The paper "Questions on Monetary Policy and Risk Management" is a great example of an assignment on macro and microeconomics. According to the data and graphs supplied above, it is evident that points of presence in the case of credit unions and building societies have consistently declined over the years. Conversely, banks continue to increase their market coverage as indicated by the rising point of presence i. e. from 5,422 in June 2009 to 5,483 in June 2014. In June 2009, credit unions and building societies registered points of presence of 872 and 300 respectively.
This can be compared with the point of presence of 604 and 244 respectively in June 2014. The conclusion that can be drawn from this data is that while banks continue to increase the number of points of presence, credit unions and building societies move in the opposite direction i. e. declining point of presence. This is a clear indicator that banks have been increasing their market share while building societies and credit unions reduce their own market coverage in Australia. In order to assess the market share of superannuation funds, it is essential to review past data on the number of member accounts as supplied by the Australian Prudential Regulation Authority. Table 2: Number of member accounts Source: Australian Prudential Regulation Authority (2014) The data in table 2 and graph illustrated in seek to show a trend in the number of member accounts.
It is clear that the number of member accounts initially rose from 31,957 in June 2008 to 32,861 in June 2010 but subsequently declined to 30,736 in June 2013. Concisely, market share for superannuation funds is declining with time as illustrated by figure 2 below. Figure 2: Trend in member accounts of superannuation funds According to the Reserve Bank of Australia (2014), commercial banks obtain their funds from wholesale markets as well as using debentures and unsecured loans.
Robertson and Rush (2013) recognize that commercial banks have shifted their focus away from short-term wholesale debt and securitization. The researchers affirm that commercial banks are currently utilizing deposits as a source of funds. The trend is credited to the associated funding risks and the pressure to utilize a more stable source of funds.
This trend is illustrated in figure 3 below. Figure 3: Trend in the source of funding Source: APRA (2014) Part B: Too big to fail The “ too big to fail” argument mainly looks at the size of financial institutions and the corresponding systemic importance (Bouris and Joye, 2012). It takes account of the actions taken by the Federal Reserve Bank to bail out large banks. The collapse of Lehman Brothers, following the global financial crisis, seeks to illustrate the concept of “ too big to fail” . In the United States, financial institutions that were on the verge of collapse received billions of loans to allow the banks to gain stability.
Considering the case of the United States, several programs were launched to salvage the economy. Specifically, the Capital Purchase Program was put into place to stabilize the financial system through a process of availing capital to feasible financial institutions across the country (U. S Department of the Treasury, n.d). The government was well aware that a vibrant banking system was inevitable for an efficient lending system. Besides building the confidence of financial institutions, the programs supported the capital position of the institutions. One of the arguments in support of “ too big to fail” is that the banks are large hence are able to avail services directly to the customers throughout the nation and across the globe.
Secondly, the institutions can conduct large financial operations by utilizing enormous such money. Using these funds, the banks can avail more services to more people compared with smaller banks. Thirdly, the size and capital base of large banks position them to provide services at a cheaper rate.
These characteristics demonstrate that big banks play a pivotal role in the success of the domestic and global economy. Furthermore, it is important to note that the contagion effect often happen through a big bank i. e. that is well networked in its balance sheet. This validates the need to salvage the bank from collapse otherwise; the crisis would spread to other banks across the globe, as is the case with the Euro Crisis. On the contrary, the “ too big to fail” argument encourages excessive risk-taking behavior hence banks would consider taking more risk because of the government preferential treatment of big banks.
Ultimately, this distorts discipline in the market. One of the moral factors that governments struggle to reconcile is the need to bail out banks that were high-risk takers during the boom period. Zandi (2012) explains that bailing out Citicorp, Fannie Mae, or Freddie Mac encouraged the institutions to take more risks because they were secured that the government would support them in times of trouble. The case of Australia The Australian financial market is concentrated by ANZ, Commonwealth, Westpac, and NAB.
During the global financial meltdown, these major banks took over some of the smaller banks such as BankWest, St George, Wizard, and RAMS. This means that the big four became the Australian banks. Going back to the recession of 1990 and the breakdown of building societies, people resorted to banks where they were considered as safe havens. By the close of 1994, banks operated about 91% of home loans in Australia. The figure, however, diminished with the return Aussie and other home loan lenders. Statistics by the APRA (2014) indicate that the big four banks control 84.3% of the home loan market undertaken by banks as well as 81% of deposits.
