Australian Financial Institutions and Challenges
Reserve Bank of Australia is the one that acts as the country’s central bank (RBA). The bank is responsible for controlling inflation, unemployment as well as ensuring the overall economic well-being of the Australian people. The main financial challenges that are experienced by Australian financial institutions include; high banks interest rates, limited securitization in Australian markets as well as a considerable fall in shares and volatility in share prices.
For RBA to adequately execute its mandate, it has a well-defined structure and legal framework. RBA uses structures such as APRA and ASIC. RBA in addition uses fiscal as well as monetary policies as its legal framework to undertake appropriate measures to ensure economic stability in the financial institutions as well as in the overall economy of Australia. RBA manages to regulate inflation with the help of fiscal and monetary policies that entails setting interest rates on overnight loans in the money market. Monetary policy is regarded as short-term management of the interest rates to meet domestic policy objectives.
The monetary policy affects the economy in that short-term interest rates affect the overall demand and supply. The adjustment of the interest rates influences the borrowing and lending processes which affect the economic activity and eventually the inflation rate. For, example the recent economic crisis experienced in 2008 forced the Australian government to increase its spending as well as use stimulating packages to spur activity in the country.
As a result of the adoption of the expeditionary policy, economic activity in Australia increased to approximately 5.5% which was above the recommended growth of about 3.5. At the same time inflation increased to 5%. For the government to reduce the inflation and the growth rate to the recommended rate, it used contraction and monetary policy to reduce inflation and growth rate to approximately 3. 5%. This was essential to reduce the high rate of unemployment to approximately 3. 5 which is slightly equal to government preferred inflation of about 2-3% (Bultitude 2011).
The RAB is responsible for maintaining stability in financial institutions in Australia. During the recent 2008 economic crisis RBA took appropriate actions in advance immediately it realized some financial problems in mid-2007. It supported financial institutions in Australia in liquidity by extending its money market operations through injecting liquidity into financial systems. In addition, RBA made structural alterations to its liquidity arrangements by extending classes of financial instruments that could be accepted as collateral for repurchase agreements. This helped to build more confidence in financial institutions as banks could approach RBA for funding for important parts of their portfolio in case the market fails to meet their needs (Saunders & Cornett 2011).
Because of the prevailing turbulence in Australian financial institutions, as a result of the recent global recession and the current economic problems in Europe, Australian Prudential Regulation Authority has increased its monitoring of banks. It is closely monitoring liquidity processes as well as the funding arrangements. It is working more closely with RBA’s markets operation teams to keep a close understanding of the overall market liquidity status to undertake appropriate measures in time (Bastasin 2012).
The financial turbulence in the Australian financial market has also resulted in an increase in monitoring and surveillance activities. The APRA, the RBA as well the Australian Securities and Investments Commission (ASIC) have enhanced their collaboration with market participants in order to be kept updated about the market developments. Good monitoring of financial markets is imperative in Australian financial markets to avoid insolvency of financial institutions which can result in adverse economic impacts on the Australian economy.
List of References
Bastasin, C 2012, Saving Europe: How national politics nearly destroyed the euro. Brookings Institution Press, Washington, D.C.
Bultitude, S 2012, ‘Regulatory Response to Financial Market Turbulence,’ Journal of Management, Vol. 20, no. 6, PP. 78-90.
Saunders, A & Cornett, M 2011, Financial Institutions Management: A Risk Management Approach, – McGraw Hill Irwin, Sydney.