FINS5530, Week 2 - 5/26/11 03:01:01 AM FinS 5530 Financial...

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Click to edit Master subtitle style 5/26/11 03:01:01 AM FinS 5530 Financial institutionS Ilya Serov Week 2: Introduction to Risk
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5/26/11 03:01:03 AM Agenda Ø Overview of the Australian Financial System Ø Macroeconomic background Ø Change in FI balance sheet composition Ø Financial system developments Ø Introduction to FI Risk Assessment Ø Interest rate risk, market risk, credit risk, off-balance-sheet risk, foreign exchange risk, country or sovereign risk, 22
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5/26/11 03:01:03 AM Overview of the Australian Ø Macroeconomic background Ø Change in FI balance sheet composition Ø Financial system developments For a useful reference, see Ø Ryan, C. and Thompson, C., “Risk and Transformation of the Australian Financial System”, Reserve Bank of Australia ( www.rba.gov.au) 33
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5/26/11 03:01:03 AM Macroeconomic trends Ø Last economic recession in 1991 Ø Characterised by: Ø Deregulation and economic reform of 1980- 90’s. Ø Gradual reduction in unemployment & rise in household incomes Ø Lower interest rates and inflation Ø High levels of investment due to expansion and mining boom 44
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5/26/11 03:01:03 AM Deregulation Ø Banking sector: Ø 1982: quantitative lending guidance eliminated Ø These controls restricted credit supply. As a result, only customers with a very good credit record and high income and/or savings were able to obtain a loan. Ø 1986: removal of ceiling on mortgage interest rate Ø Entry of foreign banks during the late 55
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5/26/11 03:01:03 AM Household Indebtedness 66
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5/26/11 03:01:03 AM Non-bank Lenders Ø Securitisation: Ø Packaging and selling of loans and other assets backed by securities. Ø Typically, residential mortgage loans. Ø Allows for funding not reliant on deposits Ø Rapid rise in the 1990’s: Ø Aussie Home Loans, RAMS, Wizard and others 77
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5/26/11 03:01:03 AM Investment Banking and Securities Firms Ø Foreign banks entering in 1990’s. Ø Domestic players: Ø Macquarie Bank Ø Initially, infrastructure fund oriented Ø Expansion into other lines of business. Ø Babcock & Brown, Allco Ø ‘Mini-Me’ infrastructure and securitisation strategy Ø Did not survive the GFC 88
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5/26/11 03:01:03 AM Superannuation and Insurance 99
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5/26/11 03:01:03 AM Assets of Financial Institutions 10
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5/26/11 03:01:03 AM Bank Balance Sheets 11
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5/26/11 03:01:03 AM Recent Trends 12
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5/26/11 03:01:03 AM Recent Trends Ø Greater emphasis on: Ø Deposit funding Ø Longer-term debt Ø Reduction in securitisation following the GFC: Ø 2007: securitisation maarket of AUD 50 billion Ø 2010: AUD 18 billion. Ø Competition in mortgage markets Ø e.g. NAB ‘break up’ campaign. 13
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5/26/11 03:01:04 AM Recent Trends Ø Slowdown in credit / increase in savings rate: 14
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5/26/11 03:01:04 AM Regulation Ø Australian Prudential Regulation Authority Ø Adopts International standards for Australia Ø International framework is known as Basel II Ø Provides calculations for different risks Ø Specifies minimum amount of capital that a bank needs to hold for each risk Ø Generally, there are three levels of 15
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5/26/11 03:01:04 AM Introduction to FI Risk Ø Risk Management: Ø Primary function Ø
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This note was uploaded on 05/26/2011 for the course FIN 5530 taught by Professor Lee during the Three '11 term at University of New South Wales.

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FINS5530, Week 2 - 5/26/11 03:01:01 AM FinS 5530 Financial...

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