Assessing Australian Banking's Impact on Economic Growth: CBA Study

This research project investigates the influence of the Australian banking sector on economic growth, with a specific focus on the Commonwealth Bank of Australia (CBA). The report begins with an introduction and background, highlighting the dominance of major banks in Australia and the role of banking in a modern service-based economy. It outlines the project's objectives, including determining the role of the financial system, assessing the impact of exchange rate fluctuations and interest rates, and evaluating the role of the Reserve Bank's monetary policy. The literature review explores the role of financial systems and banks, emphasizing financial intermediation and banking regulations. It also examines the impact of exchange rate fluctuations and interest rates on the banking sector. The report discusses currency risk management and its importance, as well as the effects of interest rate alterations on the financial system. The project aims to provide insights into the critical role banks play in capital formation and economic growth, emphasizing their influence on various aspects of the economy.

RESEARCH PROJECT

TABLE OF CONTENTS
Topic: To assess influence of Australian banking sector on economic growth- A study on
Commonwealth bank of Australia..........................................................................................1
INTRODUCTION...........................................................................................................................1
Background of study...............................................................................................................1
PROJECT OBJECTIVE..................................................................................................................2
Aims and Objective................................................................................................................2
PROJECT SCOPE...........................................................................................................................3
LITERATURE REVIEW................................................................................................................3
Role of financial system (banks) on economy.......................................................................3
Impact of fluctuations in exchange rate on banking sector....................................................4
Impact of interest rate on banking sector...............................................................................6
Role of reserve bank monetary policy on economic growth..................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

Topic: To assess influence of Australian banking sector on economic growth- A study on
Commonwealth bank of Australia
INTRODUCTION
Banking is referred as financial institution which is engaged in lending and borrowing
money. The present report will briefly discuss about Australian banking sector and how it is
influencing economic growth with reference to Commonwealth bank of Australia. In the same
series, it will be stating project objectives, scope and literature review with appropriate
conclusion.
Background of study
Banking in Australia is highly dominated through four major banks such as Westpac
banking corporation, Commonwealth Bank of Australia, national Australia bank and New
Zealand banking group. These banks have AA ratings where trade finance liquidity is issue in
rest of the world. The banking system in Australia is highly transparent and reliable as its
operational and structural differences through American system (Banking in Australia, 2019). On
historic basis, Australian banks have not operated with reference to restrictions which limited US
bank operation in 1933. The Australian banking system has undergone with progressive
deregulation along with privatization as well. In this aspect, foreign banks are allowed for
entering financial market and retail banks give wide range of financial services like general and
life insurance, security underwriting and stock brokering to its retail consumers for creating
consumer and corporate loans as it forms competition through merchant banks and brokerage
houses.
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Illustration 1: Economic contribution by industry
(Source: Australian Economy, 2019)
The Australian economy is referred as a modern services on basis of developed economy
as service sector which will contribute about 3 quarters of GDP. With this context, finance and
insurance industry is referred as largest of service industry with reference to economic
contribution which is bigger than health and double of education. However, banking has very
crucial role in success of economy via core value creating functions where system has
requirement of balancing three competing objectives (Australia why – Austrade, 2019).
Commonwealth bank of Australia is an Australian multinational bank with its business
across Asia, New Zealand, United Kingdom and United States. This gives variety of financial
services which includes institutional banking, superannuation, retail business, fund management,
investment, insurance along with broking services. This bank is the largest Australian listed
company on Australian Securities exchange. The usual role of banks is to give financial services
to business as public and ensures economic along with social stability and sustainable growth of
economy. It plays significant role in economy whereas banks gathers savings of individual and
lend them to business, manufacturers and people (CommBank, 2019). Henceforth, banks plays
crucial role for capital formation in country which helps in attaining growth process.
PROJECT OBJECTIVE
Aims and Objective
Aim:
To assess influence of Australian banking sector on economic growth- A study on
Commonwealth bank of Australia
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Objectives
 To determine role of financial system (banks) on economy
 To assess impact of fluctuations in exchange rate risk on banking sector.
