Microsoft Word - MidSemester.docx
AFIN8003
MID SEMESTER ASSIGNMENT
Instructions: Write a 1500-word (+/- 10%) report in your own words, answering the Question below,
along with footnotes (see below). You should use a few appropriate section headings. Include a (
ief)
Introduction and Conclusion.
The reference below is just a sample for you where you can find relevant information to the topic. You are
free to have more reference. Make sure you cite your reference
iefly in
ackets during the text of your
analysis using simply the autho
journal/date (eg Smith, Investor magazine, April XXXXXXXXXXProvide a full
list of references used at the end of your paper. Footnotes must be numbered and displayed page-by-page
as they occur (not in a single list at the end of your essay). Footnotes and bibliography are additional to
the core 1500 word requirement.
Your assignment must be typed and submitted in PDF online via iLearn, where it will be checked by
Turnitin for similarity. Plagiarism may result in penalty deductions or failure of the assessment. Allow
time to format, check, and upload your report before the deadline. The report is due Monday 26 April
17:00 (Sydney time). Late submissions are subject to penalty, i.e., deduction of 10% of the total available
marks made from the total awarded mark for each 24-hour period or part thereof that submission is late
(for example, 25 hours late in submission -20% penalty). This penalty does not apply for cases in which
an application for special consideration is made and approved.
Main Question: COVID-19 crisis and banks (25 marks)
How is COVID-19 crisis affecting banks and bank regulation in advanced industrial countries (including
Australia)?
References:
https:
www2.deloitte.com/global/en/pages/about-deloitte/articles/covid-19/covid-19-s-impact-on-banking---capital-
market-institutions-.html
https:
www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/fitch-%20downgrades-
australia-s-4-biggest-banks-on-covid-19-impact XXXXXXXXXX
https:
thewest.com.au
usiness/economy/global-financial-crisis-shake-up-of-banks-will-get-us-through-covid-19-
says-reserve-bank-of-australia-ng-b881515175z
https:
www.smh.com.au
usiness
anking-and-finance/new-normal-life-for-australia-s-banks-after-the-pandemic-
won-t-be-pleasant XXXXXXXXXXp54px3.html
https:
www.abc.net.au/news/ XXXXXXXXXX/are-australian-banks-safe-amid-the-shock-of- coronavirus/ XXXXXXXXXX
https:
www.
a.gov.au/speeches/2020/sp-so XXXXXXXXXXhtml
https:
www.bcg.com/en-au/publications/2020/five-strategic-priorities-for-australian-banks-during-pandemic
https:
www.itnews.com.au/news
anks-sacrificed-cdr-efforts-to-prevent-covid-19-cyber-threats-547396
https:
www.
a.gov.au/speeches/2020/sp-gov XXXXXXXXXXhtml
https:
www.theguardian.com
usiness/2020/ma
20
ank-of-england-cancels-stress-tests-for-uk-biggest-lenders-
coronavirus
https:
www.cnbc.com/2020/04/27/deutsche-bank-warns-on-coronavirus-impact-as-its-profit-falls-from-a-year-
ago.html
https:
www.bankingsupervision.europa.eu/press/p
date/2020/html/ssm.pr200312~43351ac3ac.en.html
https:
www.bankofcanada.ca/2020/05
idge-recovery-banks-covid-19-pandemic-response/
https:
www.
ookings.edu
esearch/fed-response-to-covid19/
https:
edition.cnn.com/2020/04/17
usiness
ank-earnings-defaults-recession/index.html
https:
www.federalreserve.gov/newsevents/pressreleases
creg20200401a.htm
https:
www.reuters.com/article/us-health-coronavirus-banks-bis-idUSKCN21X1B6
https:
voxeu.org/article/stress-tests-banks-liquidity-insurers-time-covid
https:
www.bis.org/publ
isbull11.htm
https:
www.bis.org/fsi/fsi
iefs2.htm
https:
www.bis.org/press/p200403.htm
https:
www.dw.com/en/coronavirus-shock-vs-global-financial-crisis-the-worse-economic- disaste
a XXXXXXXXXX
https:
www.investmentweek.co.uk/opinion/4012753/coronavirus-crisis XXXXXXXXXX
https:
www.morgans.com.au/Blog/2020/March/Equity-Strategy-Why-COVID-19-isnt-a-GFC
Bonus points for making connections with lectures XXXXXXXXXXmarks)
5 bonus marks are available – during the course of your answer to the Main Question - for insightfully
identifying connections to concepts/measures/issues in AFIN8003 lectures weeks 1-6. Cite the location in
lectures (eg. ’week 4, slide 7’). Use footnotes ONLY to establish these connections between your
assignment and concepts from AFIN8003 lectures. These footnotes are additional to the 1500-word essay
length. Be sure to display footnotes at the foot of the essay page where they are referenced (not as a single
list at the end of the report).
