Banking and Risk Management

Market Share of Australia’s Financial Institutions

There are many financial institutions in Australia. Among these, commercial banks are the most proliferated. The leading commercial banks are Westpac Banking Corporation, Commonwealth Bank of Australia, Australian and New Zealand Banking Group and National Australia Bank. According to Allen and Powell (2012), these leaders control about 90% of all financial transactions in the country. Their combined market capitalization is about $270 billion.

Sources of Funds for Commercial Banks

There are many sources of funds for commercial banks. Some of these sources include reserve funds, shareholders’ capital, deposits, retained earnings, share equity, surpluses, borrowings, capital among others. However, according to O'Hara and Shaw (1990), the main source of funds for commercial banks is deposits. These are managed in several types of accounts. These include savings, current and terms deposits. O'Hara and Shaw (1990) noted that 80% of sources of funds for commercial banks comes from deposits. Among these, 50% come from term deposits.  It is also important to note that investments constitute a significant amount of funds or revenues.

Over the years, Australia has recorded a shift in the financial market. Murthy writes that in the 1970’s, the main source of loans for individuals was building societies and other non-banking institutions. As time went by, it was evident that commercial banks were used only as custodians of deposits and not sources of funds. Moreover, in the recent past, proliferated retail banking has led to more business for commercial banks.  In addition, the recent past has been characterized by global economic crises. These crises have not spared Australia. As a result, commercial banks have opted to rely more heavily on the Australian Reserve Bank.

Recent global financial problems led to increased rates on loans. Therefore, the central bank was obliged to reduce its rates to the commercial banks. However, there has been a game of gaining in which commercial banks want to maximize their gains. The most recent trend is characterized by desire by banks to charge high interest rates even when the central bank reduces rates for them. Loan funding

Banks Too Big To Fail

There are many reasons as to why big bags do not fail or collapse. First of all, during times of high profitability, banks save up to 12% of their net profit as reserves to be used in times of lean profitability or losses. In this regard, they cannot just fail. In addition, banks are drivers of economic growth in a country. Therefore, governments cannot allow banks to fail (Mishkin, 2006). Banks are interconnected with many sectors of economy. Their losses can be felt in all sectors of economy. As a result, governments chip in to support banks and given them the necessary infrastructural or financial support. Further, banks are interconnected with the global economy. Since central bank as a financial regulator needs to shield its citizens, they would make the necessary interventions.

This concept faces several criticisms. First, it is apparent that some commercial banks are bound to take advantage of this situation and charge exorbitant rates. In addition, banks or financial institutions are bound to engage in risky behaviors because they are assured of government’s protection. Other critics cite moral perspectives in cases where government bears responsibility for banks’ dismal performance in their strategic positioning. Some authorities assert that banks that do not have efficient risk management mechanisms in place should be let to fail. Moreover, there are those who take middle ground. The latter argue that banks should separate their investments from credit sections.

There are several policies that government puts in to deal with the issues of “big to fail”. Some of these policies include managerial incentives and government bailouts. The latter would help the bank in bettering its financial status in terms of revenues. Further, it is also possible to limit short-term wholesale financing. Furthermore, the other policy entails limiting those who can access the discount window or regulating the king of products offered during the discount window. Other authorities believe that encouraging more Australians to borrow money from banks would deal with the situation. On the other hand, there are also restrictive rules that control the possibility of banks to take advantage of the situation. According to Gup (2003), there is a new bill that makes big banks pay some levies for this protection that they get from the government.

Bank’s Response to Criticisms

Although the central bank reduced rates, commercial banks revised their rates upwards. This led to a lot of criticisms from the media as well as political scenes. In response to these criticisms, commercial banks cited the need for the government to let market forces play their role in stabilizing rates. This presented some kind of tension or ideological differences. Moreover, there is a need for commercial banks to realize that the role of central bank is indeed to control the fiscal policy.


Regulation plays an important role in the running of banks. Towards the end of the last century, there was a need to establish a committee for regulation of banking at the global scene. Regulation was important because there are usually many challenges facing banks. The RBA’s Quarterly Bulletin appropriately records currency differences as a major challenge for banks. Other challenges are purely macro-economic. These include fluctuations in the oil prices that make prices of things go up. There is also imminent inflation and other economic crises. These have continued to bedevil banks over time and across space. As a result, Basel Committee on Banking Supervision set a series of regulations. Basel II precepts were regulations and standards set in 2004 to guide banking. These regulations were expected to guide and protect the financial system at the global platform. These regulations were supposed to help in capital management, risk management and investments. The basic rationale behind these rules is the fact that the more risks that a bank faces, the more the capital it should have. This, therefore, has funding implications. The rules have been updates over the years such as in 2005, 2006, 2007, 2008 and 2009. The major challenge of Basel II was the 2008 global economic crisis. This led to the development of yet another code of regulations.

asel III was proposed in 2010 as a way of dealing with financial challenges in a better way as opposed to earlier approaches. The accord is mainly an advanced set of regulations that are more detailed. For instance, there are more provisions on capital as opposed to the first one. Some new aspect included incentives in management, increase buffers to capital, enhance ways of credit management and establishment of integrated management systems. However, a significant difference exists between Basel II and III. The latter in risk-focused while the former focuses on creating leverage for banks and have new ways of error measurement and other safeguards. In other words, it can be said that Basel III is more effective than Basel II.

There have also been other non-monetary challenges faced by banks. These include political issues. For instance, different countries have different economic policies or ideologies. As a matter of example, the West and the East have different economic and political approaches to development. These are capitalism and socialism. Under capitalism, forces of market are supposed to be the determining factor. However, socialism practices some controls that may affect the entire fiscal policy. In addition, other than the general ideological environment, there have been lots of government influences in the negative manner. Government spending in any economy has always been a major challenge. Other countries face a lot of corruption cases and lack of commitment on the part of the government. Where this happens, there is no doubt that managers of banks especially central banks are in a dilemma. All in all, there is a need for countries to implement Basel III provisions because it would see an overhaul in the financial management system of different countries.

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