Compare and contrast the financial systems of two different countries. Use an institutional approach to describe the system. Comment on the impact on, and response to the GFC in each country

Topics: Federal Reserve System, Bank, Monetary policy Pages: 16 (4704 words) Published: October 12, 2013
1.0 Introduction
A financial system inquires for efficient allocation of resources among the surplus and deficit units (Viney 2009) as such it encourages more savings where funds are provided for investor to invest and also ease the transactions for goods and services (Viney 2009). There are three main components in the financial systems which are the financial institutions, financial instruments and financial markets. All three types of financial system each carry different function, roles and regulations. However, financial institutions will be mainly focus in this research essay. Global Financial Crisis (GFC), also known as the ‘great recession’ occurs in the year of approximately 2007-08. GFC has caused a several impact on the economy which leads to a several collapse of the financial institutions. For instance, the collapse of Lehman Brothers, one of the major investment banks in US (Australia Bureau of Statistics 2010). Thus, the objective of this essay is to examine both financial system of the chosen countries which are United States and Australia, also the impacts and responses on the GFC in both of the chosen countries.

2.0 Compare and Contrast both Financial Systems
2.1 Central Bank
The central bank of the United States (U.S.) is known as Federal Reserve System (FED) whereas the central bank of Australia is known as the Reserve Bank of Australia (RBA).

The Federal Reserve System’s structure consist of the Board of Governors which are duly appointed by the president, the Federal Open Market Committee (FOMC), and 12 regional Federal Reserve Banks located throughout the major states in the country (The Federal Reserve Board 2003).

Banking in U.S. is regulated at both federal and state level. Unlike U.S., Australia has only one central bank which is the Reserve Bank of Australia. However, both central banks are independent within their government (Reserve Bank of Australia 2001) whereby for FED, the monetary policies decisions do not have to go through the President’s authorization, and for RBA, they have statutory authority established by an act of parliament which grants them specific powers and obligations to carry out necessary policies (Reserve Bank of Australia 2001).

On the other hand, RBA has two board, which are the reserve bank board and payment systems board (Reserve Bank of Australia 2001). The reserve bank board is responsible for monetary and banking policy whereas the payment systems board is responsible for controlling risk in the financial system, promoting the efficiency of the payments system, and promoting competition in the market for payment services, consistent with the overall stability of the financial system (Reserve Bank of Australia 2001).

The role of FED is to conduct the country’s monetary policy, which includes full employment, stable prices and moderate long term interest rates as stated in the Federal Reserve Act (Board of Governors of the Federal Reserve System 2008). Furthermore, they maintain the stability of the financial system, supervise and regulate banking institutions, provide financial services to depository institutions, and foreign official institutions. FOMC will determine the cost and availability of money and credit in the country’s economy by affecting the discount rate, reserve requirements and controlling the open market operations (Board of Governors of the Federal Reserve System 2012).

Likewise, the role of RBA is to conduct monetary policy as well, which includes the maintenance of price stability, full employment and the economic prosperity and welfare of the Australian citizens (Reserve Bank of Australia 2001). Besides that, they also set the cash rate to meet a medium term inflation target (Reserve Bank of Australia 2001). Moreover, RBA must maintain a strong financial system and efficient payments system and the issuing of the nation’s bank notes. Selected banking services are provided to the Australian government, agencies, official...

References: Kumar, A, Chuppe, T & Perttunen, P 1997, The Regulation of Non-Bank Financial Institutions, The International Bank for Reconstruction and Development, U.S.A.
McLennan, W 2000, 2000 Year Book Australia No.82, Australia Bureau of Statistics, Australia
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