Banking and Financial Intermediation
Department of Applied Finance
2024-07-24
Contact:
Course description:
Key approaches:
The course materials are prepared based on several sources. Additional references are provided at the end of each week’s slides.
There are three assessments in this course.
Assessment | Weight | Hurdle | When |
---|---|---|---|
Midterm exam | 20% | No | Week 7 |
Individual assignment | 30% | No | Due in Week 12 |
Final exam | 50% | No | University Examination Period |
A financial system encompasses various financial intermediaries, markets, regulators, and infrastructure in the generation and distribution of financial resources.
A well developed smoothly functioning facilitates the efficient life-cycle allocation of household consumption and the efficient allocation of physical capital to its most productive use in the business sector (Merton 1993).
Robert Merton, Nobel laureate (1997)
Financial intermediation is part of the financial system.
A historical perspective:
A banking analogue of the Modigliani and Miller (1958) theorem showing that banks are useless with perfect financial markets.
In a competitive equilibrium, banks make zero profit and have no impact on other agents’ decisions. Firms are indifferent between bank credit and bonds.
The existence of banks (and other financial intermediaries) must be justified by their roles in mitigating market frictions.
From an industrial organization perspective, the structure and competition of banking sector should have a unique impact on the economy, which warrants for regulation.
Figure 1: The share of financial sector of economic output is relatively stable
We start this banking course by studying the importance of banks in improving the efficient allocation of financial resources in the economy.
Some frictions render this setup unappealing.
Let’s see a simplified Diamond and Dybvig (1983) model:1
Not bothered by math, the implications are:
Asset transformation, risk transformation and liquidity transformation.
Banks do more than maturity transformation.
Banks are also better positioned to mitigate informational frictions in the market due to economies of scale.
Diamond (1984) model, overly simplified:
Economies of scale is evident:
A caveat. It must be that the cost of delegation is smaller than the benefits gained from economies of scale. The delegated monitor needs to be monitored, too.
Key insights:
The Australian’s central bank, Reserve Bank of Australia (RBA), classifies financial institutions into broadly three categories:1
Financial institutions authorised by the Australia Prudential Regulation Authority (APRA) to carry out financial intermediation are called authorised depository institutions (ADIs).
Assets | Liabilities and Equity |
---|---|
Loans | Deposits |
Other assets | Other liabilities |
Equity |
Largest banks by total assets in 2024, according to S&P Global Market Intelligence:
Rank | Company | Headquarter | Total assets ($B) |
---|---|---|---|
1 | Industrial and Commercial Bank of China Ltd. | China | 6,303.44 |
2 | Agricultural Bank of China Ltd. | China | 5,623.12 |
3 | China Construction Bank Corp. | China | 5,400.28 |
4 | Bank of China Ltd. | China | 4,578.28 |
5 | JPMorgan Chase & Co. | US | 3,875.39 |
6 | Bank of America Corp. | US | 3,180.15 |
7 | HSBC Holdings PLC | UK | 2,919.84 |
8 | BNP Paribas SA | France | 2,867.44 |
9 | Mitsubishi UFJ Financial Group Inc. | Japan | 2,816.77 |
10 | Crédit Agricole Group | France | 2,736.95 |
… | |||
42 | Commonwealth Bank of Australia | Australia | 868.74 |
Four major banks: CBA, ANZ, NAB, and Westpac.
Other major banks: Macquarie Bank, Bendigo and Adelaide Bank, Bank of Queensland, Suncorp, AMP Bank, etc.
Regional banks
Figure 5: Funding composition of banks in Australia
Figure 6: NIM of banks in Australia
Figure 7: Non-performing assets of banks in Australia
Credit Unions
Building Societies
Both credit unions and building societies are subject to the same prudential regulations as banks.
Only 36 credit unions and building societies in 2023.
Top 10 life insurers by total assets in 2023:
Company | Total Assets | Share |
---|---|---|
Resolution Life Australasia Limited (former AMP) | 25,636,094,000 | 21.11% |
Challenger Life Company Limited | 25,025,565,000 | 20.61% |
AIA Australia Limited | 14,999,640,516 | 12.35% |
TAL Life Limited | 12,451,370,000 | 10.25% |
Zurich Australia Limited | 8,268,873,000 | 6.81% |
MLC Limited | 6,775,456,183 | 5.58% |
Munich Reinsurance Company of Australasia Limited | 5,401,974,315 | 4.45% |
Swiss Re Life & Health Australia Limited | 3,454,823,000 | 2.85% |
TAL Life Insurance Services Limited | 3,200,477,631 | 2.64% |
Hannover Life Re of Australasia Ltd | 3,053,576,000 | 2.51% |
Australian governments have encouraged national savings over last decades through:
Sector represents 30% of the assets of all FIs as at December 2021.
Managed by:
Non-bank FIs’ assets
AFIN8003 Banking and Financial Intermediation