Post Gfc Developments in the Australian Financial Sector

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Developments in the Australian Financial Section Abstract This research report examines the structure of the Australian financial industry, its legal and regulatory framework and the current challenges faced by Australian banks. The report finds that the Australian financial sector has a comparatively strong regulatory structure; however, the effect of the Global Financial Crisis of the late 2000s has significantly lowered the growth rate the banks’ assets and posed other challenges to the banks. The report concludes that the collective challenges currently faced by Australian banks may, given the fragile global financial climate, combine to affect the profitability and overall stability of Australian banks if not properly addressed. This report is of the view that, in resolving these challenges, banks should fix their lending rates to reflect their cost of funding independent of the cash rate and adopt measures to improve efficiency in their management. Introduction The Australian financial sector is generally perceived as stable and well-regulated, and although it fared relatively well through the Financial Crises of the late-2000s, there has been noteworthy changes in its structure, regulation and the nature of threats facing its banks. This report explores the major challenges confronting Australian banks by analysing the causes and various perspectives on the issue. Firstly, the structure of Australian financial intuitions is analysed in terms of their asset size over a seven year period from December 2005 to December 2011. Secondly, the major laws and bodies governing the Australian financial industry are examined with particular focus on the liquidity and capital adequacy requirements of banks. Lastly, the report looks at the major challenges currently facing Australian banks which it identifies as: high cost of funding and exchange rate; lower credit and


deposit growth; mounting political and public pressure to cut interest rates on loans; and associated costs of adopting regulatory reforms and new developments in technology. Structure of Australian Financial Services Industry Australian financial institutions can be broadly categorized into five: Authorised Deposit Taking Institutions (ADIs); Registered Financial Corporations (RFCs); Life Offices and Superannuation Funds; Other Managed Funds; and Other Financial Institutions. Table 1 shows the type of financial institutions under each category (Reserve Bank of Australia [RBA], 2012a).

The data in Table 1 indicates ADIs holding the largest proportion of assets with banks dominating with about 59.5

percent of the assets in that group. The assets of Australia’s four major banks constitute about 70 percent of the total assets of banks (Australian Trade

Commission 2012). Life Offices and Superannuation Funds follow with a total asset size of 24.11 percent. Figure 1


depicts the dominant asset share of banks and superannuation funds, which together hold 79.44 percent of the assets in the sector (RBA 2012a). The asset of these two institutions experienced a decline between 2007 and 2008 during the Global Financial Crisis (GFC). This was attributed to changes in consumer expenditure behaviour brought about by a climate of uncertainty during the crisis which led to a 30 year low in the demand for loans and an increase in household savings (Lowe 2012). The asset of banks declined from a peak of $2.67 trillion in 2008 to $2.5 trillion in December 2009, and has since been experiencing a slow growth. Whereas, the asset size of funds


declined from $826 billion in 2007 to $710 billion in 2008. Figure 3 shows the impact of the GFC on the assets of the financial institutions (RBA 2012a). While the assets of banks and superannuation funds have picked up growth from 2009 and 2008, respectively, all other financial institutions have been experiencing a steady decline in their asset size from 2008 onward. Legal and Regulatory Framework of...
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