Funds In Short Term Money Market example essay topic

Financial markets play a crucial role in the operation of modern market economies. They provide a return for those who have excess funds or savings, while making loan funds available to those who need additional money. Not only is the financial service industry one of the largest industry in Australia, but its actions also influence all other industries because of its key role in the economy. For this reason, the deregulation of the financial sector in Australia since the 1980's has brought far reaching consequences. Financial markets are commonly divided into two main types - o Primary markets involve direct transactions between purchases and the initial seller of some sort of security. A security is a document entitling its owner to a financial asset, such as a share in a company or interest payments on a debt.

When a company is first floated on the stock market, this represents a primary market transaction. Companies that wish to issue securities to the general public via a primary market must follow very specific procedures, such as releasing a prospectus for shares. In a primary market, the money received from investors goes to directly to the company. The release for a prospectus for new Telstra shares is an example of a primary market activity. o Secondary markets involve transactions with securities that have been issued on a primary market some time in the past.

The vast majority of financial market transactions are on secondary markets, with existing securities. The company that first issued the security has no involvement with secondary market transactions. For example the Australian Stock Exchange is one of the largest secondary markets in Australia. In various ways all financial intermediaries perform the same basic information - they channel the excess savings from the (net savers) in the economy to those who wish to borrow funds (the net borrowers). Besides banks there are a wide range of other financial institutions: financial companies, merchant banks, credit unions, permanent building societies and mortgage originators. The remaining non bank financial institutions are often referred to under the general category of fund managers and insurers and they include life insurance companies, superannuation funds, unit trust, trustee companies and friendly societies.

There are a variety of financial market products in the economy to meet the various needs of lenders and borrowers. They vary in risk, return and liquidity. Consumer credit allows consumer to purchase consumer goods and services in advance of actual payment, the most common type of consumer credit is the credit card. Housing loans are offered by banks, as well as mortgage originators, such as Aussie, Wizard and RAMS. These are long term loans to purchase property, requiring periodic repayments with interest.

Business loans are a form of debt that allows businesses to begin or expand production of goods and services. These rates tend to be one or two % higher than household lending rates. The short term money market brings together people and businesses with temporary shortages or surpluses of funds. Bonds markets are markets for longer term securities to maturity. Share markets provide an avenue for the trade of shares and other financial products.

Financial futures are contracts to trade in financial instruments (bank bills, treasury bonds and the share price index as a later date for a certain price, and finally The foreign exchange or FOREX market is the market for buying and selling of foreign currencies. The FOREX market provides a market for people to buy and sell currencies and it operates 24 hours a day. Australia's financial system has undergone two major changes in recent decades. The deregulation of the financial industry in the early to mid 1980's increased the efficiency of the system by removing a number of government controls and exposing the industry to greater influence from domestic and global market forces.

More recently the implementation of regulatory changes by the Coalition Government has sought to further increase the efficiency of the system by responding to changes to financial markets that have occurred since deregulation. Under the new regulatory structure for the financial system, there are three major regulators- o The Reserve Bank of Australia (RBA) with responsibility for monetary policy, payments system regulation and systemic stability. o The Australian Prudential Regulation Authority (APRA) with prudential supervision and regulation of all deposit taking institutions, life and general insurance, and superannuation funds. o The Australian securities and investments commission (ASIC) with responsibility for corporate regulation, consumer protection and oversight of financial service products. The Reserve Bank of Australia (RBA) is Australia's central bank. A central bank generally has the role of controlling a country's money and banking system.

As such, it is different from other banks- it is not set up as a financial business with the desire to make profit. Rather, its primary purpose is the overall management of the financial sector in accordance with the economic objectives of the Commonwealth Government. The RBA was created in 1959 under the Reserve Bank Act 1959. Prior to that, limited central banking operations was conducted by the Commonwealth Bank. According to the Reserve Bank's Charter, in its conduct As Australia's central bank, the Reserve Bank is to be guided by three broad objectives: the stability of Australia's currency, the maintenance of full employment and the economic prosperity and welfare of the people of Australia. In reality, its major aim in recent years has been to sustain low inflation.

The functions of the Reserve Bank of Australia can be summarised as follows: Conducting monetary policy on behalf of the government- The conduct of monetary policy is the most important responsibility of the Reserve Bank. Monetary policy can be defined as Reserve Bank action designed to influence the cost and availability of money in the Australian economy (through influencing the general level of interest rates). The Reserve Bank conducts monetary policy with the aim of achieving a sustained low inflation rate while encouraging economic growth. Systemic Stability- The Reserve Bank's traditional role has been to exercise prudential supervision of banks, protecting the funds of depositors in the financial system. These responsibilities recently shifted to the Australian Prudential Regulation Authority (APRA). However, the RBA retains its traditional responsibility for the overall stability of the financial system.

