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The global financial crisis (GFC) affected many countries, although some showed great potential in withstanding the resulting economic turbulence. For example, Australian banks came through the GFC with relatively low losses compared to other Western countries. Factors that helped Australia to cope with the economic challenges included diversification, capitalization, intermediation, healthy profitability, and adequate policy responses. These will be discussed in this paper.
Factors and Policies
To understand how Australian banks managed the GFC, it is essential to pay attention to the very structure of its banking. One of the most significant factors is that “banks are subject to a prudential capital ratio (PCR) of eight percent of total risk-weighted assets” (Hawtrey 105). This shows the capitalized nature of Australian banks, while their Western counterparts are often characterized as low-capitalized ones. The second beneficial factor is associated with a stable funding basis and diversification, which are ensured by two crucial sources: wholesale funding and customer deposits (“Chapter 1: Resilience”). In cases where investment in many financial institutions was uncertain because of the crisis, diversification allowed Australian banks to preserve at least part of its funding sources.
A culture of intermediation adopted by Australian banks benefitted in reliable lending practices as the impaired loan ratio composed only 0.2 percent during the GFC compared to 1.1 percent in the US or 5.4 percent in Italy (Hawtrey 104). Even though securitization was present in the Australian banking system, intermediation served as a dominant model, especially in mortgage lending. The primary lending focus was associated with small risks, taking approximately one percent of non-conforming housing loans, while the US system accounted for 12 percent. The fact that Australia kept its provisioning loan higher than 100 percent is another issue related to intermediation and this acted as an additional protective measure.
The focus on healthy profitability based on evaluating return on equity (ROE) should also be noted among factors that helped Australian banks during the GFC. Brown and Davis argue that Australia was more interested in raising profitability from domestic funds in comparison to other large countries (538). Therefore, the condition of Australian banks before the economic crisis was highly profitable. The growth in credit, as well as bank loans, was the main source of healthy profitability. In addition to the above factor, robust corporate governance in the form of prudent lending solutions should also be noted as a key factor. This can be observed in the levels of market integrity and transparency that were rather high – ranked two and seven, respectively (Hawtrey 110). Effective financial regulation was aligned with the separation of social assistance from commercial banking as opposed to Australian banks’ counterparts. In particular, US banks targeted social objectives as an integral part of their performance, while banks in Australia considered the two already mentioned aspects as separate priorities. Since the boundaries between social and commercial affairs were not blurred, the above approach led to the sound performance of Australian banks during the GFC.
Even though the Australian banking system proved to be prepared for the crisis, it still needed to provide an appropriate response towards the economic challenges that the GFC brought. The residential mortgage-backed securities (RMBS), as a means of repurchase agreements, were introduced by the Reserve Bank and Government to restart the part of the market that was frozen earlier (“Chapter 5: Regulatory System”). To improve confidence in the stability of the national financial system, a blanket guarantee was issued for all bank debts and deposits. More to the point, the Australian Securities Exchange (ASX) regulation was accepted, thus preventing further instability in the given field that was supported by the Australian Prudential Regulation Authority (APRA) and its proposal for executive remuneration initiatives (“Chapter 5: Regulatory System”). The reduction of fiscal actions and interest rates also contributed to the decreased pressure on banks. Ultimately, the Federal Government issued a guarantee for the State and Territory Governments’ borrowings to address debt.
As for the response to the potential economic crisis in the future, it is possible to state with greater confidence that there are still some risks that may threaten the national banking system. Namely, economic slowdowns and high house prices may cause additional pressure, while stock market collapse and issues with pension funds may also pose a real threat in case of another financial crisis. In this regard, it becomes evident that to be confident in the ability of Australian banks to come through a future crisis, it is critical to consider and implement additional protective policies and measures aimed at strengthening the regulatory system along with banking sector funding.
To conclude, specific measures implemented to support money-market stability allowed Australia to encounter only modest financial instability. Also, one should emphasize that Australian banks prevented abnormal write-downs, showed piece resilience along with a low level of problems with loans and credits and experienced no bailouts. Intermediation, diversification, capitalization, and healthy profitability were the main factors that allowed Australia to cope with the economic crisis brought on by the GFC more effectively than its Western counterparts. Such policies as the Australian Securities Exchange (ASX), the residential mortgage-backed securities (RMBS), and executive remuneration initiatives were all used in response to the GFC. To be confident that Australian banks will withstand any future financial crisis, it is important to adopt additional protective policies.
Brown, Christine, and Kevin Davis. “Australia’s Experience in the Global Financial Crisis.” Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future, edited by Robert Kolb, Wiley, 2010, pp. 537-544, Web.
“Chapter 1: Resilience.” Financial System Inquiry, 2014, Web.
“Chapter 5: Regulatory System.” Financial System Inquiry, 2014, Web.
Hawtrey, Kim. “The Global Credit Crisis: Why Have Australian Banks Been So Remarkably Resilient?” Agenda: A Journal of Policy Analysis and Reform, vol. 16, no. 3, 2009, pp. 95-114, Web.