Money and Banking: Commercial Banks, Lending, and Bank Failures

This report provides an overview of money and banking, focusing on various types of financial institutions, including banks, insurance companies, stock brokerage firms, and credit unions. It examines how commercial banks source their funds and how the funding structure has changed over the years, particularly in the context of the global financial crisis. The report analyzes the size and proportion of assets held by different financial institutions and assesses how lending proportions have evolved over the past five years. Furthermore, it discusses the potential impacts of bank failures on the economy, presenting arguments for and against allowing banks to fail, considering their crucial role in money supply, trade finance, and overall economic stability. This document is available on Desklib, a platform offering a wealth of study resources for students.

Running Head: MONEY AND BANKING 0
Money and Banking

MONEY AND BANKING 1
Table of Contents
Introduction................................................................................................................................2
Types of the financial institutions..............................................................................................2
Banks......................................................................................................................................2
Insurance.................................................................................................................................2
Stock brokerage firm institution.............................................................................................2
Credit unions..........................................................................................................................2
Commercial banks source their funds from?.............................................................................3
How has the funding structure to the commercial banks changed over the years?....................3
The size and proportion..............................................................................................................3
Has the proportion of lending changed over time?....................................................................4
Financial Review of past 5 years...............................................................................................5
Failure of banks and its impacts on the economy......................................................................7
General impact........................................................................................................................7
Argument 1.............................................................................................................................7
Argument 2.............................................................................................................................7
Arguments in favour of the bank failure....................................................................................8
Argument 1.............................................................................................................................8
Argument 2.............................................................................................................................8
References..................................................................................................................................9

MONEY AND BANKING 2
Introduction
A company which is involved in the business of financial and the monetary transactions such
as services provided in the form of deposits, loans, the investments and exchange of the
currency. There is a wide range of operations available in the financial service sector. This
includes banks, insurance companies, trust companies, investment dealers and the brokerage
firms. Financial institutions provide services to different type of categories and financial
operations are critically important to the economy (Da Gbadji, Gailly and Schwienbacher,
2015). It becomes imperative for the government to keep a check on the banks and the
financial institutions because they play a vital role in the economy of the country.
Types of the financial institutions
Banks
The products and services offered by the financial institutions to the individuals and the
commercial clients is the basic job done by the financial institutions. The banks and the
similar entities offer the financial services such as lending of loans, providing of mortgages,
keeping a track of the savings account and also acts as an agent via currency exchange and
wire transfers.
Insurance
The non-banking financial institutions are insurance companies whether for the individual or
the corporations which provide the hedge against the financial risk. The insurance companies
provide the service like insurance services, securities, buying or selling of the real estates,
providing loans and the credit card facility. Further, the insurance is classified into two
categories general insurance and life insurance (Bruton, Khavul, Siegel and Wright, 2015).
There are number of insurance policies however the most important ones are of the health
category, life insurance, vehicle and residential homes.

MONEY AND BANKING 3
Stock brokerage firm institution
The stock brokerage firm acts as a middleman between the buying and the selling
transactions of the financial securities. The main aim of the brokerage firm is to serve the
clientele of investors and the number of the stockbrokers and with the help of them, the
stocks and securities are being traded. The main services provided by the stockbroking firms
are money market, lending of the loans, mortgages.
Credit unions
The credit unions are described by the various names across the world and is a not for profit
financial cooperative. The credit unions are established and operated by the members unlike
in case of the banks and the financial institutions. The credit unions do not follow the
particular standards. The range of the credit union cannot be decided as at one moment a
team of few individuals to a large organisation with thousands of people can form the credit
union. The services provided by the credit unions are online banking, share draft accounts,
share term certificates.
Commercial banks source their funds from?
How commercial banks fund their loans is a questionable situation after the country has
accounted for the global financial crisis. Generally the commercial banks generate funds
through lending of the money at the higher rates to cover the cost of the money they lend.
Specifically the banks collect interest on the securities and loans and pay the interest on the
deposits, short term borrowings and current deposits (Kidwell, Blackwell, Sias and Whidbee,
2016).

