Answer To: Term XXXXXXXXXXASSIGNMENT FIN203 BANKING AND FINANCE INDIVIDUAL ASSIGNMENT T319 SUBJECT CODE & NAME:...
Kushal answered on Jan 20 2021
Contents
Executive Summary 1
Introduction 1
Literature Review 2
Research and Analysis 2
Foreign Currency Liabilities – 3
Comparison across banks – 4
Impact of the Global financial Crisis – 4
How crises and funding are intertwined? 5
Recommendations 5
Conclusions 5
Appendices – 6
Executive Summary
The big four banks in the Australia, tend to raise more than 70% of the funds from the deposits. As we can see the foreign currency liabilities are decreasing across banks, the banks have also increasingly engaged into increasing the hedging practices. As far as the smaller banks are concerned the foreign currency exposure as far as their liabilities are concerned is very low. When the Lehmann Brothers fell, it led to global contagion crisis due to the worldwide banks having the exposure to those bank and hence the things have changed significantly after the crisis. Banks need to extensively engage into risk management practices.
Introduction
Global financial crisis that happened during 2008 and 2009, was a worldwide crisis that took place globally due to the banking system being at the core of it1,2. Many banks including the big four Australian banks were exposed to this and the effect of this crisis was to the different extent for every bank. Banks raised the funds from the multiple sources including the deposits, wholesale funding, international loans, overseas deposits, bonds. Hence, if a bank is globally expanded then the liabilities will also be in the foreign currency terms and hence the banks are susceptible to the risks of foreign currency fluctuations, interest rate risks and other factors. After the global financial crisis, this changed significantly since the banks had a lot of exposure to foreign banks and that led to very high degree of deterioration of the banks and its shareholders wealth. We are trying to analyse Australian banks before and after the global financial crisis and see how the source of funds have changed in this duration.
Literature Review
We tried to assess the impact of how the funding for the banks and the recession or any contagion crisis are intertwined and how the patterns for the funding for the banks do change pre and post period of such crisis. When we dig deep into this1, we are able to analyse that the banks funding patterns changed significantly post the euro crisis. It changed significantly after the global financial crisis as well and the reduction of the interbank loans in the source of funds is the example of this.
Banks in order to ensure that such Black Swan events do not impact the ability of the banks to move forward as a going concern and hence, they take the extensive route of hedging themselves against these adverse movements of the interest rates, currency rates.5
Research and Analysis
Banks Chosen –
1. Australia and New Zealand Banking Group
2. Commonwealth bank of Australia
3. Westpac
4. NAB
5. Bank of Melbourne
6. Bankwest
Source of funds for big banks –
Westpac -
Westpac has been able to raise most of the money from the time deposits and other borrowings, other borrowing consists of the derivatives, bonds issues, foreign currency liabilities in the form of bonds issued outside the Australia and New Zealand. The deposits and other borrowings portion is a very significant portion for ANZ, which comprise of 80% of the total liabilities and 70% of the total source of funds when shareholder’s equity is included in the denominator.
As far as the share of the foreign currency liabilities is concerned less than 5% of the total deposits are raised from outside the Australia and New Zealand. Considering New Zealand, as an overseas country, then this portion goes up to 17%.
As far as the other foreign currency liabilities are concerned their portion is higher in other instruments, for examples the short term debt and long term debt significantly consists the foreign currency debt, US commercial paper in both short term and long term.
If check the overall portion of the foreign currency liabilities, we calculated it to be 10% of the total liabilities and as compared to 2006, the exposure to the foreign currency as far as the source of funds is concerned, it has decreased. The firm also engages into the cross currency swaps, interest rate swaps for the hedging practices to ensure that no major loss is realised due to the adverse impact on the interest rates.3
Commonwealth bank of Australia -
As we expect from the banks, banks have been raising majority of the funds from the time deposits and savings deposits which could be categorized as savings and current deposits which has a major share of almost 75% of the total source of funds. These deposits are classified into domestic and overseas deposits and the remaining source of funds apart from the equity comes from...