 To identify impact of interest rate on banking sector.
 To assess role of reserve bank monetary policy for economic growth.
PROJECT SCOPE
In this study, topic of project has been decided with context of Australian banking sector
as in first part, brief overview of entire project has been given. Furthermore, background of the
study has been designed with context of Commonwealth bank of Australia and then project
objective and aim has been framed. In the similar aspect, themes has been framed with each
objective and literature review is performed and then entire research project is concluded.
LITERATURE REVIEW
Role of financial system (banks) on economy
According to Geddes, Schmidt and Steffen (2018), banks accepts deposits and forms loan
and profit margin has been derived with variation in interest rate paid and charged to depositors
and borrowers on respective aspect. The procedure performed through banks of taking funds
through depositor and then lending to any borrower is termed as financial intermediation.
However, Auer and et.al., (2019) states that procedure of this financial intermediation in which
certain assets are conversed into multiple liabilities or assets. The financial intermediaries
channel funds by the one who have surplus savings or extra money to one who does not have
enough money for carrying desired activity.
As per views of Ouenniche and Carrales (2018), banking thrive with context of financial
intermediation with capabilities of financial institutions who directly allows for lending and
receiving money on deposit. The bank is replicated as very important financial intermediary with
context to economy along with connecting it to deficit and surplus economic agents. Its main role
is to give safe place for keeping money and opportunity as well for earning interest on deposits.
On the contrary, Pacheco Pardo, Knoerich and Li (2018) had critiqued that combination of
investment and commercial banking could be outcome of conflict of interest. Some might
provide importance to single type of bankings which provides less significant to other banking
type which does not create commercial sense. Services such as savings and current account give
convenient aspect for repaying bills with absence of hustle of inapplicable cash. On the similar
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note Auer and et.al., (2019), stated that when one runs short of liquidity then bank is capable for
giving advance for recouping shortfall via other funds of depositories.
Ouenniche and Carrales (2018) stated that, regulations of banks helps for building
confidence in public and forming trust in country's banking system and ensure about safety of
public savings and mandatory for protecting public deposit. In the same series, credit control is
crucial aspect of banking regulation and prevents excess creation of credit through controlling
investments and loans. Banks ensure about fairness with context to financial services to every
customers with absence of discrimination related to sex, race, religion etc. whereas government
policy should be implemented on appropriate aspect for assisting nation's economic policy. On
the contrary, Geddes, Schmidt and Steffen (2018) has argued that there is presence of
unnecessary control along with heavy regulation might restricts banks for performing task on
freely basis so, banks are not capable for earning adequate margin. The regulations of banking
might control every unnecessary task but could not prevent to unnecessary failure as these are
very expensive and time consuming procedure.
As per views of Pardo, Knoerich and Li (2018), banks are referred as vital institutions in
society has significantly contributed for economic development via business facilitation. The
development of saving plans has been facilitated along with instrument of monetary strategy of
government through others. Clemens and Auer and et.al., (2019) has stated that, banks had made
availability of loans for various periods to trade, agriculture and industry which forms direct
investment in industrial sectors. They give agricultural, commercial and industrial consultancy
which facilitate procedure of economic development.
Impact of fluctuations in exchange rate on banking sector
According to Okoye and et.al., (2018), foreign exchange rate fluctuations impact banks in
direct and indirect manner. Its direct impact emerges from asset or liabilities holdings through
bank with reference to net payment streams denominated in foreign currency. The fluctuations in
foreign exchange rate changes values of domestic currency like assets as explicit source of risk
of foreign exchange are easiest for determining and could be hedged. On the contrary, Edwards
(2018) has stated that indirect source of risk are subtle and important and bank with absence of
foreign assets and liabilities could be exposed related to currency risk due of exchange rate
impact profitability of operations of domestic banking.
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As per views of Ibrahim, Belal and Ahmed (2018), maintaining the exchange risk
management as integral part of decision of every firm related to foreign currency exposure.
