The Global Financial Crisis affected many economies of the developed countries. The effect was different for the economies with some being affected in greater ways than others which greatly determined the pace at which they recovered. The Australian economy is among those that were not affected much. As such, the Australian banks managed to come through the crisis with a little ease and in relatively stable way than most of other developed counterparts. In 2009 first quarter, the economy managed a GDP growth of 0.4% which was a remarkable figure following the world-wide recession that was playing down the economies (Brown & Davis, 2010). Apart from a small drop and somewhat increased levels of bad debts, the banking sector experienced no adverse failures and profitability remained strong.
Several reasons can explain why the Australian banks came through the crisis in relatively better shape than their counterparts. Three reasons that best explain this situation include good management, regulations, and luck. The major banks in the country were well managed. First, they were intensely involved in the development of risk management systems meant to qualify them for advanced IRB status to introduce the Base II prudential regulation framework come January 2008 (Brown & Davis, 2010). The attention given to risk quantification and management may have arguably helped in avoiding the excessive risk-taking which was occurring elsewhere.
The banking sector had a great deal of securitization through regulations that had been put in place. The heavy securitization had been prompted by the increase of pension funds seeking for fixed interest style of investment without a significant local corporate bond market together with a small government securities market. On the supply side, the system reflected possible legal risks for lenders and originators and higher regulatory capital requirements for non-standard loans (Brown & Davis, 2010). Borrowers were aware of the risks of loss resulting from defaulting. Thus, regulation helped in the moderation of the sector. The Australian banks can also be viewed to have been lucky. The memories of a previously failed banking system in the early 1990s could have reduced the degree of risk-taking. The financial flows involved international borrowing to grow the local economy. Domestic loan activities gave high profitability thus lessening the incentive to engage in risky activities.
Policy Responses since GFC
The Australian government developed policy responses since the crisis to counter such a possibility in future. The policies can be categorized into four groups. The first category is the Reserve Bank and Government actions aimed at unfreezing and restoring liquidity to the financial markets. The Reserve Bank expanded the range of securities it would accept as collateral for repurchase agreement and include securities from the private sector (Brown & Davis, 2010). Such were Residential Mortgage Backed Securities (RMBS) and the term for repurchase extended to one year. The government opened a policy to purchase the RMBS in a bid to restart the frozen RMBS market. A second category involves actions that have been designed to boost confidence in the stability and strength of the financial system, particularly the banking sector. A notable move was the 2008 announcement of a blanket guarantee by the government of all bank deposits and debt which was threatening to undermine the international wholesale market funding of the Australian banks. Another one was an opt-in guarantee scheme for debts and deposits exceeding $1 million and a 100% guarantee for deposits below $1 million which was in introduced in November 2008 and was designed to run for three years.
The third category is the introduction of regulations meant to prevent activities by financial markets that increase instability. This included a ban on short-selling on the Australian Stock Exchange announced in September 2008. Another was a consultation paper with proposals to ensure consistency of executive remuneration practices in financial institutions with good risk management (Brown & Davis, 2010). The fourth response is fiscal actions and official interest rate reductions to offset the crisis-induced slowdown in the economy. A large fiscal stimulus package was announced in 2008 October which led to a forecast of a much-increased budget deficit in the 2009/2010 budget. There was also a guarantee scheme for borrowings by the State and the Territory Governments to ensure debt capital markets accessibility for funding infrastructure.
Confidence Level in the Banks to Weather a Future Financial Crisis
Judging from the resilience that the Australian banks and economy have shown in the face of the Global Financial Crisis and the policies they implemented in response, it is evident that the banking sector is well equipped to weather a future financial crisis. Several factors show support for this claim. One, the Australian lending culture is prudent with banks that are soundly capitalized (Hawtrey, 2009). The funding base is stable and well diversified. The banks also have a track record of healthy profitability over the years. Most importantly, the regulations put in place ensure proper moderation of the financial system. There exists a diligent official oversight of the banks and sound corporate governance. Most importantly, the country has separated commercial banking from social assistance policy. This separation has provided for each sector to perform its duties independently, unlike many other countries such as the United States.
Brown, C., & Davis, K. (2010). Australia's experience in the global financial crisis. Lessons from the financial crisis: Causes, consequences, and our economic future, 537-544.
Hawtrey, K. (2009). The global credit crisis: why have Australian banks been so remarkably resilient? Agenda: A Journal of Policy Analysis and Reform, 95-114.
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