The recent global financial crisis affected almost all banks in the world with very few banks shielded from this misfortune. Australia and Canada were not greatly affected by the crisis. This is a result of effective regulatory mechanisms that were in place. But this is not to say that the two countries were immune to the global crises. On the contrary, they were equally vulnerable but they were able to control the damage during and after the crisis. Some of the banking sectors were greatly affected but not to the extent of crumbling down as to require bailouts.
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Australia has four major banks that define the country’s banking system. All of them are either individually or collectively owned and account for a large chunk of the country’s GDP. Canada on the other hand has five major banks that are important to her economy. They are often referred to as the Big Five. All these banks in the two countries had been exposed to the crises that were experienced in the recent past.
Although there have been several financial crises in the past, the banks in the two countries have maintained stability throughout their operations. Several reasons have been suggested to explain their stability even during the most difficult financial crises. This paper will discuss the features which are common to both countries. This will provide a clear understanding of each of the country’s financial stability.
Features of Australian Banks
As already indicated, four major banks dominate the Australian banking sector. The growth in the banking sector increased sharply after the global financial crisis. This was because these banks were not affected as much as other banks in the world. The Australian banking system has an asset base of about 75% while the mortgage banking sector has a higher percentage which is around 80% of the total financial market share. The global crisis restrained smaller banks from offering credit services when the crisis was at its peak.
When a comparative analysis is done concerning the Australian four banks, it is noted that they account for about 180% of the country’s GDP. These banks are cautious when it comes to lending money to the public.
If a slight mistake is made the banks would slip into a financial crisis. They have to operate cautiously to avoid any financial crisis encountered across the globe. So far they have maintained their immunity to the crisis due to their effective way of operating within the banking system. They are perceived as too strong to fail since they account for a large chunk of the Australian economy. Intense supervision by these banks is an example of how they can avert the financial crises. They can effectively avert possible internal and external financial threats.
The likelihood of a bank failure can be determined by analyzing its performance and its impacts. These are the impacts on both the public and on the stakeholders so that special measures can be put in place to safeguard the interest of the banks. The four banks have acquired their strength by operating with capital that is greater than the regulated minimum operations’ funds. So far, operating capital has increased and in the long run, external risks can be avoided by creating a well-defined banking system in the world.
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Banks in Australia have rationalized their lending services and whenever such lending takes place, it is closely monitored. This has stabilized the economy regardless of the threats from the external environment. The Australian banking sector has experienced high performance even during the recent financial crisis. Other countries have experienced financial drawbacks especially as a result of poor loan ratios.
Features of Canadian Banks
The recent global financial crisis did not spare the Canadian banking system. Other advanced banks in the world failed to reciprocate leading to one of the worst recessions since the 1930’s Great Depression. Canada was immune to this given that no bank went down and none of the banks were bailed out by the government. The Canadian immunity to these crises was analyzed and many policymakers have provided several explanations behind this stability during and after the crisis. The most cited explanation is that Canada had initiated conservative measures to control lending. Another important measure that the Canadian authorities had put into consideration was the tough regulatory mechanism that was initiated to address the banking system.
Several financial crises have affected the world’s economy and especially so the global banking system. The crises date as far back as the year 1863, with the most recent one having taken place in 2008. Canada has remained fairly stable throughout the crises. One of the reasons behind the stability in the banking system in Canada is the diversity of the banking avenues. Diversification makes the banking system strong. In addition to this, the chartered banks have to exhibit financial stability before they are granted permission to operate in the banking industry.
Comparison between Australia and Canadian Banks on One Hand and US Banks on the Other
According to analysts and policymakers, the recent financial crises have resulted from shadow banking especially in the US and other countries in the world. The failure of these shadow banking systems affects the entire global economy. Australia and Canada had concentrated on eradicating the key factors that posed a threat to their banking system. Mortgage and investment banking were highly controlled to eradicate any potential risk to the banking industry.
One of the major weaknesses of the US banking system is the existence of a fragmented banking system. This increased in the security markets. In addition to this, regulatory agencies were on the rampage, a clear indication of the magnitude of the 2007- 08 financial crises.
