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An Analysis of the Structure of the Current Financial System

Discuss about the Applying for a Banking License in Australia.

Brilliant bank is a global bank which is headquartered in New York. It wants to conduct baking operation in Australia. As a director of brilliant bank, a report has been prepared for the methods and requirement to be followed for foreign banking operations in Australia.

The financial system includes three components those are financial enterprise, those are financial enterprise such as banks, regulatory authorities such as Australian prudential regulation authority and reserve bank of Australia and third is payment system such as cash, cheques (Reserve bank of Australia, 2006).

In a financial system, a bank plays considerable role, as it holds majority of the financial assets of the economy. In modern era bank does not only involves in lending activities, deposit banking rather they are also indulged in business banking financial market trading, insurance, funds management, stock broking (Wenworth) There rise in demand of the housing loan as after the inflation in early period of 1990s. Simultaneously there has been increase in the competition between the banks. A trend has been seen that banks have started raising loans by third party brokers that have also laid to increase in competition. In Australia there are currently four largest banks which are Commonwealth bank of Australia, Westpac banking corporation, National Australia bank, ANZ banking group, these banks lays a wide range of services and provide services nationwide (The Australian financial system).

In Australia financial system has following factors that lead to changes. Those are as follows:

Financial deepening: that means increase in demand of categories of highly developed financial products. Apart from that there also has been change in the legislation that is increase in the demand of individuals for self funding superannuation rather than relying only on public provisions of pension (At Kearney).

Globalization: by increase in globalization it has lead to an increase in the floatation of Australian currency and open trade system. While in case of supply system it has made a challenge to the domestic traders as they would be competing international firms.

Technological advancement: as advancement in informational technology leads to decrease in the cost of transmitting, storing and processing the information. Apart from this it has also reduced the cost of providing a vast services and the way they would be produced or delivered to the end customer.

Deregulation: it affects the monetary policy of the country, and lead to changes in the effectiveness in the financial system (Australian bureau of statistics, 2010).

Structure and Developments in the Current Banking Industry

Asset performances of the banks and their conditions of lending: the non performing asset ratio of the banks have reduced drastically as in 2015 it was 0.8% as compare to in 2010 it was 1.9%.  This change is due to improvement in business loans, housing loans, and personal loans.

International exposures: banks in Australia are exposed to the risk due to international exposures.  Exposures can be in relation to trade related claims, short term, which can effect funding and credit risks. Apart from this banks which are headquartered in foreign lays a different risk profile. Like these foreign banks can make lending more favorable to the public by reducing interest rates or by providing more quality services.

Profitability: there has been a great increase in profits as loan amount provided have increased.

Capital: the amount invested as capital in the banks has been increased. It has made changes in the liquidity ratios of banks. This shows expectancy for banks that the core economic functions would be improved in future.

Shadow banking: it represents involvement of non regulatory authorities by regulatory authorities. This sector has been reduced to 7% in 2016, as compare to 10% in 2007. It involves limited systematic risk, even for the highly leveraged banks.                                                                              

Superannuation: it is the core activity of financial system. It involves $2trillion amount which is approximately half of the banking system. These funds are relies on outsourced service providers. The point to be noted in this is any financial or operational failure can lead to disruption in superannuation fund system (Reserve bank of Australia, 2016).

In Australia the banking sector have many banks which are licensed to carry on banking transactions complying the rules and regulations formed by the Banking Act 1959, foreign banks can carry banking operations by having a branch in Australia or by subsidiaries of foreign banks incorporated in Australia. However many institutions like financial institution, mutual banks, building societies, credit unions provide banking operations (Putnis, 2010).

Australian banking system is divided into two parts those are APRA (Australian prudential regulation authority), which is responsible for licensing and supervision of financial institutions and ASIC (Australian securities and investment commission) which is highly responsible for market integrity and consumer protection. Banks in Australia are highly regulated by EDR (external dispute resolution) schemes and FOS (Financial ombudsman service). The responsibility of regulatory provisions levies on APRA, ASIC, RBA, and the Australian treasury. These all four bodies if combined together are called as Council of financial regulations.

The Regulation of Banks in Australia

RBA is a central bank of Australia, the main responsibility of RBA is the sustainability of financial resources and stability of monetary policies. In technical terms the primary responsibility of a bank is to control exchange currency, but in practical terms this responsibility is conducted by foreign exchange dealers and money market dealers which are authorized by central bank (Sykes).

