Risk Management Strategies in the Australian Banking Sector

The assignment content discusses the financial derivatives market and its importance in the sales and trading activities of ANZ Banking Group. It highlights various types of derivative instruments such as futures, options, and contracts and agreements that provide a hedging or speculation opportunity. The text also emphasizes the need for regulatory frameworks to govern banking groups, mentioning laws and policies related to government, carbon pricing, climatic change, mitigation, hedging, taxation, FATCA, and IGA. Finally, it concludes by stating that ANZ Banking Group is one of the largest national banks in Australia, driving the Australian financial system's diversification.

FINANCIAL INSTITUTIONS
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INTRODUCTION (SLIDE 2)
The Australian financial system comprises of activities that involve borrowing and lending funds,
also, to the transmitting of the ownership of financial claims. Some of the services are:
 Authorised deposit-taking institutions
 Insurance
 Superannuation
 Financial markets
 Payment systems
(Slide 3)Currently, out of the existing 54 commercial banks, Australia and New Zealand Banking
Group (ANZ) is a most significant bank which has a worldwide presence and offers a wide range of
financial operations both in domestic as well as overseas market. This report would entail in
describing how ANZ has driven up the functionalities of the financial system of Australia through
its activities and performance.
TASK 1 ACTIVITIES AND PERFORMANCE OF ANZ
Sources of funds (Slide 5)
ANZ can raise funds internally and externally from following sources:
 Ordinary Equity Capital: Raising funds through issuing equity shares to the public.
 Retained earnings: Part of profits retained into business after distributing dividends.
 Reserves: Reserves created out of surplus profits can be utilised as a source of finance.
 Trading securities: Securities which are held for trading can be exchanged.
 Derivative financial instruments: These instruments can be pledged against borrowed
funds.
 Preference share capital: Issuing preference share to the public to raise substantial amount.
 Treasury shares: Shares for company's treasury through buy back or retaining at the time of
public issue.
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Illustration 1: Sources of Funds for Banks
(Source: Various Sources of Bank Funds, 2017)

Uses of funds (Slide 6)
Funds are raised by ANZ for the following purposes:
 Purchases: Purchasing inventory or fixed assets for the bank.
 Interest payments: Interest payment on deposits to customers, loans, import bills, lease,
etc.
 Payment of collaterals: Bank needs to pay against the collaterals secured.
 Amortised values of loan origination expenses: Amounts involved are significant and
therefore matching principle is followed to amortise the same.
 Payment of share-based compensation expenses: Payment of compensation regarding
shares or against it requires the outflow of funds to be effectively managed.
 Payments of Leases: Lease payments for the property or buildings require bullet repayment
at the end of lease period.
 Tax implications: Payment of taxes involves huge funds which need to manage properly.
Asset Liability Management for managing three major kinds of risk (Slide 7)
 Interest rate risk: Risk of interest rate fluctuation in the market.
 Liquidity risks: Risk of the inadequacy of resources to meet the current financial demand or
obligation.
 Foreign currency risk: Risk of exchange rate fluctuation in a case of contracts other than in
the domestic currency.
Present Value of Money(Slide 8)
It is very clear that 1 AUD of today is not equivalent to 1 AUD tomorrow due tot its potential
earning capabilities. Therefore to ascertain the net present value of expected cash inflows ANZ
takes risk-free rate as discounting rate and considers the time value of money. Cash inflows or
outflows comprises of (Slide 9)
 Premiums: Premiums received on insurance contracts or paid
 Expenses: Operating and other direct and indirect expenses
 Redemptions: Redemptions of various bonds or securities involves cash flows.
 Benefits payments: Payment of perks and benefits to customers and employees.
 Bonuses: Bonuses paid to staff and workforce.
Competitive Analysis(Slide 11)
Since ANZ has a sound financial position with increased profitability in the year 2014 as compared
to the year 2013 with consistent results in term of solid ROE and ROCE. Although, the efficiency
ratio of the bank remained below 50% as compared to the industry. However, ANZ's operating
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expenses are comparable to the other three national banks of Australia. There has been a revenue
growth and PAT by 8% as compared to the other players in the industry
TASK 2 PARTICIPATION OF ANZ IN THE FINANCIAL MARKETS (SLIDE 13)
ANZ is listed on the ASX and is involved in share( both equity and preference shares) and bond
trading facilities. ANZ Banking group is an active member at following stock exchanges:
Stock Exchange Trading
Australian Securities Exchange (ASX) ANZ convertible preference shares, ANZ capital notes,
senior debts, subordinate bonds
Channel Islands Stock Exchange subordinated debts of ANZ
Luxembourg Stock Exchange Senior and subordinate debts of ANZ Limited and debts
and non-cumulative trust securities
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Illustration 2: Pie chart depicting share of net loans and advances among big
four banks and others