The history of the financial crisis in the US can be traced back to the time when all states were obliged to charter as well as regulate their banking system. Though this approach promised growth to the US economy, instability was a threat to the stock exchange market.
There were efforts made to keep the situation under control but the structural inadequacies persisted. The government was unable to control the banking system and it inevitably crumbled leading to the worst crisis ever. This was due to the failure of the federal government to impose stiff penalties on the banking sector.
A significant difference between the US and Canadian banking systems is the fact that Canada regulates the banks which are chartered by the federal government. Australia has also adopted these criteria but the US was unable to control its banking system because the constitution does not mandate the federal government to do so.
In Australia, the banks are controlled by a regulatory commission namely the Investments and Security Commission. Additionally, Australian Prudent Regulatory Authority (APRA) has a policy providing that all banking institutions should report on their daily performance.
Mortgage Lending in the US, Australia, and Canada
The mortgage market has currently increased its lending services especially in Canada, Australia, and the US. A mortgage is always controlled or provided by brokers in these countries. These brokers find a suitable bank that can offer direct loans to individuals who require mortgages. In Canada, the brokers are paid by bankers who provide the loans to the mortgage seekers.
In the United States, the mortgage is dominated by about 53,000 companies dealing directly or indirectly with the provision of mortgage services. Mortgage lending through a brokerage is estimated to account for about 68% of the residential loans in the US. Mortgage lending in the US is controlled by ten federal laws as well as five federal agencies. The banks in the US have used brokers to identify individuals that qualify for a mortgage.
In Canada, the provision of mortgage loans is controlled by provincial governments. Mortgage brokers are required by the provincial governments to identified qualified borrowers under the provincial licensing scheme. In most cases, the loans are controlled and insured by agencies such as the Canadian Housing and Mortgage Corporation.
Australia has always adopted mortgage brokerage channels since the 1980s. These became more powerful in the 1990s as the mortgage market became more active in Australia. The mortgage brokers have acquired about 35% of the loans directed towards mortgage borrowing. Australia has its mortgage borrowing services controlled by the Australian Securities and Investments Commission. They have stiff lending obligations in that even the brokerage firms have to be involved whenever there is a need for external dispute resolution. For the lending process to be effective, the Australian commission provides that all the brokers should be recognized by an active governing body such as the Mortgage and Finance Association.
Like mortgages in other countries such as the US and Canada, the brokers in Australia are paid by the banks after successfully selling a mortgage loan. After the recent crisis in the mortgage market in 2008, the Australian government has put mechanisms in place to regulate the activities of the mortgage brokers.
Global Banking Response to the GFC
The global financial crisis was a great setback to many nations. The effects were felt in many countries across the globe but the US and the European countries suffered more. The problem emanated from America’s Hubble Housing Mortgage lending services that affected the whole world.
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The GFC has created the need to coordinate the operations of all financial institutions to enable them to operate under financial laws. Although the individual countries have adopted their regulatory initiatives, they tend to comply with the international standards to be at par with global financial developments. Capital control provides that banks should be regulated to be on the safe side. A macro-prudent policy is very important for this. Many foreign banks have adopted this policy after their experiences.
The international standards stipulate that all financial institutions should be regulated to come up with common international obligations that can be assessed and monitored against the set rules. The international banks have gone ahead to enact rules regulating their financial institutions at the local level. This was the only way that these banks could recover from the financial crisis. Australia and Canada, for example, are not controlled by international laws but governments went ahead and formed supervisory bodies to regulate the banking system. This is one of the reasons why they have been immune to the recent GFC.
Several measures have been taken to ensure that the banking sector operates effectively. This includes imposing taxes on larger banks as well as formulating policies to regulate the operations of the banks. To this end, global financial regulations have played an important role in ensuring that foreign banks do not negatively affect the economy by skewing the international exchange rates. The pre-GFC as well as the post-GFC developments pose a challenge to the world’s economy.
Some of the initiatives undertaken by the international financial regulators are listed below:
- All financial institutions should comply with the provisions of the international regulatory bodies. In this case, the potential risks are identified and a unified intervention adopted.
- The GFC was brought about by the fragmentation of banking sectors which were controlled by the federal government in some states resulting in dual banking.