APRA is responsible for supervising general insurance and life insurance companies. Apart from that it is also responsible for supervising the superannuation funds. APRA does not restrict foreign banks to carry financial operations in Australia. However it levies two restrictions on opening branches in Australia, those restrictions are: the 1st restriction is foreign branches are not allowed to accept any initial money as deposit from residents of Australia less than A$250,000. The 2nd restriction to foreign branches is they must disclose banking act depositor protection provisions to their depositors (Reserve bank of Australia, 2017).

ASIC is responsible for promoting and controlling protection to consumer, integrity of market, and providing licensing in respect of financial services and products.

In the period of 1817- 1911 the banking operations were done by four institutions those are private banks, the deregulation, the reserve bank and the commonwealth banks.  During the period of 1911, the first bank in Australia was commonwealth bank of Australia. However this bank was not central bank as it does not levies the authority to issue currency notes, as it was controlled by Australian department of treasury. But in 1920 this responsibility was taken back. In the period of 1924, the commonwealth bank was given an authority to issue currency notes. In 1951 a new body was formed which was responsible for managing the operations of banks. In 1959, the reserve bank act has formed a new corporate body called as reserve bank of Australia, which will be carrying central operations as carried by commonwealth bank. However the reserve bank came into effectiveness in 1960s. In 1968 the supervision activities were granted to a new authority called APRA, which were carried by RBA earlier. The reserve bank act was also amended to maintain effectiveness in payment system and hence the payment system, payment system (regulation) act 1998 and netting act 1998 was brought in the financial market.

The duties of the reserve bank of Australia have made formal and stringent to get more clear information about the monetary policies of Australia like currency stability, maintaining full employment and welfare and economic prosperity of the public. In 2013, banks need to confirm that the inflation rate would be in between 2 to 3%. As it would help the big corporate houses and households to make effective financial decisions, will create employment, and will control the purchasing power of the company. As RBA is the owner of RITS which is reserve bank information and transmission system, hence the stability and security to be achieved from cyber attacks. Apart from this, it is also the responsibility of central bank to provide custody and banking facilities to other banks. And government is working on banking regulations to make them flexible so to make advancement in payment system and interaction with the customers (Pearson, 2009).

Historical Provisions

After LPG policies in 1991, a large number of foreign banks braches were opened in Australia. There are at present 33 branches of foreign banks and 9 foreign owned subsidiary banks. Investing overseas allow diversification in the bank’s portfolio, as the risk of financial crises would be reduced. The opportunities for foreign banks which have started banking transactions by opening a branch in Australia are like they have vast office network, retail and commercial banking, trade finance, retail banking, financial and treasury markets, cash and global liquidity management. As these banks have an opportunity to provide their customers to avail the facilities of overseas banking, cross border banking (Norton rose Fulbright, 2017).

The structure of opening a foreign branch in Australia, it is the principle requirement to follow the rules and regulations formed by APRA authority. ADI which is authorized deposit taking institution is authorized to check such compliances of whether APRA rules and regulations are followed or not. A further requirement to be followed is a financial institution has to take prior consent from APRA to suffix words like banker, bank, or banking, as these are restricted in banking regulations act (IBP, 2013). Financial operation can be done by a foreign bank in Australia by opening a local subsidiary or having a branch in Australia. If a subsidiary option is availed, that subsidiary would be called as ADI, and it would be dealt as separate from its parent bank. While if the branch option is availed then it is called as foreign ADI, and it must follow all the legal rules and regulations like an Australian bank (Turner & Nugent, 2017).

And if the bank is permitted to operate through local branch as well as subsidiary, in this case the subsidiary and foreign ADI must comply with the requirement of working at arm’s length. That is their dealing would be different from one another. However it is new rule incorporated by APRA that if a newly foreign bank wants to conduct financial operations in Australia that can be only done through as branches. That is financial dealings through subsidiaries are not permitted according to rulings of APRA (APRA insight, 2012).

Besides from this, for a foreign bank for having financial operations in Australia, branch need to get registered as foreign bank as per the corporations act. Then the branch must comply with the obligations of ASIC that are depositing the financial records like balance sheet, income statements, cash flow statement to ASIC. Before conducting financial operations a branch must obtain license from AFSL that is Australian financial services license (IBP, 2015).

There can be several risks in case of foreign ADI like in case of funding markets, direct exposures, effects on slower economic growth of the Australia. Foreign ADIs has low growth in credit, they have high cost in generating funds. Apart from this there are structural challenges to these banks, as they have to maintain shareholders returns. In case of capital, they need to meet the expectations set by Basel III norms (Bank for international settlement, 2014). There should be proper planning done by foreign branches for proper risk management (FINSIA, 2017).