Illustration 3: Share Market position of ANZ on 14 December.
TASK 3 ANZ IN DERIVATIVES MARKET (SLIDE 14)
Derivatives are the hedging instruments for ANZ banking group
The types of derivatives which are transacted by ANZ banking group includes the following:
 Swaps: This refers to the exchange of financial instrument for hedging interest rates,
currency rate between two parties.
 Forwards: This is the instrument used in hedging or speculation backed by the underlying
contract such as import bill or export.
 Futures: Futures are the exchange traded forward contracts with the benefit of net
settlement.
 Options: The contracts involved with the right but not the obligation giving the owner
choice to perform or non-perform. (call or put option)
 Contracts and Agreements: Contract or agreements which are liable for performance such
as import or export of goods or services.
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Trading and transacting position of the institution in the financial derivatives market is an integral
part of the sales and trading activities. When these derivative instruments are sold out to customers,
ANZ Banking group can control its exposure to the fluctuations of the for-ex and the interest rates
in the foreign exchange.
TASK 4 APPLICABLE REGULATIONS (SLIDE 16)
There are various laws which need to abide by every enterprise in an economy. Regulatory
Framework governing the banking group are:
 Government policies
 Carbon pricing policies
 Climatic change policies
 Mitigation policies
 Hedging policies
 Taxation laws
 Compliance with the provisions of FATCA and IGA
CONCLUSION (SLIDE 17)
ANZ banking groups are one of the largest national banks in Australia that has its reach nationwide
as compared to that of other national banks in Australia. It is the driving factor of the Australian
financial system in diversification aspired by the economy since last few years.
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Illustration 4: Types of Derivative contracts
(Source: Derivatives, 2017)

REFERENCES (SLIDE 18)
Nijskens, R. and Wagner, W., 2011. Credit risk transfer activities and systemic risk: How banks
became less risky individually but posed greater risks to the financial system at the same
time. Journal of Banking & Finance. 35(6). pp.1391-1398. Viewed on 28th Dec 2016
Haldane, A.G., 2013. Rethinking the financial network. In Fragile stabilität–stabile fragilität (pp.
243-278). Springer Fachmedien Wiesbaden. Viewed on 28th Dec 2016
Huang, X., Zhou, H. and Zhu, H., 2012. Assessing the systemic risk of a heterogeneous portfolio of
banks during the recent financial crisis. Journal of Financial Stability. 8(3). pp.193-205.
Viewed on 28th Dec 2016
Davis, K., 2011. The Australian financial system in the 2000s: dodging the bullet. The Australian
Economy in the 2000s. pp.313-314. Viewed on 28th dec 2016.
Schwartz, C., 2010. The Australian government guarantee scheme. Reserve Bank of Australia
Bulletin. pp.19-26. Viewed on 28th dec 2016.
Online
Various Sources of Bank Funds, 2017.[Online]. Available through <http://bankofinfo.com/various-
sources-of-bank-funds/>. Accessed on 11th January, 2017.
Derivatives, 2017.[Online]. Available through <http://www.caclubindia.com/articles/derivatives-
22693.asp>. Accessed on 11th January, 2017.
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