MONEY AND BANKING 4
How has the funding structure to the commercial banks changed over the years?
The structure of the funds to the commercial bank has changed over the years. In particular
there has been a shift in the use of wholesale debt securities, including securitisation, towards
the domestic deposits. Due to the global financial crisis the structure of the financial system
of the Australia the banks’ non-performing housing loans are secured. Due to weaker
economic conditions in the western region of Australia, the contribution is higher in terms of
the arrears or personal loans (Gitman, Juchau and Flanagan, 2015). There is also reduction in
the international lending exposures in comparison to the previous year. The lower return
banks are scaling back to the business. Australian banks all together have increased the
funding and the stability of the banks in the form of long wholesale debt. The portion of the
non-housing housing loans accelerated a little and yet they are mostly secured with the share
that is impaired is very low.
The size and proportion
PARTICULARS
Total
Assets 2017 2016 2015 2014 2013
($B) ($B) ($B) ($B) ($B)
BANKS 4130 3960 3785 3549 3124
CREDIT UNIONS 38.6 36.3 36.8 32.9 30.2
LIFE INSURANCE
COMPANIES 177.9 170.5 169.3 164.21 159.36
GENERAL INSURANCE COMPANIES 203.8 200.5 201.48 195.87 193.4
STOCK BROKING
COMPANIES 28 26.5 27.6 25.33 24.3

MONEY AND BANKING 5
4578.
3
4393.
8
4214.1
8
3967.3
1
3531.2
6
(Source: Reserve Bank of Australia, 2018)
Banks
Size in
(AUS$) Revenue Employees
Commonwealth Bank 976.374 9.881 51800
ANZ Bank 889.9 21.071 50152
Westpac 812.15 21.462 32620
NAB 945.12 6.357 35603
Bank of Queensland 43.027 260.5 1903

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Has the proportion of lending changed over time?
The proportion of the lending has changed significantly over the years. From the above table
it can be observed that during the past 5 years the proportion of lending has evolved. The
lending by the life and the general insurance companies form a major part of the assets in the
significant years after the major lending is done via the banks. The banks form the 90% of the
composition of the structure of the Australian financial system. The lending in terms of banks
have increased eventually by 3% as compared to the previous years.
90%
1% 4%
4%
1%
Total Assets
BANKS
CREDIT UNIONS
LIFE INSURANCE
COMPANIES
GENERAL INSURANCE
COMPANIES
STOCK BROKING
COMPANIES
(Source: By Author)

MONEY AND BANKING 7

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Financial Review of past 5 years
PARTICULA
RS
ANZ Bank Commonwea
lth Bank
Westp
ac
NAB Bank of
Queensla
nd
Housing
Lending 42514 43544 42716 32953 27850
Commercial Lending 2110 2211 1505 1829 9312

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BOQ Finance 8413 1545 1885 1167 4345
Consumer 3528 2351 2195 6539 307
Gross loans and
advances 56565 49651 48301 42488 41814
Specific and collective
Provisions 323 211 286 -415 -227
Net Loans and
Advances 56888 49862 48587 42073 41587
2016
PARTICULA
RS
ANZ Bank Commonwea
lth Bank
Westp
ac
NAB Bank of
Queensla
nd
Housing
Lending 41487 40966 40419 29312 27850
Commercial Lending 2293 2113 1502 1509 9312
BOQ Finance 7846 1458 1912 1121 4345
Consumer 3469 2372 2282 6025 307
Gross loans and
advances 55095 46909 46115 37967 41814
Specific and collective
Provisions 544 214 333 -479 -227
Net Loans and
Advances 55639 47123 46448 37488 41587