It provides guidelines to foster the stability of individual financial institutions, and these guidelines will be enforced by the APRA. Prudential supervision is concerned with maintaining the longer term stability of the financial system by avoiding (or at least reducing the risk of) financial crises. The rules of prudential supervision minimise the chances that financial institutions will become insolvent. This protects the deposits of members of the public, without actually providing a formal guarantee for depositors' funds. Banks are allowed to make their own decisions about how much of their assets should be kept in 'liquid' form.

Nevertheless, banks develop their liquidity strategy in consultation with APRA. APRA provides prudential regulation for all authorised deposit-taking institutions (ADIs), superannuation funds and insurance companies. ADIs include banks, credit unions and building societies. APRA has two main regulatory roles- 1. APRA encourages behaviour by institutions that will ensure they are able to meet their obligations to the people who place money with them. Essentially, APRA regulates institutions to ensure that deposit-holders can take back their deposit money when they want it, that insurance companies can meet their policy obligations, and that superannuation funds can pay people who withdraw their savings.

In order to fulfil this role, APRA requires its related institutions to maintain certain levels of funds on hand and to manage risks according to specific formulae. One of the major implications of the Wallis Committee reforms is that APRA is now harmonizing ADI standards to ensure consistent application of prudential supervision across the financial system as a whole. 2. For any ADIs, insurance companies or superannuation funds that experience financial difficulty, APRA has the role of sorting out the institutions financial position and ensuring that policy or deposit holders receive as much of their funds as possible. This recovery role is supported by a range of investigation powers, giving APRA the right to intervene in any of its related institutions if it feels it has become financially un viable. Australian Securities and Investments Commission (ASIC) - ASIC is responsible for administering a number of laws, the most notable being the Corporation Act 2001.

ASIC plays a key consumer protection role in the Australian financial system. ASIC has the power to monitor, investigate and act in situations where the integrity of the financial system has been undermined either by the illegal acts of individuals or unethical investment products. As a result of the wide ranging reforms to the financial system in recent years, the Corporation Act 2001 has also undergone review; The Corporate Law Economic Reform Program (CLERP) aims to simplify the regulatory regime for companies and remove out of date requirements. CLERP has not only simplified many reporting procedures for small business but has also sought to create greater coherence for produce and licensing laws across the industry. These moves are aimed at both increasing the efficacy and the integrity of Australia's financial system. ASIC is the primary regulator responsible for monitoring the conduct of companies.

ASICs role governs the supervision of all aspect of company behaviour including formation, registration and reporting. It is also responsible for the monitoring of Australia's securities industry and security markets such as the Australian Stock Exchange. Domestic Market Operation by the Reserve Bank- Domestic Market Operation (DMO) is the instrument of government monetary policy. DMO refers to the purchase and sale of second hand (previously issued) government securities (i.e. Treasury notes and Treasury bonds) by the Reserve Bank, for the purpose of influencing interest rates.

The interest rate structure will influence the demand for money causing a change in the money supply, and the overall level of economic activity. It is important to distinguish between DMO and debt financing which is sometimes used by the government to make up for shortfalls in the government budgets. New government securities are used to finance a budget deficit - the government is simply borrowing money from the general public and then spending it. Deficit financing will ultimately have no impact on the money supply, and has nothing to do with DMO.

When the supply of funds held in the official short term money market increases, the price of borrowing this money- the cash rate of interest- falls. On the other hand, when the supply of funds in the settlements market decreases, the cash rate will rise. The RBA cash rate provides the foundation of the interest rate structure in the economy. An increase in the cash rate means that it becomes more expensive for financial institutions to obtain funds in short term money market. This increases the overall cost structure of borrowing, eventually flowing through to longer term and mortgage interest rates, as banks try to maintain their profit margins. Similarly a reduction in the cash rate lowers the cost of borrowing for banks in the short term money market, and financial institutions then pass this cost saving on to their customers in the form of lower lending rates.

Changes in the general level of interest rates (caused by changes in the cash rate) impact upon the level of economic activity. If interest rates fall, this encourages consumption and investment spending, which increases the level of economic activity. If interest rates rise, this deters consumption and investment spending and reduces the overall level of economic activity.