Global financial crisis and banking systems in Australia, Canada, and United States

Global Financial Crisis and the Banking Systems in Australia, Canada and United States

What common features of the banking systems of Australia and Canada might be behind the relative 'good' performance of both of these country's banks through the global financial crisis (GFC)? How do both of these systems differ, in structure and regulation, from the banking system of the United States?

What are the main differences with respect to the ways mortgage lending is conducted in these three countries?

Common features between Canada and Australia banking systems

The global financial crisis had a little effect on both Australia and Canada because of the strategies they had put in place. These common strategies mainly focused on reducing the vulnerabilities of the banks from the effect of the highly indebted households (Kyoon & Sheridan 2012, p.3). In achieving their resilience to the global financial crisis, the banks, have to reduce their residential lending and ensuring that they have short terms of borrowing. The short-term borrowing could help in reducing the effect, which always relates to the bad debts. The Australian countries have four established banks, which is the key strategy for making the bank be over the others. In reducing their vulnerability to the GFC, the four main banks have helped the Australian countries in the following ways:

The four large banks in Australia dominate all the assets in the country implying that the smaller banks have a little effect on the financial position of the bank. The slower growth of the smaller banks also leads to the domination by the four banks. The four main banks have enough securitization compared to the smaller banks making them stand even strong during the financial crisis. In Australia and Canada, the four leading banks have more possession of the assets than the counterpart smaller banks (Kyoon & Sheridan 2012, p.4). Because of the higher securitization of the bigger firms, the country is in a good position because of the main banks contributed most in the GDP of the country. The low securitization of the smaller banks is due to the little access they have for adequate funding hence they were vulnerable to failure during the crisis. The smaller banks also have a little access to the foreign lending, whenever there is the onset of financial crisis. This is because of the little financial collateral they have while the main banks have the favor of most of the financial institution because they are too big to fail (Kyoon & Sheridan 2012, p.5). The domination of the major banks over the smaller banks in Australia and Canada makes the countries to enjoy a high resiliency during the crisis because the existing banks can withstand the crises. This makes the major banks dominate over the smaller banks in times of crisis.

The Australian government, just like the Canadian, has put forward the four-pillar policy, which help in preventing the four major banks from merging (Kyoon & Sheridan 2012, p.6). Merging will lead to the country having their funds controlled by one merger financial institution. If any risk of financial loss is to occur on the merger bank, the country will have to suffer a proportionally large effect of the crisis because one institution is controlling all their funding. The failure of the one big financial institution will result in destabilization of the market because of the deprivation of options. This is indifferent with the pillar policy that ensures in the presence of crisis, the crisis spread across the four major banks. Consequently, there will be lessening of the effect of financial crisis. The four major banks, which are strongly established in their financial position, also, also provide the market with option whenever there is any financial crisis. It is also worth noting that the four banks have always been profitable in their operations and hence assuring the countries of capital adequacy.

Another factor, which has led to the resiliency of both the two country's resiliency, is the conservative lending policies of the banks besides the good performance of the economies of the countries. Therefore, this will contradict the provision that the high exposure to the residential lending will lead to the failure of the banks during the financial crisis (Kyoon & Sheridan 2012, p.6). The countries also have their debts largely held by the high-income households hence furthering the security to the financial security of the countries. The banks in the country have also established the use of the short-term offshore that helps in increasing the vulnerability of the banks. This is because the banks will be exposed to increase influenced from the global market in relation to the potential capital in the market. Therefore, this has increased the resistance of the banks to any sort of crisis in the market. Development in the countries has also arisen from the extension of the maturity held by the short-term debts. This has served in increasing the amount of capital held by the banks even during the crisis.

How do the Australian and the Canadian system differ with the U.S. banking system

The banking system of each country, depend on what strategies the countries have in place. The difference in the banking system between the U.S. And the other two countries arise from the strategy thenceforth. In the course of the financial crisis, the U.S. suffered a lot in terms of the banks failures as compared to the former countries. The difference in the banking system arises from the type of bank created. For instance, in the two former countries, there was the creation of a larger financial institution as compared to the fragmented nature of the banks present in the U.S. (Bordo et al. 2011, p.2). The size of the banks in the two countries made them enjoy the benefits of their robustness and hence contributing to the strength of the banks during the financial crisis. The fragmented nature of those in the U.S. made them be susceptible to failure during the financial crisis because of the fragileness.

The cause of the robustness in Canada was due to involvement of the federal government in the regulation of the banks. The federal government allowed for the creation of a major bank that could see the country stronger during the financial crisis (Bordo et al. 2011, 11). This is indifferent with the American system where the state government was in control of the banking system hence leading to "a dual system. This results to the weak fragmented system in the U.S. The system allowed the Canadian banking system to absorb the other non-financial intermediaries that made the county's regulation be unified unlike the U.S. system where the regulation was problematic (Bordo et al. 2011, p.4).

Difference between the three with reference to mortgage lending

The Canadian mortgage lending is more stable than the mortgage lending in Australia and U.S.. In Australia, the four banks hold more of the country's assets; hence, making the non-banks without securitization to own less hence making those banks to face liquidity problems. This is indifferent with the Canadian system where there is no exploitation by the larger banks. While in the U.S., the brokers have dominated the lending of the mortgage in the market. This is due to lack of regulations to restrict the rate at which the brokerage offers their mortgage. Therefore, this has discouraged the consumers who thenceforth lose hope in the banking system. In Canada, there are strict regulations that determine what price the mortgage should be lend by both the banks and the non-bank to be equal.

2. Has the perennial 'affiliates vs. subsidiary' question with respect to the operation of foreign banks in emerging markets been resolved by the GFC?

Why?

Yes.

Some of the central banks owning the foreign banks may be having more shares than the others, and there is always no major difference amid the affiliates and the subsidiary during the financial crisis (Mihaljek, 2011, p.44). Both the foreign owned banks and the local banks responded the same to the financial crisis. At the onset of the financial crisis, the actions of the foreign owned and the locally owned all lead to the same destination for instance while the foreign banks may reduce the household loans with increasing the secured lending, the local owned increases the household with reducing the secure loans. Therefore, this makes them be the same during the financial crisis. Therefore, this act as a solution to the question that always exists between the perennial and subsidiary. During the crisis, both the affiliates and the subsidiary banks cut on down on the amount of cooperate lending they make to the households hence they both secure equal funding to the households (Mihaljek, 2011, p.44).

During the crisis, the subsidiaries of the larger foreign banks always cut off from their parents. This is because of the fear of experiencing the turmoil, which may be affecting the parent banks. Therefore, this implies that the funding they received from the foreign owned banks would reduce, hence creating an impact on their exposure to the cooperate world. 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.