead of short term wholesale debt. On the other hand, usage of term deposits has spurred up in the foreign and other major bank owned deposits.  Due to the advent of healthier competition, term deposits have now started attracting huge interest rates than the other kinds of deposits of similar maturity periods.

Banks are widely regarded as the crux of every nation’s financial health and conditions. They are the bloodline of the financial health system of every country. They are entrusted with the task of providing creation and distribution of money in the economy.  They undertake the tasks of paramount importance to the economy such as the production, exchange and   distribution of wealth. In this process, they directly assist in the economic growth and development of the economy.

 After the global recession which had crippled all the major economies of the world since the advent of 2008, the risk propensity in the global financial market has increased significantly. Due to the changing circumstances in the financial markets, the effects have percolated into the banking industry .The risk of failing of these institutions has caused an alarming uproar across the global financial institutions. This leads to the argument that whether banks should or should not be allowed to fail, which has been discussed below.

• Stabilisation of the banking system: During the times of financial emergency, if the efforts are being made to bail out failing banks, it creates a disastrous effect on the entire banking system. The common expectation, that they will be bailed out, leads to a risky and unsustainable business situations. Government usually spend billions of dollars to bail in the banks, which destabilizes of the entire banking system. Due to this bail in guarantee provided to the banks, the officials have little incentive to act in a responsible way. For the household investors, it is a tragedy as they remain oblivious of the fact; they are the first line of defaulters. It is huge financial burden on the part of them. In such cases, if there is an option, a failing bank must be allowed to fail.
• Proper functioning of capitalism: As has been pointed out by the Deputy Governor of the bank of England, Paul Tucker, that there is still a long way to go to counter the effects of the 2008 financial crisis. He says that no bank at any point of time should be considered too big to fail. In the very centre of the capitalism structure of governance, if the taxpayers remain at the losing end and the banks in the winning end, there is a big problem in the structure. The pattern of working of every other company in the capitalism system should be applied to the banking sector too. The banking sector should be provided with adequate capital, so that during the time of financial contingency, they have enough funds to absorb the shocks. If it isn’t happening, the burden falls on the tax payers. To avoid such kind of scenarios in the future, if a bank fails, it should be allowed to fail.

• Collapse of the entire banking System: When a bank fails to honour its business obligations towards its customers and it has become insolvent to meet its liabilities, a bank failure occurs. A chaos ensues in the market. The failure of a single bank spreads like fire across the other banks ant the entire economy in no time, if proper measures are not followed. To avoid meeting the same fate, customers from other banks start taking out money from these banks. Due to the lack of faith and funds, the banking system comes to a standstill and the economy begins to suffer. In this kind of a situation, allowing failures of banks would lead to detrimental affects to the entire economy.
• Death of consumer confidence and other problems: If any bank is allowed to fail, then this action leads to a severe loss of consumer confidence upon the banking sector. It compels the consumers to increase personal cash savings which results in a lack of investment funds for the other banks. A negative spiral cycle starts working. Loss of consumer confidence leads to reduction in spending on the consumer’s part, which leads to less demand for goods and eventually unemployment. All this percolates into the decline in GDP of the economy. Thus, a bank can never be allowed to fail.

The Australian royal Commission is landmark incorporation into the Australian banking and financial services. It is an enquiry commission which is governed by an act of parliament. Its major objectives are:

• The Royal commission is primarily established with the objective of investigating the various kinds of financial misconducts in the Australian economy (BBC News, 2018).
• The commission would look into the various misleading and deceptive kinds of behaviour in the banking industry of Australia.
• According to ABC News, (2018), one of the most vital reasons for its establishment is to pull back the degraded standards of the Australian banking industry, which recently had fallen below its erstwhile stratospheric standards.

References:

ABC News. (2018). Here’s what we know about the banking royal commission. [online] Available at: https://www.abc.net.au/news/2017-12-04/banking-royal-commission-heres-what-we-know/9210214 [Accessed 21 Mar. 2018].

BBC News. (2018). Australia begins landmark banking inquiry. [online] Available at: https://www.bbc.com/news/world-australia-43027137 [Accessed 21 Mar. 2018].

Brewer, E. and Jagtiani, J., 2013. How much did banks pay to become Too-Big-To-Fail and to become systemically Important?. Journal of Financial Services Research, 43(1), pp.1-35.

Moradi-Motlagh, A. and Babacan, A., 2015. The impact of the global financial crisis on the efficiency of Australian banks. Economic Modelling, 46, pp.397-406.

Pwc.com.au. (2018). [online] Available at: https://www.pwc.com.au/publications/assets/major-banks-analysis-11-nov-2016.pdf [Accessed 21 Mar. 2018].

Reserve Bank of Australia. (2018). Box A: Funding Composition of Banks in Australia | Financial Stability Review – September 2012 | RBA. [online] Available at: https://www.rba.gov.au/publications/fsr/2012/sep/box-a.html [Accessed 21 Mar. 2018].

Reserve Bank of Australia. (2018). Main Types of Financial Institutions | RBA. [online] Available at: https://www.rba.gov.au/fin-stability/fin-inst/main-types-of-financial-institutions.html [Accessed 21 Mar. 2018].