Topic 3: Financial Institutions

Aim

The aim is to introduce depository and non-depository financial institutions, covering a wide range of commercial banks and non-bank financial institutions.

Learning Objectives

1. Understand the current institutional features in the financial system.
2. Evaluate the functions and activities of commercial banks.
3. Identify the main sources and uses of funds of commercial banks.
4. Understand different types of non-bank financial institutions and analyse changes in these sectors.

Objective 1: Institutional Features in the Financial System

• The Australian financial system includes various financial institutions offering intermediation and other services.

Key Observations:

1. Dominant Role of Banks

   • Comprising more than 50% of total assets in the financial system.
   • Share fell during regulation but increased after deregulation.

2. Building Societies and Credit Unions

   • Small share of financial assets but numerous (30 building societies, 320 credit unions).
   • Decline in asset share due to conversion to banks.

3. Life Offices and Superannuation Funds

   • Significant growth in asset share, driven by government policies.
   • Superannuation funds are growing rapidly, while life offices' share declines.

4. Managed Funds

   • Growth in public unit trusts, driven by retail investors.
   • Types include cash management trusts, public unit trusts, superannuation funds, and more.

5. Mortgage Originators and Securitisation Vehicles

   • Recognized recently, data collection started in 1996.
   • Growth in the 90s, decline post-Global Financial Crisis.

Main Types of Financial Institutions (Dec 2021)

• Banks: 5531.3 billion in assets, 46.53% share.
• Building Societies/Credit Unions: 50.6 billion in assets, 0.43% share.
• Non-ADI Institutions: Various types with small asset shares.

Objective 2: Functions and Activities of Commercial Banks

• Largest group of financial institutions, crucial for fund flow.
• Core business: gathering savings to provide loans.
• Offer off-balance-sheet transactions (e.g., underwriting).

Objective 3: Sources and Uses of Funds of Commercial Banks

Sources of Funds

• Managed actively, offering diverse products.
• Include current deposits, term deposits, debt liabilities, etc.

Uses of Funds

• Apply a liability management approach.
• Lending Categories:
  • Personal and housing lending.
  • Commercial lending.
  • Lending to government through securities.

Objective 4: Non-Bank Financial Institutions

1.3.1 Investment Banks

• Provide innovative products and advisory services.
• Activities divided into front, middle, and back office functions.
• Specialize in advisory services and off-balance-sheet products.

1.3.2 Life and General Insurance Offices

• Life Insurance: Generate funds from premiums, major in superannuation.
• General Insurance: Funded by premiums for various policies (house, motor, etc.).

1.3.3 Finance Companies

• Provide loans including lease finance.
• Decline post-deregulation; often linked to manufacturers.

1.3.4 Building Societies and Credit Unions

• Funds primarily from deposits.
• Offer housing loans and personal finance.
• Defined by common bond of members.

Conclusion

• Understanding the diverse roles and structures of financial institutions is critical for navigating the financial system. Significant changes have occurred due to regulatory changes and market evolution.