AUSTRALIA
Shashank Gupta Yukti Jain
GDP
GDP $1.371 Bn Annual Growth rate 3.1% GDP by Sector:
4% Industry 24.6% Services 71.4%
Agriculture
GDP growth rate
Some facts
Inflation 2.2% Unemployment 5.4% Government Debt to GDP 22.9 Population 22.6 Mn 5th in Purchasing Power Parity Ranked 2nd in Human Development Index Sovereign Credit Rating of AAA 13th largest by GDP and 16th largest by GDP per capita
Australian Stock Exchange
Regulatory Framework
Twin Peaks Regulatory Model
Basic Objectives is to check:
Market misconduct - ASIC Information Asymmetry - APRA Anti-competitive behavior - ACCC Systemic instability - RBA
Australian Prudential Regulation Authority
APRA, which was originally established in 1988, has three main types of powers in regulating financial institutions:
authorisation or licensing powers; supervision and monitoring powers; and powers to act in circumstances of financial difficulties to protect depositors, policy holders and superannuation fund members, including powers relating to taking control of entities and/or winding up insolvent entities.
HIH Collapse
Collapse of $3.75 bn Australian Insurance Company Introduction of Probability and Impact Rating System (PARIS) to classify regulated financial institutions in two areas:
The
probability that the institution might be unable to honour its financial promises to beneficiaries depositors, policyholders and superannuation fund members; and the impact on the Australian financial system should the institution fail.
Australian Securities and Investments Commission
Australias corporate, market and financial services regulator. Regulates 1.5 million corporations, 4,415 financial services businesses and 15 financial markets. It seeks to ensure that Australias capital and financial services markets are fair and transparent, supported by confident and informed investors and consumers.
Council of Financial Regulators
Co-ordinating body for Australias main financial regulatory agencies:
the
Reserve Bank of Australia (which chairs the Council), APRA, ASIC and The Treasury.
Comparison
APRA IRDA, PFRDA ASIC FMC, SEBI RBA - RBI Financial Stability
Rationale behind Twin Peak
The combination of deposit taking, insurance and superannuation regulation is unlikely to be carried out efficiently and flexibly by a central bank Separation will clarify that, while the central bank may still provide support to maintain financial stability, there is no implied or automatic guarantee of any financial institution or its promises in the event of insolvency Separation enables both the RBA and APRA to focus clearly on their primary objectives and will clarify the lines of accountability for the regulatory task.
Advantages of Twin Peak Model
Twin Peaks superior to a single regulator because it permits each agency to focus on a single objective:
Political priority likely to be given to consumer protection versus prudential regulation (House of Lords, 2009) Different skills required by consumer protection and prudential regulation
Giving equal billing to central bank and regulatory agency did not work in practice. Recipe for delayed decisions and lack of
Four Pillars
Commonwealth Bank Westpac Banking Corporation Australia and New Zealand Banking Group National Australia Bank
Global Financial Crisis (GFC)
Australia Somewhat more insulated But affects of GFC are very real Housing market has slowed
Global Financial Crisis
ASX on 6 March 2009 was 54% less than the 1 November 2007 high.
Superannuation
Funds- 14% in 2008 Life Insurers- 20% Public Unit Trusts- 16% Other Managed Funds- 38%
Households 10% wealth loss Growth in the economy slowed to around 0.5% Unemployment rate 5% by Nov 2009 (2% rise)
Global Financial Crisis
Economic stimulus package (first) worth $10.4 billion announced in October 2008
Inflation
situation Payments to seniors and families Christmas spending, reported strong sales The first home buyers grant Automotive industry
Global Financial Crisis
Second economic stimulus package in February 2009 A$47 billion:
$14.7
billion for schools $6.6 billion for 20,000 new homes $3.9 billion to insulate 2.7 million homes $890 million for road repairs and infrastructure $2.7 billion in small business tax breaks $12.7 billion for cash bonuses: $950 for every Australian taxpayer who earned less than $80,000
Housing Prices
Property bubble??? 2011: Mar Qtr - Home price falls by 6% 2011: Sept Qtr - fall 1.2% 2011: Dec Qtr - fall 1% House prices fall 4.8% over the year 2012: Mar Qtr - fall 1.1% House prices continued to rise throughout 2012
How did they Escape Crisis
Domestic regulatory framework has performed well APRA relatively proactive in prudential regulation
Several
stress tests of ADIs, housing loan portfolios Strengthening the capital requirements for higherrisk housing loans In 2004, APRA introduced higher risk weights on non-standard loans
How did they Escape Crisis
China, biggest importer of Australian mining goods, is still growing economy Not much exposure to toxic debt NPA were about 0.2% of all Aussie Bank loans less than UK(0.9%), US(1.1%), Germany(3.4%) RBA has the ability to reduce interest rates to combat a recession Housing shortage
How did they Escape Crisis
Lesser role of NBFCs they accounted for 20% of all loans Less competition faced by banks Ability to raise short term capital easily due to good credit ratings Government guarantying deposits (three year uncapped bank deposit guarantee) Focus on growth (and not survival)
Confidence
Australia is leading the developed world not just in GDP and employment gains, but also in the self-fulfilling prophecy that Keynes calls animal spirits: faith that things will get better, which is a prerequisite for their getting better for real.
Lessons from crisis
Importance of good crisis management arrangements:
Ensure
coordination between provider of liquidity (central bank) and supervisory agency Roleof Finance Ministry (Treasury) as provider of capital of last resort.
Need to deal with the Too Big to Fail problem. Some large firms operate without effective market discipline because the spillover effects of bankruptcy are too great.
Further Fears
Slowdown in mining activity OECD. BHP Billiton reporting 35% drop in profits and delayed expansion plans Probable housing price bubble High Currency Value. Exports Low. Jobs hit Foreigners own 80% of Australian Government Debt High dependence on China
