Chapter+01+Answers+to+end-of-chapter+questions - PART 1...

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PART 1 INTRODUCTION CHAPTER 1 THE FINANCIAL SERVICES INDUSTRY: DEPOSITORY INSTITUTIONS Chapter outline Banks Size, Structure and Composition of the Industry Balance Sheet and Recent Trends Assets Liabilities Off-Balance-Sheet Activities Building Societies and Credit Unions Size, Structure and Composition of the Industry Balance Sheet and Trends Regulation The Australian Prudential Regulation Authority The Australian Securities and Investments Commission The Reserve Bank of Australia Prudential Standards for Authorised Depository Institutions The Financial Services Reform Act 2001 (CLERP6) Instructor’s Resource Manual t/a Financial Instiutions Management 2e by Lange, Saunders, Anderson, 1
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Answers to end-of-chapter questions QUESTIONS AND PROBLEMS 1. What are the major sources of funds for banks in Australia? What are the major uses of funds for banks in Australia? Sources of funds: Deposit liabilities: current account or transactions accounts (demand deposits); fixed-term deposits and savings accounts (including certificates of deposit) Borrowed funds Equity: Shareholders’ funds; long-term subordinated debt Uses of funds: Loans and advances: home mortgages; commercial loans; bank accepted bills; commercial bills; promissory notes; corporate bonds and debentures Deposits in exchange settlement accounts with the RBA Securities: government (federal and state) securities; corporate bonds; securitised assets Foreign currency and foreign currency assets Cash 2. How would you explain the recent decline in the size of the building society industry? Building societies were originally set up to pool small deposits from individuals and households in order to finance mortgage lending. Residential home ownership was highly desired by Australians and as it was difficult to obtain home finance from banks in the regulated environment, building societies were able to fill the breach and thrived. With deregulation of banks and the growth of the securitised mortgage market, the value of the intermediation function performed by building societies and credit unions (funnelling small savings into home mortgage lending or shorter term lending) was eroded by competition. Deregulation of the financial industry freed the banks’ capacity to extend home loans to individuals, which resulted in increased competition from the banking sector, making it more difficult for NBFIs to survive in their previous form. As a result many smaller societies and credit cooperatives have merged, while larger building societies converted to banks, allowing them to offer more services (although more recently building societies have been able to expand the
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This note was uploaded on 08/21/2009 for the course FINS 3630 taught by Professor Yip during the Three '09 term at University of New South Wales.

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Chapter+01+Answers+to+end-of-chapter+questions - PART 1...

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