Currency risks has need of appropriate understanding of economic techniques and agents for
dealing with implication of consequent risk. Choosing proper degree of exposure of risk and
decision which is ought to be recouped. This is referred as critical problem which is referred as
focus of business unit. Mrabet and Alsamara (2018) has argued that, required of currency risk
management has acquired prominence in world around year 1973, after break down of Bre-Hon
woods system when US dollar was directly pegged to gold. The problem of management of
currency risk with context of non financial firms who are independent through core business is
dealt through corporate treasuries. Multiple banks have risk committees for observing treasury
strategy for managing interest and exchange rate which replicates significance of firm which
attaches risk techniques and issues.
Edwards (2018) stated that, sensitivity of bank profits and returns it exerts huge influence
on exchange and interest rate risks via traditional on-balance sheet operations of banking. Okoye
and et.al., (2018) posits that its international investors had managed risk of exchange rate on
internal aspect through perspective of assets and liabilities. On basis of this fact, exposure of
currency is on basis of transaction risk on its liabilities and assets denominated in foreign
currencies which tend for considering currencies as different asset class with mandate of overlay
currency. The foreign currency's price with context of local currency with significance of
understanding growth of every country throughout the world. The consequences of
misalignments of exchange rate lead to contraction of result and extensive economic hardships.
However, Edwards (2018) stated that there is presence of reasonably very strong evidence where
alignment of exchange rate has provided critical impact on rate of growth of per capital output
especially in countries of low income.
According to Mrabet and Alsamara (2018), exchange rate is referred as value of single
currency in term of any other currency as it matter to economy of Australia due to influence on
financial and trade flows among Australia and rest of the world. Alterations in exchange rate
impact Australian economy in two aspects such as direct impact on prices of services and goods
generated in Australia relative to price of services and goods produced overseas. Similarly,
indirect impact on inflation and economic activity as change in relative price of services and
goods generated domestically and overseas influences decision making on basis of consumption
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and production. On the contrary, Ibrahim, Belal and Ahmed (2018) stated that by considering
both effects have presence of implications for purpose of balance of payments. The effects of
movement of exchange rate highlights main channel via these changes give direct impact on
Australian economy. For instance, if exchange rate among Australian and US dollar is 0.75 then
one AUD is transformed in US75c. Any increment in value of AUD is referred as appreciation
and decrement in value of AUD is known as depreciation.
Impact of interest rate on banking sector
As per views of Devarajan (2018), alterations in interest rates forms ripple effect via
financial system and impacting in various aspects. Increment in cash price is good for banks and
businesses of Australia but rise in rate of interest signifies rise in repayment for other loans and
mortgages as well. There are various Australians, extracts borrowing money harder whereas
personal finances are very expensive which doesn't bode time of reduced spending. However,
Drechsler, Savov and Schnabl (2018) said that, official cash rate is referred as lowest rate of
interest on which banks borrow through other banks. In simple words, rise in rate of interest rate
shows that it is very expensive for purpose of banks to borrow money and leading to specific
banks along with increment in rates to keep up.
According to Prabhakaran and Karthika (2018), banking sector has contributed
commendable role in sustaining and fuelling growth with context of economy. The saving of
nation could be mobilized and channelling with priorities of high investment and optimum
utilization of availability of resources. The risk related to interest rate is referred as exposure of
financial condition of bank till adverse movements in interest rate. The acceptance of this risk is
very normal for perspective of banking and could be referred as important source of shareholder
value and profitability. Conversely, Wilms, Swank and de Haan (2018) stated that excessive risk
of interest rate could pose significant threat to capital base and earnings of bank. Fluctuations in
interest rate impact earnings of bank through altering its net interest income along with level of
other interest sensitive income and operating expenses as well. In the similar aspect, it will also
impact underlying value of assets and liabilities of bank along with off balance sheet instruments
due to present value of future cash flows alters along with interest rate.
Drechsler, Savov and Schnabl (2018) stated that high real interest rates tends for
encouraging savings as it also identifies investment. Liberalization has been rated with lending
and low inflation promotes capital accumulation and economic growth in developing countries.
