25556 Chap.2 Australian Institutions, Markets and Regulators
Australian Institutions, Markets and Regulators
This chapter maps the players in the Australian system. Institutions fall into three groups: authorised deposit-taking institutions such as the major banks and credit unions, non-bank lenders such as finance companies, and fund managers including superannuation funds, unit trusts and insurers.
Five markets carry the securities and contracts they deal in: the money, bond and equity markets for direct financing, the foreign exchange market and the derivatives market.
Oversight is shared by four authorities that meet as the Council of Financial Regulators.
APRA supervises the soundness of banks, insurers and super trustees, ASIC polices conduct and disclosure, the Reserve Bank runs monetary policy and guards stability, and Treasury advises government. The chapter ends with the workshop's history lessons: how mortgage-backed securities carried American housing losses around the world in the global financial crisis, and what the Royal Commission found in Australian banking.
What this chapter covers
- 01
Authorised deposit-taking institutions and non-banks
- 02
Fund managers: superannuation, unit trusts and insurers
- 03
The money, bond, equity, FX and derivatives markets
- 04
APRA, ASIC, the RBA and Treasury
- 05
The six functions of the Reserve Bank
- 06
Mortgage-backed securities, the GFC and the Royal Commission
Worked example · free
Locate the broken link in a mortgage-backed security chain
- 1Event (i) is a failure at the mortgage brokers, whose job is to identify and verify suitable borrowers before a loan is made.
- 1Event (iii) lands on the households themselves: their repayments jump, and the weakest borrowers can no longer pay.
- 1Event (ii) is a failure at the ratings agencies, whose fee incentive inflated the grade; event (iv) is a failure at the advisers, who owe their investor clients care.
- 1Transmission: weak borrowers facing higher repayments default, cash flowing into the pool falls, and because investment banks passed the loans on as MBS, the investors at the end of the chain bear the loss.
Key terms
- Authorised deposit-taking institution
- An institution licensed by APRA to carry on banking business: taking deposits, making loans and providing related services.
- Fund manager
- An institution that invests clients' money for a fee, such as a superannuation fund, public unit trust or insurer.
- Mortgage-backed security
- A security created by pooling many home loans, whose holders share the repayments the borrowers make.
- Prudential regulation
- Supervision aimed at keeping financial institutions sound enough to meet their obligations, the role APRA performs.
- Subprime loan
- A home loan made to a borrower with a doubtful capacity to repay, such as one with a poor credit history or no deposit.
Australian Institutions, Markets and Regulators FAQ
What is the difference between APRA and ASIC?
APRA is the prudential regulator: it checks that banks, insurers and superannuation trustees stay sound enough to honour their obligations. ASIC regulates conduct, enforcing company and financial services law so that consumers, investors and creditors are treated fairly and given proper disclosure. A capital requirement points to APRA; a misleading product statement points to ASIC.
What are the main functions of the Reserve Bank of Australia?
The lecture lists six: carrying out monetary policy through short-term interest rates, issuing currency (the lecture lists notes and coins), banking for the Commonwealth Government, monitoring financial stability, regulating the payments system through its Payments System Board, and managing the nation's foreign exchange reserves.
Which markets arrange direct financing?
Three do: the money market for debt maturing within a year, the bond market for longer-term debt, and the equity market for shares and exchange-traded funds. The foreign exchange and derivatives markets complete the five, but they serve currency transactions and risk management rather than raising funds.
How did mortgage-backed securities contribute to the global financial crisis?
Investment banks pooled weak subprime home loans into securities that ratings agencies graded too generously. When US rates climbed and house prices fell, borrowers defaulted, cash flowing to the securities dropped and investors worldwide took losses, which froze credit well beyond the American housing market.
Is Treasury a financial regulator?
No. Treasury is the government's main economic department and advises on financial policy, such as the deposit guarantee, but it supervises no institution. It still sits on the Council of Financial Regulators beside APRA, ASIC and the Reserve Bank because it shapes the framework they apply.
Exam move
Draw your own one-page map with the three institution groups down one side and the five markets across the top, then add the regulator that watches each. Test yourself by writing two-line scenarios, a misleading advertisement or a bank short of capital, and naming the authority responsible. Learn the RBA's six functions as a numbered list so you can give all six without prompting.
For the crisis material, practise telling the chain story in order, from household loan to investor loss, naming the failure at each link and the incentive behind it.
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