This makes the affiliates banks achieve the same status of the subsidiary banks because the latter will be least affected in relation to the turmoil. If the crisis was hard on their parent banks, then the affiliates banks would have required to stand on their own. The domestic banks in contrast could receive financial bails during the financial crisis hence offsetting the difference that existed between them and subsidiary of the foreign banks (Mihaljek, 2011, p.44). During the global financial crisis, both the local and the foreign owned banks had to reduce their profit target hence, the diminishing factor of whether one is an affiliate or the other is a subsidiary. Therefore, the financial crisis affected all the banks independent of whether they were subsidiary or affiliates.
3. What are the strengths and weaknesses of the capital positions of Australian
and German banks in the wake of the GFC?
The establishment of the pillar policy in the management of the banking system contributes as the major strength during the financial crisis. While the Australian had the four-pillar policy, the German had the three-pillar policy. Each of these pillars, in the two countries, constituted the other small cooperative banks hence making the larger categories to have more share of the total bank assets in such countries (IMF 2011, p.5). Therefore, this implies that the control of the country's assets under the pillar policy which in turn has ensured securitization. The merge into the main pillars also gave an outward expression of too large to fail. The pillars also made the countries be in a position to receive foreign lending because of the potential collateral they had. This is indifferent if the countries could have just been made up of the fragmented small banks, which could lead to least securitization especially during the financial crisis.
In Germany especially, the cooperative sector, was in a better position to solve all the problems arising from the financial crisis hence lessening the effect of the financial crisis on the public. This is because cooperate pillar was able to finance all the problems independent of the public money. The smaller banks could not have dealt with this situation because of their weaker nature in relation to their financial position. Australia, on another hand, also had most of its assets being controlled by the four main banks, making the regulation of the financial crisis be easier because of the cooperation of banks at the pillar level.
The control of these countries' assets by the larger banks has also contributed to their weakness in relation to the financial crisis. For instance, the meeting of the new Basel III requirement could pose a challenge to the German and the Australian banks. This is because the larger banks did not rely on the equity capital that is the provision of the Basel III in relation to the international competition (IMF 2011, p.10). The requirement provided that the banks must have sufficient sources of funding. This leads to the scenario of stress test in these countries, which shows that these larger banks were facing challenges during the financial crisis. Generally, the Basel III always put more pressure on the high leveraged institution in relation to the market funding (Davis, 2011, p.303).
4. What are some of the similarities and differences in patterns of bank funding in Australia and emerging market countries, before and after the GFC?
Before the GFC
The issue of too big to fail, an attribute of the four-pillar policy made the Australian banks be different to the other emerging economies' (Kyoon & Sheridan 2012, p.3). The government provided the banks with funding because their failure would have heavily affected the economy of the Australian country. This is indifferent with the funding in the emerging economies where the small banks do not have much effect on the economy. The fragmented form of the banking system has made the emerging market economies have a different funding from Australian system (Kyoon & Sheridan 2012, p.3). While most of the emerging market countries heavily relied on the foreign sources to expand their credit, the establishment of the four-pillar policy made Australia reduce its reliance on the equity capital. The four pillar policy made the country to majorly rely on their cooperate funding, making them more successful than the other countries.
After the GFC
In their funding, the Australian banks adopted the 20% loss given default (LGD) for all the residential mortgages that are above the Basel floor of most of the emerging markets (Kyoon & Sheridan 2012, p.4). The emerging market had their Basel floor reading 10%. The Basel II helped in determining the LGD of a country in relation to their mortgage lending. Because of the higher Basel II in Australia, they LGD rates higher than the other emerging markets. The conservative lending ratio of the banking system in Australia has also contributed to the difference in the funding system. This has led to the low performance of the loan ratio compared to other emerging economies that have high loan performing ratio (Kyoon & Sheridan 2012, p.5). The banking system of Australia also uses the conservative eligibility of capital that makes them have high quality capital in relation to the other economies.
Kyoon, B. & Sheridan, N. 2012. International Monetary Fund: Bank Capital Adequacy in Australia. WP/12/25,
Bordo, M., Redish, a., Rockoff, H., 2011. Why Didn't Canada Have a Banking Crisis in 2008 (or in 1930, or 1907, or ...)? Working Paper 17312
Mihaljek, D. 2011. Domestic Bank Intermediation in Emerging Market Economies During the Crisis: Locally Owned vs. Foreign-Owned Banks. BIS Papers No 54