Jericho (2014), is convinced that the big four banks in Australia are important to the economy and have moved from control to a smaller proportion of the home loan market in 2002 to over 83.6 percent today. Part A of this paper revealed that banks have increased the number of points of presence but credit unions and building societies have declined in terms of market share. This echoes the assertion that major banks cannot be allowed to collapse. In order to protect the big banks from failing, Wolfson and Epstein (2013) held that their sizes should be limited so that their failure does not threaten the failure of the entire financial system.
Secondly, there should be strong prudential regulation for prompt corrective action and risk management in times of trouble. Thirdly, there is a need to promote a healthy financial system by adhering to standardized accounting and disclosure requirements (Hoflich, 2012). The fourth proposal is to inculcate the market-based discipline, particularly when dealing with risks.
This is achievable by a requirement to avail of information to the public on institutional credit ratings. Finally, capital control plays an essential role in regulating lending booms and excess risk-taking by banks. Part C Quintyn and Taylor (2004) outlined the first rationale for regulation as the need to protect the consumer. Rules in the financial market facilitate the prevention of excesses and failures of an unregulated market. Secondly, regulation leads to financial stability, an element that is critical to the smooth operation of an economy.
Daramy (2014) reiterates that the 2007 global financial crisis was partly due to weak regulation in the sector. The researcher notes that the success of a society depends on the effective operation of a financial sector hence the need for regulation. Where an intervention is successful, the outcome is economic growth resulting from increased economic activities. To add to this, the success of financial regulation is a good environment for transaction services consequently leading to effective trade and wealth accumulation. While giving a speech on bank regulation and the future of banking, Lowe (2012) held that an ineffective financial regulation hurts the economy.
This means that an inefficient intervention does not only yield losses to shareholders but also other divisions of the society. In a bid to protect the society from a malfunctioning financial mediation, government intervention is indispensable. Lowe is convinced that regulation is accompanied by the emergence of new products and banks in the market. The net regulatory burden is classified as positive when a regulation imposes private costs while minimizing social costs. Goodhart (2013) defines a positive net regulatory burden as the excess of benefits over costs that a regulator’ s disciplinary measure affords the population.
A positive net regulatory burden is also said to arise when the additional cost helps in mitigating negative effects on society. Moreover, it brings about the smooth operation of an economy. A perfect financial market is characterized by costless transactions, the possibility of purchasing securities in any denomination, and perfection information regarding financial instruments. A financial market that is operating efficiently and without cost does not require financial institutions. Market imperfections give rise to financial institutions.
In this vein, a market where information is perfectly available to participants does not require financial institutions to act as intermediaries. However, financial institutions would still exist when social benefits i. e. credit allocation are to be realized.
Australian Prudential Regulation Authority 2014, Quarterly Superannuation Performance, APRA, Sydney NSW.
Bouris, M & Joye, C 2012, ‘Our banks: too big to fail, too few to be competitive’, abc, 12 Feb, viewed 23 September 2014, < http://www.abc.net.au/news/2012-02-07/joye--/3815636>.
Daramy, D 2014, Why are Banks Financial Intermediaries among the most regulated sectors in the world? The African Bulletin, 23 Sept, viewed 23 Sept 2014, http://www.mediablackberry.com/index.php?oid=9553.
Goodhart, C, et al 2013, Financial Regulation: Why, How and Where Now?, Routledge, London.
Hoflich, P 2012, Banks at Risk: Global Best Practices in an Age of Turbulence, John Wiley & Sons, Hoboken.
Jericho, G 2014, ‘Are Australia’s banks too big to fail?’, The Guardian, 30 January, viewed 23 September 2014,
Lowe, P 2012, ‘Remarks to the 41st Australian Conference of Economists Melbourne’, transcript, Reserve Bank of Australia, 11 July, viewed 23 Sept 2014, http://www.rba.gov.au/speeches/2012/sp-dg-110712.html.
Quintyn, M & Taylor, M 2004, Should Financial Sector Regulators Be Independent? International Monetary Fund, Washington, DC.
Reserve Bank of Australia 2014, Main Types of Financial Institutions, Reserve Bank of Australia, Sydney.
Robertson, B & Rush, A 2013, ‘Development in Banks’ Funding Costs and Lending Rates’, RBA Bulletin, March viewed 23 Sep, 2014 from http://www.rba.gov.au/publications/bulletin/2013/mar/7.html.
U.S Department of the Treasury n.d, Capital Purchase Program, viewed from
Wolfson, M & Epstein, A 2013, The Handbook of the Political Economy of Financial Crises, Oxford University Press, Oxford.
Zandi, M 2012, Paying the Price: Ending the Great Recession and Ensuring a New American Century, FT Press, New York.