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2015
PARTICULA
RS
ANZ Bank Commonwea
lth Bank
Westp
ac
NAB Bank of
Queensla
nd
Housing
Lending 39482 39645 39467 32953 27850
Commercial Lending 2156 2005 1486 1829 9312
BOQ Finance 6432 1050 1896 1167 4345
Consumer 3256 1968 2265 6539 307
Gross loans and
advances 51326 44668 45114 42488 41814
Specific and collective
Provisions 523 189 310 -415 -227
Net Loans and
Advances 51849 44857 45424 42073 41587
2014
PARTICULA
RS
Commonwea
lth Bank ANZ Bank
Westp
ac NAB
Bank of
Queensla
nd
Housing
Lending 35669 36527 34817 32953 27850
Commercial Lending 1947 1973 1432 1829 9312
BOQ Finance 6139 986 1852 1167 4345
Consumer 2968 1936 2212 6539 307
Gross loans and 46723 41422 40313 42488 41814

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advances
Specific and collective
Provisions -496 -165 -298 -415 -227
Net Loans and
Advances 46227 41257 40015 42073 41587
2013
PARTICULA
RS
Commonwea
lth Bank ANZ Bank
Westp
ac NAB
Bank of
Queensla
nd
Housing
Lending 32661 34569 34817 32953 27850
Commercial Lending 1923 1947 1408 1829 9312
BOQ Finance 5977 941 1806 1167 4345
Consumer 2439 1960 2159 6539 307
Gross loans and
advances 43000 39417 40190 42488 41814
Specific and collective
Provisions -448 -148 -253 -415 -227
Net Loans and
Advances 42552 39269 39937 42073 41587
Failure of banks and its impacts on the economy
The Australian financial system remains resilient and its ability to cope up with the shocks
continues to become more robust. The capital ratios of the banks are above the standards set

MONEY AND BANKING 12
by the Australian Prudential Regulation Authority also commonly known as (APRA’s). The
targets are set strong enough to set a cover sufficient to withstand against the historical
financial crisis Econ., 2001).
General impact
Generally if any industry fails there is an enormous impact on the economy of the country.
However, if the banks are the reason for the disruption in the economy it is a critical aspect
and it invariably effects the economic growth of the country Sourigna, Zhu and Ali, 2017).
Following are the two arguments which support the view that the banks shall not be allowed
to fail.
Argument 1
Banks are the bulk market for the supply of the money and if the banks are facing scarcity in
the scenario of the liquidity the banks will fail to lend the money to the firms and the
consumers (Acemoglu, Ozdaglar and Tahbaz-Salehi, 2015). Without the presence of the
banks the financial needs will be hampered and the business will not run properly. In
particular the business would not be able to receive the loan as it is involved in the risky
investments. Therefore the firms who wish to borrow the finance it may become
cumbersome. If the investment levels fall down below the significant benchmark, this will
ultimately crash the economic growth, the emerging situations will create the unemployment.
Overall if observed the investment forms a part of 15-20% of aggregate demand to have a
significant impact on the economy (Wilkins, 2014). Therefore the banks shall not be allowed
to fail. The moment they fail the entire economic system crashes down, the stock market
fluctuates and the revenue of the country is deteriorated and can cause major depression.

MONEY AND BANKING 13
Argument 2
Services provided by the banks cannot be replaced by the other financial institutions. The
banks facilitate the financing of the external as well as the internal trade by discounting the
exchange bills, through the issue of the letter of credit and other facility such as guarantees to
the customers, cash management services, private equity financing and the merchant banking
system and also help in providing the balances sheet exposures which are not made available
by the other institutions providing the financial facility (Markets and Money, 2016). The
most important feature which the bank provides is the facility of the fixed deposits and the
recurring deposits which is not permitted by the ARPA. Generally the amount deposited in
the bank is of varied level and by variety of the individuals and the companies. Banks acts as
a custodian and the distributor of the liquid capital in the form loans and advance sand if the
bank fails the company’s will fail to respond. If the money is not received from the public,
the funds will not be provided to the entrepreneurs to start up the business which leads to
generation of the employment opportunities. If any of the factors gets disrupted from the
above cycle it leads to break down of the economy therefore, the banks shall not fail.
Arguments in favour of the bank failure
Argument 1
There are certain instances in which the banks fail to provide the services and products to the
customers as the liquidity position of the bank is not that strong. Australian economy’s major
share depends upon the revenue generated through the banks. Most of the money is deposited
in the form of the savings and current deposits. The moment the bank fails the funds are
under the danger and the faith has been deteriorated. Also the bank fails to provide the funds
back to the recipient party. In such a scenario it becomes necessary to close the banks. The
banks shall be allowed to close as its better to close the sick bank rather than spending the