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There are various commercial banks which had raised holdings of its long term assets and
liabilities as their values are sensitive to changes in rate. These changes signify that managing the
lending interest rate risk is complex and important. On the contrary, Devarajan (2018) stated that
nature of business activity of bank along with overall risk level must be identified about
sophisticated management of interest must be managed. It would have process which enables
management of bank to determine, monitor, control and measure interest risk on timely aspect.
As per views of Drechsler, Savov and Schnabl (2018), profitability of banking sector
raise with hike in interest rate. There are various institutions in this banking sector like
commercial and retail banks, insurance organizations, investment banks along with brokerage
have massive cash holdings due to business activities and customer balances. The rise in interest
rate will directly impact on raising yield on cash and proceeds directly to earnings. However,
Prabhakaran and Karthika (2018) states that benefit of higher interest rate is notable for
commercial and regional banks and brokerage as well. The organization which holds cash of
customer in accounts which pay out set interest rate is below short term rates. Further profit off
of marginal variation among yield which is generated with invested cash in short term notes
along with interest paid out to consumers. If there is raise in rate then spread increases along with
extra income to earnings.
According to Wilms, Swank and de Haan (2018), indirect method with hike of interest
rate raises profitability for banking sector which tends to incur in environment where economic
growth is strong and increment in bond yields. With these conditions, business and consumer
demand for loans spike would directly augment bank's earnings. However, Prabhakaran and
Karthika (2018) stated that rise in interest rate would raise profitability on loan with presence of
huge spread among federal fund rate and bank charges to its specific customers. The spread
among short term and long term rate will expand with hike of interest rate due to long term rates
tend to increase faster compared to short term rates. It is very true for rate hike as it shows
underlying conditions along with inflationary pressures which directly tends for prompting
increment in interest rate as it is optimal confluence for bank events which borrow on short term
aspect and lend with perspective of long term basis.
Role of reserve bank monetary policy on economic growth
According to Gambacorta and Shin (2018), reserve bank of Australia is central bank as it
conducts monetary policy and works for maintaining strong financial system and issues currency
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of nation. With well being of policy making body, reserve bank gives services of banking and
registry to particular range of agencies of government till number of overseas official institutions
and central banks. In the similar aspect, it manages gold and foreign exchange reserves of
Australia. On the contrary, Su and et.al., (2018) has stated that functions and role of reserve bank
in underpinned with different pieces of legislation. The bank is referred as statutory authority
which established act of parliament, reserve bank act 1959 which had provided specific
obligations and powers. With context of this act boards are categorised in two types which are
reserve bank board and payments system board.
As per views of Groenewold (2018), monetary policy is conducted for attaining its
objectives of board of reserve bank. It is referred as board responsibility for setting interest rate
in such aspect that directly contribute to currency's stability, economic prosperity, full
employment and welfare of Australia people. However, Hamza and Saadaoui (2018) states that
to attain price stability, reserve bank implies flexible medium term target inflation with objective
of inflation in 2 and 3%. In the similar aspect, cash rate is set for purpose of influencing
economic activity for attaining goal.
Su and et.al., (2018) states that, price stability is maintained by controlling level of
money supply as it plays stabilizing role for purpose of influencing economic growth via
numerous channels. Consequently, scope of this role might be limited with concurrent pursuit of
various other primary objectives of monetary policy with its nature and transmission mechanism.
The other factors such as uncertainty faced through policy makers along with stance of economic
policies and concurrent target of its intermediate objectives might have implications for attaining
ultimate objective to gain sustainable growth.
On the contrary, Gambacorta and Shin (2018) argued that decision of monetary policy
cuts interest rate for instance, lowering borrowing cost, outcome of higher investment activity
and buying various other consumer durables. The expectation related to economic activity would
strengthen and might prompt banks for ease of lending policy and enables households and
business for boost spending. With reference to low interest rate regime, stocks are attractive to
purchase along with increment in household financial assets. This might contribute for huge
consumer spending and organization's investment project are highly attractive. Lower rate of
interest tends for cause of depreciating in currency due to high demand for domestic goods
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where imported goods are very expensive. Furthermore, combination of these particular factor
increases result along with employment, consumer spending and investment as well.
