Economic Principles Applicable To Financial Assessment Answer
Key Topics
- Introduction
- Main products or services of the chosen company operations.
- Is company monopoly, oligopoly, duopoly, or something else? Describe each type of market structure and give reasons for your answer.
- Key features of the sector
- Changes that are currently taking place in the market structure in this industry
- New entrants (if any) in the industry in recent years.
- Other products or services in the market that can be substitute to the products and services currently provided by the company and their impacts on the operations of an oligopolistic company.
- Impacts that the business can have if a larger company providing same providing same products and services enter the industry.
- Roles and objectives of the three major financial services industry regulators:
- Conclusion
Research and prepare a comprehensive report on economic principles applicable to financial service industry in Australia.
Introduction
The financial service industry in Australia is highly developed with regulations which are world’s best practices. Investors from around the world invest in the products of the financial service industry of this country.
Here for the purpose of analysis of the economic principles affecting the financial service sector, we choose a particular sector and understand the working of the economic principles. This sector selected for study here is the banking sector and Company X is one of the leading banks in the sector.
Main products or services of the chosen company operations.
The banking sector of Australia is one the major component of the financial service industry. As company X is a leading bank, the main products and services would include deposits, superannuation fund products, transactions, finance loans, mortgages, credit cards, agriculture-financing, etc.
Is company monopoly, oligopoly, duopoly, or something else? Describe each type of market structure and give reasons for your answer.
The different types of market structures that exists in any economy are
Monopoly- In this type of market structure, only one entity supplies the goods and services in the economy and the entry of new members are highly restricted.
Oligopoly- In this type of market structure, there are few players who control the market and the supply of goods or services (Hems, Connolly & Georgouras, 2012). This type of market structure often lead to higher prices for the customers.
Duopoly – In this type of market structure, there are only two entities who control the market. This is the simplest form of oligopoly.
Perfect Competition- In this type of market structure, there are huge number of players in the market and the market is controlled by the forces of demand and supply. Entry and exit in such business is very easy.
The company X is operating in an oligopolistic market structure as there are few banks in this sector which have the sole authority. They have the control of the market with the objective to maximise their profits. There are four major banks operating in Australia which comprises the total asset of 400 million dollars. Further it is difficult for new companies to enter in this sector as it demands huge capital investments.
Key features of the sector
Financial services industry- Financial service industry in Australia is one the most prominent in the Asia-Pacific region. There is high amount of capital market activity and structured product which attract investors from around the world. Thus it has one of the biggest pool under management which is valued at US$850 billion. This industry provide services like private banking, retail banking, investment banking, insurance, hedge funds, superannuation, insurance, asset based financing and leasing, etc.
Banking Sector- The banking sector is the largest part of the financial services industry in Australia (Paul & Kourouche, 2008). There are four major banks in Australia, few local banks and the subsidiaries of few foreign banks.
Changes that are currently taking place in the market structure in this industry
As the financial services market in Australia is evolving, the products and services offered by the banks are now being offered by other small financial institutions who expertise in the management of particular service like mortgages, fund managements, insurance, broking activities, etc. These intermediaries operated in a deregulated environment and hence provide these services at a lower cost than the banks. Further they are more flexible than banks and sometimes banks also use these small institutions as a third party broker. This has led to a gradual ship of the market structure from oligopoly to a situation of perfect competition.
New entrants (if any) in the industry in recent years.
In the recent year, the banking sector in Australia has seen the entry of many small and intermediary players who provide specialised financial services and products. These operate in an unregulated market and are more flexible than banks which make them attractive to the consumers. Further after the recent deregulation of banks, many building societies have been converted into banks which has led to increase in the amount of total banking asset in the economy.
Other products or services in the market that can be substitute to the products and services currently provided by the company and their impacts on the operations of an oligopolistic company.
The financial products and services provided by the banking sector of Australia is highly developed and international standards. Investor from around the world take these service to manage their financial needs (Institution building in the financial sector, 2005). However, recently there have new specialised products and services in the market which are similar to the one being provided by the banks. These services include mortgages, housing finance, third party loans, etc. The entities providing this specialised service operate in a deregulated market and are better equipped as they specialise in a particular service.
Impacts that the business can have if a larger company providing same providing same products and services enter the industry.
In the oligopolistic banking industry of Australia, entry of new entities is restricted but not impossible. However if through government reforms, this entry becomes easy and new large companies start providing the same products and service as banks provide, the structure of the market would change to perfect competition where the price of such products and services would be determined by the forces of demand and supply Dept, 2017).
Roles and objectives of the three major financial services industry regulators:
Australian Prudential Regulation Authority (APRA) - This regulating authority guides banks, insurance companies, private health insurance, reinsurance, life -insurance, and other entities of superannuation industry. It was established in June 1998 and is world renowned regulator for prudential. It also serves as the statistical agency for the financial service sector in Australia.
Australian Securities and Investments Commission (ASIC) – It is a credit regulator for companies, financial service institutions, markets and consumers. It aids in funding the economy by building trust among the investors.
Reserve Bank of Australia (RBA) - It is Australia’s central bank and is guided by Reserve Bank Act of 1959 (International Monetary Fund, 2006). It works for the prosperity and welfare of the Australian economy thus managing stability of the currency and the employment rate.
Conclusion
Financial Services is the most important industry in any economy as it helps in channelizing investments for the growth of the economy (The Role of Australia's Financial Sector in Sustainability, 2001). This industry works on various economic principles like interest rates, unemployment rate, growth rate, etc. Hence the country’s economic parameters play a vital role in functioning of this industry.
Reference
Hems, L., Connolly, C., & Georgouras, M. (2012). Measuring financial exclusion in Australia. Sydney: The Centre for Social Impact for National Australia Bank.
Paul, S., & Kourouche, K. (2008). Regulatory Policy and the Efficiency of the Banking Sector in Australia. Australian Economic Review, 41(3), 260-271
Institution building in the financial sector. (2005). Sydney.
Dept, I. (2017). Australia. Washington, D.C.: International Monetary Fund.
International Monetary Fund. (2006). Australia: Financial Sector Assessment Program: Detailed Assessment of Observance of Standards and Codes. IMF Staff Country Reports, 06(415), 1.
The Role of Australia's Financial Sector in Sustainability. (2001). Canberra.
