CBM Lecture 2 Australian Banking and Primer on lending
Australian banking
 The Australian landscape
 Trends in banking
 Regulation
Primer on Lending
 Importance of lending
 Lending to corporation versus lending to consumers
 Corporate loans
 Consumer loans
Australian ADIs
APRA: authorised deposit taking institutions (ADIs)
 Banks
o Well diversified, offerinf loans to corporations and consumers
o For profit, owned by shareholders
 Building societies
o Tend to focus on retial finance-related ledning, such as mortgages
o Non-profit, mutal org. membership = ownership
 Credit unions
o Tend to focus on retail finance-related lending, such as small business loans
and mortgages.
o Non-profit , mutual org. membership = ownership


Banks are the largest depository institutions in terms of size in Australia
Bank assets ~ $5 trillion or 3.5x GDP
Australian Banks
Four Main Categories: Aus big 4 has 80% of total banking assets
1. Major banks : the 4 largest Australian banks are
o ANZ
o CBA
o NAB
o Westpac
2. 20 Regional banks: locally owned banks excluding those classified as major banks,
e.g. bank of Queensland, Macquarie bank
3. Foreign subsidiary banks: foreign banks authorised to carry on banking business in
Australia through a locally incorporated subsidiary e.g. HSBC Bank (UK), ING Bank
(NL)
4. Foreign bank branches: foreign banks licensed to conduct banking business in
Australia through branches, subject to a condition which specifically restricts the
acceptance of retail deposits, e.g. State bank of India (IN), Credit Suisse
Banks: balance sheet and recent trends
 Shift from commercial lending to lending for residential housing over the last 20
years:
o Changes in the structure of the baking industry
o Implementation of capital adequacy regulations in 1989
 Growth of foreign currency assests and liabilities:
o Relation of regulations with respect to banks holdings of foreign currency
deposits
o Banks enabled to access funding in Eurodollar markets
Large drop of liabilities raised through AUD deposits due to retail savings growth in
superannuation accounts
Increased importance of off-balance sheet (OBS) activities
 OBS activities = items that move onto the balance sheet when a contingent event
occurs
 Used to generate additional income
 Four major types of OBS business:
o Direct credit substitutes
o Trade and performance related OBS activities
o Interest rate derivative contracts
o Foreign exchange derivate contracts
Trends in banking
Advances in technology:
 Faster to respond to changing market and new products and services
 Changing the way they offer products and services through innovation
Re-regulation following the GFC
 Banks most heavily regulated companies/organisation
 Try to reduce risk taking behaviour
Globalisation – global competition
Old and new challengers
 Financial intermediation
o Non-bank lenders e.g. liberty financial
o FinTech (peer to peer lending and crowdfunding), e.g. Lending Club,
societyOne
 Payment services
o FinTech e.g. TransferWise, Revoult
Regulation of Australian depository institutions
• Australia’s current financial regulatory framework has its origins in the late 1990s’
Financial System Inquiry (Wallis Committee).
• The Wallis Committee recommended the introduction of three agencies, each with
specific functional responsibilities
•
•
•
Australian Prudential Regulation Authority (APRA)
Australian Securities and Investments Commission (ASIC)
Reserve Bank of Australia (RBA)
Who regulates banks?
• The Council of Financial Regulators (CFR) is the coordinating body for Australia's
main financial regulatory agencies. It is a non-statutory body whose role is to
contribute to the efficiency and effectiveness of financial regulation and to promote
stability of the Australian financial system.
• RBA, APRA, ASIC, Australian Treasury
Reserve Bank of Australia (RBA)
The RBA’s overall responsibility is financial system stability, promoting the efficiency of the
payment system, and promoting competition for payment services.
• conducts monetary policy
• issues the nation's banknotes.
• manages Australia's gold and foreign exchange reserves.
• lender of last resort (LOLR)
The aim of monetary policy is to achieve low and stable inflation over the medium term.
Australian Prudential Regulation Authority (APRA)
• APRA supervises institutions in banking, insurance and superannuation (not only
ADIs), promotes financial system stability
• ADIs are covered by the Banking Act 1959.
• Responsible for the prudential regulation and supervision of the financial services
industry.
• APRA responsibilities include
• financial stability
• protect depositors, policyholders and superannuation fund members
• reduce the likelihood of a financial institution failing
• regulate ADIs under licensing regime
Australian Securities and Investments Commission (ASIC)
• ASIC is Australia's integrated corporate, markets, financial services and consumer
credit regulator.
• Responsible for market integrity and consumer protection across the financial
system.
• Sets standards for financial market behaviour with the aim to protect investor and
consumer confidence.
• Administers the Corporations Law to promote honesty and fairness in companies
and markets.