Introduction
The first part of this essay will deal with question one and the second part is the long answer questions. Question one asks about the reasons why the bank’s financial systems in Canada and Australia are successful and what has made them remain instability amid the global financial crises. The following are the major reasons, which have stabilized the banking industry in Canada and Australia.
Part one
The first reason for this stability is that banks in Canada are more robust and strong in comparison to those, which are in the United States of America. This robustness in terms of being in all states of the country as well as having a wide capital and assets base is the reason that has ensured stability in both Australia and Canada. This strong asset base and capitalization experienced by banks in Canada are because of historical differences in regulations that began as early as the nineteenth century.
The banks in the United States on the other hand are weak. They do not have a strong financial and asset base to withstand the shocks and risks involved in the banking industry such as declining macroeconomic factors. This fragmentation has seen a decline in the capabilities of those banks to withstand financial crises in the market (Bordo & Redish 1987).
The differences in regulations that have brought about major differences are attributable to regulations. In Canada, the federal government regulated the banks whereas in the United States it was the state government. This led the banks in the United States to be limited in their expansion because some states did not allow banks that were not from their state to open branches in their state. This led to banks, which were states based rather than country-based (Bodenhorn 2000).
The banks were thereby weak and their capital and asset base were limited to their states. This was different in Canada and Australia because the banks were regulated by the federal government. This allowed the banks to have branches all over the country that provided them with capital base and assets, which are critical for stability. The federal government, therefore, chartered banks in Canada whereas the state governments chartered banks in the United States (Bordo, Reddish & Rockoff 2012).
The other difference is that the security markets in Canada and Australia grew slowly compared to those of the United States and this affected the bank’s performance and stability. The security markets or the stock industry in the United States grew more than in the two countries. This was a result of the weak bank system, which would not provide the needed capital therefore the need for industries and companies to look for more finances by taking their companies’ public in the stock exchange. This made the New York Stock Exchange very robust while weakening the banking system. In Canada, due to the robust banking system, there was no urgent need for stock markets as the banks were capable of funding the necessary industries with the needed capital (Davis 2008).
The growth in the stock market in the United States led to another major difference in terms of regulation that differs from the regulation in Canada and Australia. There was the acceptance of investment banks in the United States whereas the other two countries did not adopt them until the mid-twentieth century. The investment banks are banks, which accept stocks as security for the credit. The stocks were however regulated by the Securities and Exchange Commission which determined who was to invest.
The banks in Canada on the other hand preferred more items that are tangible as security such as house and real estate. This gave the banks stability as the value of the stock was likely to depreciate depending on the market and this was the major reason why the banks in the United States were in a panic as the value of stock depreciated in Wall Street. Real estate on the other hand is certainly going to maintain its value or increase it (Bordo, Reddish & Rockoff 2012).
The regulation of credit in Canada is another reason attributed to the stability of their banks. Banks in Canada are not credit-oriented and they, therefore, do not support credit cards as most of the banks in the United States. The banks in the United States offered mortgages for homeownership. Also, they gave more credit to individuals who had the mortgage against their equity. This meant that home equity was the security which led to mass default when there was a decline in the value of houses. In Canada there is no permission for a loan on equity, the borrower had to repay fully the loan before he or she qualifies for another one. This strictness has made the country banks to remain stable amid the global financial crises (Bordo, Reddish & Rockoff 2012).
Part 2
This part will deal with the long answer questions whether the foreign-based banks either subsidiary or affiliates are affected by the global financial crises and how they responded to this crisis. The subsidiaries are those banks, which have their parent company based in a foreign country, the subsidiaries may receive their initial funding from the parent company, but with time, they operate independently only requiring periodical supervision of their performance by the parent company.
The affiliates are also banks based locally but they affiliate with a foreign bank. The emerging market economies were unaffected by the global financial crises while the western nations were affected. Irrespective of this the subsidiaries had to react to the crises to ensure that they were prepared to handle it. One of how the subsidiaries responded to the crises was by cutting the overhead costs as well as reducing the rates of borrowing.
Other subsidiaries temporarily stopped lending to Small and Medium enterprises and rather preferred to lend to large and established enterprises. Those subsidiaries that were performing well than their parent companies reiterated that they are independent while those that were performing dismally had the support of their parent company and there was no need for panic (Mihaljek1 2011).
Question two of the long answer question asks for the strengths of German and Australian banks and their weaknesses. There are several strengths of German and Australian banks. The first strength regards the fact that German banks have three structures. There are privately held commercial banks, which are the largest banking institutions in the country. The publicly held banks have the government as a shareholder, and there are cooperative banks owned by the commercial members of the banks most of whom deposit their money.
This structure ensures stability in the German banks although partly affected by the global financial crises, especially the commercial banks. However, the cooperatives experienced much of the effects as they received deposits from their cooperative members. The weakness in the banking system in Germany has to do with the commercial banks having toxic assets. Toxic assets are those assets, which cannot easily turn liquid such as stocks that were declining in value because of the global credit crunch (International Monetary Fund 2011).
Question three is about similar patterns of operation between the Australian banking system and banks in the emerging markets. The first similarity is that of lending to small and medium enterprises in the country that is not only risky but also the one with the highest rate of return. Most of the emerging markets are experiencing industrial growth, which requires funding. The banks in emerging economies have taken advantage of this beneficial opportunity. Also, Australia is experiencing industrial growth and there are new industries that require funding. The banks are taking it as a major opportunity irrespective of the risks involved. Notably, Australia did not experience the heat of the Global recession as most of the Western countries (Kyoon & Sheridan 2012).
The difference in the banking system is that Australian banks have more assets base than banks in emerging economies. They are in a better position to remain stable amid the risks. On the other hand, banks in the emerging economy do not have a wide capital base to buffer them from the risks in times of crisis. However, they have the advantage that their economies are growing thus providing them with the needed resources and means of sustenance (Gorton 2010).
Conclusion
Banking is a robust industry, it directly relates to the economy, and therefore the regulations are important especially when meant to provide stability in the industry. The economies are becoming credit-oriented and there is a vital need to provide mechanisms like those in Canada that are going to ensure stability amid crises.
References
Bodenhorn, H 2000, A history of banking in antebellum America: Financial markets and economic development in an era of nation-building, Cambridge University Press, Cambridge.
Bordo, M & Redish, A 1987, Why did the bank of Canada emerge in 1935? Journal of Economic History vol. 47, no. 2, pp. 405-17.
Bordo, M, Reddish, A & Rockoff, H 2012, Why didn’t Canada have a banking crisis in 2008 (or in 1930, or 1907, or…)? National Bureau of Economic Research Working Paper No. 17312 2011, pp. 4-10.
Davis, K. (2008) The Australian financial system in the 2000s: Dodging the Bullet The World Economic Forum Development Report increased Australia’s financial system ranking from 11th internationally in 2008 to 2nd in 2009, partly in response to Australia’s experience during the financial crisis. World Economic Forum, Paris, pp. 29-34.
Gorton, G 2010, Slapped by the invisible hand: The panic of 2007, Financial management association survey and synthesis series, Oxford University Press, New York.
International Monetary Fund, 2011, Germany banking sector structure technical note: Financial Sector Assessment Program Update, New York.
Kyoon, B & Sheridan, N 2012, Asia and Pacific department bank capital adequacy in Australia, IMF Working Paper, New York, pp. 3-31.
Mihaljek1, D 2011, Domestic bank intermediation in emerging market economies during the crisis: locally owned versus foreign-owned banks. The BIS meeting of Deputy Governors of emerging market economies, New York.