TOTAL MARKS AVAILABLE: 25+5
DUE BY: 5pm (17:00 Sydney time) Monday, 26 April 2021
Microsoft Word - AFIN8003 Marking Guide.docx
AFIN8003 Marking Guide (Mid-Semester)
Criteria Very Weak (1) Weak (2) Adequate (3) Good (4) Excellent (5)
Relevance (5) Failure to
understand the
question,
extensive
i
elevance
Failure to
address
important
aspects of the
question
Adequate
answer to the
question,
covers main
aspects
Thorough
answer
covering most
aspects of the
question
Comprehensive
and effective
answer to the
question
Knowledge
and
Understanding
(5)
Major e
ors,
little
knowledge or
eading
Limited
knowledge with
serious e
ors
or omissions
Adequate
knowledge and
understanding,
e
ors balanced
y sound work
Conceptually
sound, wide-
anging
knowledge and
understanding
Knowledge
ased on
independent
eading and
high-level
synthesis
Critical,
Analytical,
and
Integrative
Thinking (5)
No evidence of
critical or
analytical
abilities
Little evidence
of critical or
analytical
abilities
Sound
argument with
evidence of
analysis and
easoning,
more
description than
analysis
Flair and
originality of
thought,
effective
criticism of
other
arguments
Penetrating
analysis,
persuasive and
original
criticism of
others
Evidence of
the Use of
Appropriate
Materials (5)
Very little
evidence of
having read
elevant
material
Little use of
evidence,
limited reading,
eferences of an
inadequate
standard
Some use of
evidence, fair
amount of
eading,
ove
eliance
on one
or two
authorities
Good use of
evidence, wide
eading,
generally well
digested
Excellent use
and evaluation
of evidence
Structure and
Presentation
(5)
Many faults in
logic and
structure of
eport, ideas
expressed
incoherently
Weak structure
and argument,
poor style and
presentation
Generally
coherent
structure,
generally clear
writing and
acceptable style
Well organised
structure, clear
writing and
accurate
English style
Excellent
structure, every
paragraph
counts, English
style shows
flair and
eloquence
22 Fe
uary 2021
AFIN8003
BANKING AND FINANCIAL INTERMEDIATION
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Week1: Introduction to Financial Intermediation and Banks
Outline
• Why are financial institutions special?
• Introduction
• Financial institutions’ specialness
• The financial services industry: depository institutions
• Banks
• Credit unions and building societies
• The regulation of Australian DIs
• Other financial institutions
• Life insurance
• General insurance
• Superannuation funds
• Managed funds and unit trusts
• Finance companies
• Securitisation vehicles
2
Financial Institutions’ Specialness
• Without financial institutions:
― excess savings could only:
§ be held as cash
§ or invested in corporate securities.
― the flow of funds is likely to be low.
― little or no monitoring would occur.
― risk of investments would increase.
• Households might find direct investments in corporate securities unattractive because of:
― monitoring costs
― liquidity costs
― price risk.
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Financial Institutions’ Specialness
• Financial institutions stand between households and the corporate sector.
• Financial institutions fulfill two major functions:
―
okerage function:
§ economies of scale
― intermediation (asset-transformation) function:
§ primary securities
§ secondary securities
• Financial institutions are better able to resolve the costs facing an individual making a direct investment.
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Information Costs
• Household savers must monitor the actions of firms in a timely and complete fashion after purchasing
securities.
• Failure to monitor exposes investors to agency costs.
― Agency costs: costs relating to the risk that firm owners and managers use savers' funds in a way that is not in
the best interest of the savers
― Principal (saver) – Agent (bo
ower) problem
• Agglomeration of funds resolves the following problems:
― Delegated monitor: greater incentive for information collection and monitoring activities
― Information producer: replaces the need for inflexible, hard to enforce, loan covenant.
• FIs reduce the degree of information imperfection and asymmetry between the ultimate suppliers and
users of funds in the economy.
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Liquidity and Price Risk
• Financial institutions provide secondary claims to household savers: high liquidity.
• Ability to diversify some of existing portfolio risk.
• FIs can offer highly liquid, low risk product, while investing in illiquid, risky loans.
• Diversification benefits available as long as the intermediary is sufficiently large to gain from
diversification.
• Less diversified institutions ca
y:
― high default risk
― more highly illiquid claims.
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Specialness and Regulation
Problems and risks if services are not provided
• Negative externalities
– affecting firms and households when something goes wrong in the FI sector of the economy
Problems and risks if services are not provided
• Net regulatory burden
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Specialness and Regulation
Regulation attempts to decrease these risks
Major types of regulation seeking to enhance the net social welfare benefits of institutions' services:
– safety and soundness regulation
– monetary policy regulation
– credit allocation regulation
– consumer protection regulation
– investor protection regulation
– entry and chartering regulation
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Banks
• Banks are the largest depository institutions in terms of size.
• Major difference between banks and credit unions/savings institutions: banks have more varied assets
and liabilities.
• Differences in operating characteristics and profitability across size classes—for instance, with regards
to the size of the commercial loan portfolio.
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Banks in Australia
• Four major banks
Westpac, CBA, NAB, and ANZ
― national focus
― offer complete corporate and retail banking services in Australia, NZ and Papua New Guinea
― they also operate in Asia, the US and the UK
― focus on lending (around 70 per cent).
• Regional banks
20 regional banks in Australia
― regional focus with operations across state borders
― large proportion of assets invested in residential housing loans due to their origins as building societies
― focus on lending
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Balance Sheet and Trends: Assets
• Banks account for more than 97% of all depository institutions assets in Australia.
• Shift in bank lending from business loans to residential mortgages
• Increase in the scale and reach of international operations
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Balance Sheet and Trends: Liabilities
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Off-Balance-Sheet (OBS) Activities
• OBS assets
An item that moves onto the asset side of the balance sheet when a contingent even occurs
• OBS liability
An item that moves onto the liability side of the balance sheet when a contingent event occurs
• Major types of OBS activities used by Australian banks include:
• Direct credit substitutes
• Trade- and performance-related OBS activities
• Interest rate derivative contracts: futures, forwards, swaps and options
• Foreign exchange derivatives contracts: futures, forwards, swaps and options
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Credit Unions and Building Societies
• Credit Unions
Mutual cooperative organisations that provide deposit facilities, personal and housing loans and
payments services to their members, who are usually linked by way of some common bond
• Primarily provide deposit facilities, personal and housing