To avail license as to conduct banking operations for foreign banks the requirements to be followed are: consent needs to be taken from APRA, and the banking plans need to communicate to the authority in Australia. A draft application with all the information required need to be submitted to the authority. After this entire statutory requirement a licensing fee is to be deposited to the authority. The process of licensing may take few years as to operate as a foreign bank in a country is not an easy task. Before conducting financial operations as a bank capital adequacy must be ensured by the applicant of the bank that is for operating as a bank tier 1 capital must be at least $50 million (APRA, 2008).

Institutions carrying banking operations in Australia as a foreign bank are considered as ADI (APRA). The recommendation regarding the operational structure and the feasibility are that it should not be compulsory for an applicant to provide all the banking services as required as an Australian bank. Rather it must be at the choice of the applicant to restrict to those services in which it has a specialization. According to APRA for banking operations, only corporate bodies are allowed. Hence it is recommended to provide banking services as a subsidiary also.

Conclusion

The Australian economy has liberalized foreign banks to conduct banking operations. Due to this an Australian economy has benefitted a lot. However it consist some risk too, but due to rules and regulations formed by RBA,ASIC, APRA and other regulators, it has reduced to a high extent. The main benefit a global bank like brilliant bank will avail is of diversification. As it is a global bank its risk are get more diversified. Besides the opportunities given to foreign banks like in the given case of brilliant bank, there are some challenges also like licensing issues, capital requirement.

References

APRA insight. (2012) issue 2nd. Retrieved at https://www.apra.gov.au/Insight/Documents/12-Insight-issue-2.pdf

APRA. (2008) Guidelines: ADI authorization guidelines. Retrieved at https://www.apra.gov.au/adi/Documents/ADI-Guidelines-11-4-081.pdf

APRA. Guidelines on authorization of ADI. Retrieved at https://www.apra.gov.au/MediaReleases/Documents/ADI-Authorisation-Guidelines.pdf

At Kearney. Banking on our future: farming a vision for the Australian banking industry. Five trends could create a vibrant economy or a stagnant one. The right banking sector vision can tilt the odds. Retrieved at https://www.atkearney.in/documents/10192/4583346/Banking+on+Our+Future.pdf/de7b0429-2bc6-41b5-b8e4-e336436b35a4

Australian bureau of statistics.(2010) Financial system. Retrieved at https://fsi.treasury.gov.au/content/downloads/DiscussionPaper/chapt02.pdf

Bank for international settlement. (2014) Basel committee on banking supervision, regulatory consistency assessment programme (RCAP) assessment of BaselIII regulations- Australia. Retrieved at https://www.bis.org/bcbs/implementation/l2_au.pdf

Banking act, 1959. Australian government. Federal register of legislation. Retrieved at https://www.legislation.gov.au/Details/C2011C00034

FINSIA.(2017) How to get a banking license. Retrieved at https://www.finsia.com/news/news-article/2016/12/08/how-to-get-a-banking-license

IBP,Inc. (2015) Australia business and investment opportunities yearbook volume 1 practical information, opportunities, contacts. Lulu.com, USA

IBP,Inc.(2013) Australia business law handbook volume 1 strategic information and basic laws, IBP,USA

Norton rose Fulbright. (2017) How can international banks operate in yours jurisdiction. Retrieved by https://www.nortonrosefulbright.com/knowledge/technical-resources/banking-reform/supervision-of-international-bank-branches---a-global-analysis/australia/

Pearson,G. (2009) Financial services law and compliance in Australia, Cambridge university press, Australia

Putnis,J.(2010) The banking regulation review. Law business research ltd. Retrieved at https://www.claytonutz.com/ArticleDocuments/178/Law-Business-Research-Banking-Regulation-Review-Australia-2010.pdf.aspx?Embed=Y

Reserve bank of Australia. (2016). Retrieved at https://www.rba.gov.au/publications/fsr/2016/apr/aus-fin-sys.html

Reserve bank of Australia.(2006) The structure of the Australia. Retrieved at https://www.rba.gov.au/publications/fsr/2006/mar/struct-aus-fin-sys.html

Reserve bank of Australia.(2017). Retrieved at https://www.rba.gov.au/about-rba/history/

Sykes,T. Australia’s banking industry. The Australian financial review. Retrieved at https://www.abc.net.au/money/currency/features/feat3.htm

The Australian financial system. Retrieved at https://fsi.treasury.gov.au/content/downloads/DiscussionPaper/chapt02.pdf

Turner,G & Nugent,J.(2017) International linkages of the Australian banking system- implications for financial stability. Retrieved at https://www.australiancentre.com.au/sites/default/files/NewsDocs/Day2Paper1%20-%20RBA%20Public%20(update).pdf

Wenworth,E. Essential banking law and practice: special counsel to the ombudsman

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