MONEY AND BANKING 14
funds of the public to repair and maintain it whose chances to reflect the improvement are
almost negligible (Calvey, 2015).
Argument 2
Apart from the fixed deposits the second medium for the purpose of having savings is
through the mode of purchase of the shares. The observation can reflect that the 80% banks
are listed on the Australian stock exchange. Therefore if the bank fails the entire stock market
can crash down in a day. During the year 2008, due to the global financial crisis happened
because of the Lehman Brothers an investment firm because who were explicitly involved in
excessive lending. This even led to a great depression in the country and created a distress
among the fiscal policy and the bank was collapsed. Therefore, to avoid such financial crisis
the banks shall be allowed to fail. This way the money of the public will not be hampered and
the stock market will be saved CNBC.com, 2009).

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References
Kidwell, D.S., Blackwell, D.W., Sias, R.W. and Whidbee, D.A., (2016) Financial
institutions, markets, and money. United States: John Wiley & Sons.
Da Gbadji, L.A.G., Gailly, B. and Schwienbacher, A., (2015) International analysis of
venture capital programs of large corporations and financial institutions. Entrepreneurship
Theory and Practice, 39(5), pp.1213-1245.
Acemoglu, D., Ozdaglar, A. and Tahbaz-Salehi, A., (2015) Systemic risk and stability in
financial networks. American Economic Review, 105(2), pp.564-608.
Sourigna, M., Zhu, S. and Ali, S.A., (2017) Challenges and Implementation of Financial
Institutions Development Policy in Laos on 2016-2020. International Business
Research, 11(1), p.115.
Gitman, L.J., Juchau, R. and Flanagan, J., (2015) Principles of managerial finance. Pearson
Higher Education AU.
Bruton, G., Khavul, S., Siegel, D. and Wright, M., (2015) New financial alternatives in
seeding entrepreneurship: Microfinance, crowdfunding, and peer‐to‐peer
innovations. Entrepreneurship Theory and Practice, 39(1), pp.9-26.
Econ., (2001) what is the economic function of a bank? [Online] Available from
https://www.frbsf.org/education/publications/doctor-econ/2017/july/bank-economic-
function/[Accessed 23rd June 2018].
Markets and Money, (2016) Banks are too big to fail, but not for the reasons you believe
[online] Available from https://www.marketsandmoney.com.au/banks-are-too-big-to-fail-but-
not-for-the-reasons-you-believe-cw/2016/02/10/ [Accessed 23rd June 2018]

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CNBC.com, (2009) Big Banks should be allowed to fail [Online] Available from
https://www.cnbc.com/id/30346240 [Accessed 23rd June 2018]
Calvey, M., (2015) JPMorgan Chase CEO: 'Banks should be allowed to fail [online]
Available from https://www.bizjournals.com/sanfrancisco/blog/2015/11/jpmorgan-chase-ceo-
dimon-jpm-wfc-bank-failures.html [Accessed 24th June 2018]
Wilkins, G., (2014) Big four dilemma looms but failure is not an option [online] Available
From https://www.smh.com.au/business/big-four-dilemma-looms-but-failure-is-not-an-
option-20140418-36wnh.html [Accessed 23rd June 2018]
Reserve Bank of Australia, (2018) Financial Stability Review [online] Available From
https://www.rba.gov.au/publications/fsr/2018/apr/ [Accessed 22nd June 2018].