- During the GFC, consumer protection was given very little attention. To curb this, the foreign banking systems had to come up with measures to safeguard the rights of the consumer.
Following the GFC, the Group of Twenty (G20) has played an influential role in shaping the financial sectors across the globe. Several meetings have been held in the recent past to discuss such developments. This is in response to the recent financial crisis. Progress reports on all financial institutions are to be provided as well as a declaration of new policies to safeguard the banking institutions. Australia has remained on track despite the crisis meaning that this can be achieved if special mechanisms are put in place.
On realizing this, the G20 proposed that a Stability Board be formed to regulate and make sure that all the financial institutions adhere to the national and international standards put in place. This is to ensure that all foreign banks comply with the regulations. In addition to this, the Stability Board is mandated to address any developments as far as the financial performance is concerned.
Strengths and Weaknesses of Capital Markets after GFC in Australia and Germany
The global crisis triggered both national and international regulatory initiatives. Many banks resorted to bailouts and some even failed. Some were able to sail through despite the exposure to the crisis. The foundation of the market was further weakened by attempts to address the crisis. On the other hand, some banks have dominated the market and continue to post improved performance even in difficult times due to their strength that guaranteed safety.
Most of the national agencies had not formulated up to date regulatory guidelines plunging many nations into financial crises. Operating standards were poor and were inconsistent with the requirements for safe markets. Fragmentation of the banking sector was tolerated leading to the collapse of the markets.
These weaknesses inform the causes of the GFC. The weaknesses also explain why crises persist and why some nations are not affected significantly like others. The governing procedures were inadequate and lacked transparency. German was on the verge of collapse if there were no immediate interventions in the financial market. The economy would have faced a fate similar to that of the US.
German was not spared by the GFC. The effects were however mitigated by interventions from the local government. The country’s banking system can be represented by three pillars. These pillars include the private commercial banks which incurred huge losses in their financial operations. The second pillar is the cooperative banks which recorded stable financial performance during the crisis.
When it comes to weaknesses in the country’s financial operations, it is noted that low profits generated lead to the poor performance of the overall financial market. High operation costs are also a weakness in this country.
Australia has also experienced challenges on its part. Though the financial structures have performed well, the country exhibits several weaknesses as far as its banking system is concerned. This is evident because the country’s hedge funds had some anomalies.
Another weakness of the banking sector in Australia was manifested through the sharp increase in the lending margins whereby the legal securities were left to the lender. In this case, the borrowing party was subjected to counterparty risks. The regulatory community noticed this in advance and measures were put in place to address the issue.
Australia did not take chances when the problem emerged. First, the financial institutions reacted to the rise in demand by making sure that the ESA accounts were adjusted to ease pressure on the available cash flow. Its effectiveness is also evident considering that the financial regulatory agency was well prepared in advance. This enabled it to deal with the GFC by increasing the repo-eligible security rates in the long run. The banks were required to include a one-year maturity clause to be allowed to operate in the country.
Similarities in Bank Funding in Australia’s Emerging Markets
The Australian bank funding system has been characterized by a flurry of activities after the emergence of the international market. This is in an attempt to increase the capacity of the banking system. In the pre-GFC period, there was an increase in the number of bankers in Australia. Most of these banks had adhered to the regulatory provisions required by Australian authorities. The foreign banks in Australia are major players in security and investment banking. This alone has shaped the funding of the banking system in Australia.
Most banks have realized that it is important to adopt the Australian banking system. This is given the fact that the Australian banking system was not significantly affected by the recent global crisis. The emerging markets have formed common grounds in trading their services as far as the bank funding is concerned. This is to provide for a quick and effective response mechanism to resolve the financial crisis.
Differences in the Bank Funding System in Australia’s Emerging Markets
A major difference between the emerging markets was seen when the sector was faced with some challenges before the GFC. A suggestion was made to create a level playing ground for all the emerging markets. Before the GFC, the international market was greatly affected by developments in Australia. But on the contrary, the Australian bank funding system was characterized by a non-performing ratio during the GFC. This is as compared to other countries in the world. Australian offshore bank funding system is another difference notable between the emerging markets. This makes them vulnerable because they are exposed to risks from capital markets.