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Discuss How Financial Markets In Australia Are Regulated By The Reserve Bank Of Australia, The Australian Prudential Regulation Authority And The Australian Securities And Investments Commission.

1309 words - 5 pages

Financial markets are an important component of Australia's economy. They provide a return for those who have extra income, while at the same time making loans available those who need additional funds. They influence all other industries because of their key role in the economy. To protect the overall economy and the individual sectors, there are three major regulators of financial markets; RBA, APRA, and ASIC.RBAThe Reserve Bank of Australia is one of the most important regulators of financial markets. It is the central bank of Australia, and it is not set up for financial profit. Its purpose is to manage the financial sector according to three objectives set by the Reserve Bank charter - stablility of Australia's currency, maintenance of full employment and the economic prosperity and welfare of the people of Australia. The RBA plays significant roles in regulating the financial market by conducting monetary policy on behalf of the government; systemic stability; control of note issue; regulation of the payments system; banker to the banks; responsibility for holding Australia's reserves of gold and foreign currency dealings; banker and source of financial and economic advice to governments. In recent years, its major aim has been to sustain low inflation.The RBA influences inflation by undertaking DMOs, or Domestic Market operations. This is the mechanism in which the RBA controls the interest rates and thereby influences the rate of inflation. The RBA either purchases or sells Government securities, which leads to the consumer selling of their previous securities or buying new ones. If the consumer purchases new securities, this action reduces the amount of money in the M3, leading to a movement to the left in the supply curve of money, raising the equilibrium level of interest rates. The opposite happens when the consumer sells off their securities. The same principle applies to banks also, except that it's the cash rate incurred by the bank which is affected by the DMO.DiscussionThe advantages of the RBA is that it is the central bank of Australia, meaning that it has much power. It is the sole authority for the issuing of note money, which is vital to the financial market, ensuring that consumers can withdraw sufficient cash during times of greater need, e.g. Christmas.It acts as the banker for the banks, enabling banks to settle debt between themselves. Most importantly, it can use DMO to influence the interest rate, something which APRA and ASIC cannot do.The disadvantage of RBA is that its policies have time lag, e.g. the effects of implementing DMO and selling securities to banks and consumers would reduce the amount of M3, but the interest rate change would not come immediately. Also, after deregulation, the RBA has no real way of enforcing its policies, thus making it into a 'paper tiger'.APRAAPRA is another important player in the regulation of financial markets. It provides prudential regulation to all authorise deposit-taking...

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