CONCLUSION
On basis of above report it could be concluded that Australian banking sector influence
economic growth on both positive and negative aspect. It had shown that financial system plays
very important role in economy as it thrives for financial intermediation with its capabilities of
financial instruments as they allow for lending and gaining money on deposit. In the similar
context, it had reflected that fluctuations in exchange rate affects entire banking industry in both
direct and indirect manner as it is integral part of firm's decision on basis of exposure of foreign
currency. Thus, interest rate plays very significant role in banking sector as it forms ripple effect
by financial system. Henceforth, it had shown that most important is role of reserve bank
monetary policy affected economic growth as it helps in attaining objectives of reserve bank
board.
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REFERENCES
Books and Journals
Auer, S. and et.al., 2019. International monetary policy transmission through banks in small open
economies. Journal of International Money and Finance. 90. pp.34-53.
Devarajan, S., 2018. The impact of macroeconomic variables on the profitability of public and
private sector banks in India; A structural equation modeling approach. ACADEMICIA: An
International Multidisciplinary Research Journal. 8(1). pp.44-77.
Drechsler, I., Savov, A. and Schnabl, P., 2018. Banking on deposits: Maturity transformation
without interest rate risk(No. w24582). National Bureau of Economic Research.
Edwards, S., 2018. Exchange rate puzzles and dilemmas: how can policymakers
respond?. Contributed Papers (cont). p.144.
Gambacorta, L. and Shin, H. S., 2018. Why bank capital matters for monetary policy. Journal of
Financial Intermediation. 35. pp.17-29.
Geddes, A., Schmidt, T. S. and Steffen, B., 2018. The multiple roles of state investment banks in
low-carbon energy finance: An analysis of Australia, the UK and Germany. Energy
Policy. 115. pp.158-170.
Groenewold, N., 2018. Australia saved from the financial crisis by policy or by exports?. Journal
of Policy Modeling. 40(1). pp.118-135.
Hamza, H. and Saadaoui, Z., 2018. Monetary transmission through the debt financing channel of
Islamic banks: Does PSIA play a role?. Research in International Business and
Finance. 45. pp.557-570.
Ibrahim, A., Belal, M. and Ahmed, S. A. K., 2018. Impact Of Fiscal Policy Shocks On Official
Versus Parallel Exchange Rate Of Sudan: Under Long-Term Economic Sanction And
South Sudan Reverondum (1997-2017). ABC Research Alert. 6(1).
Mrabet, Z. and Alsamara, M., 2018. The impact of parallel market exchange rate volatility and
oil exports on real GDP in Syria: Evidence from the ARDL approach. The Journal of
International Trade & Economic Development. 27(3). pp.333-349.
Okoye, L. U. and et.al., 2018. EXAMINATION OF CAUSAL RELATIONSHIP BETWEEN
TRADE OPENNESS, EXCHANGE RATE CHANGES AND MANUFACTURING
CAPACITY UTILIZATION. DUTSE. JOURNAL OF ECONOMICS AND
DEVELOPMENT STUDIES (DUJEDS). 4(2).
Ouenniche, J. and Carrales, S., 2018. Assessing efficiency profiles of UK commercial banks: a
DEA analysis with regression-based feedback. Annals of Operations Research. 266(1-2).
pp.551-587.
Pacheco Pardo, R., Knoerich, J. and Li, Y., 2018. The Role of London and Frankfurt in
Supporting the Internationalisation of the Chinese Renminbi. New Political Economy,
pp.1-16.
Prabhakaran, K. and Karthika, P., 2018. Impact of Oil Price and Macroeconomic Variables on
the Profitability-A Study on Bank Muscat, Sultanate of Oman. International Journal on
Global Business Management & Research. 7(2). pp.28-38.
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