Regulation of financial markets and interest rates
Australia's financial system was once divided into banks and non-banks, however this convention has disappeared over time and now many financial intermediaries offer almost all services banks do. However, as banks still control the majority of the financial system, they remain the most important asset to the financial system.
One of the two major changes Australia's financial system has undergone through recent decades is the involvement of financial regulation. This important development in the late 1990s aimed to improve the efficiency of the system by reacting to changes to financial markets that have occurred since deregulation.
Although there are many regulators in Australia, the three main ones include the Reserve Bank of Australia (RBA), the Australia Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (AISC).
As Australia's central bank, the RBA has the important role of controlling Australia's money and banking system.
The RBA is responsible for formulating and implementing monetary policy, the regulation of the payments system as well as maintaining systemic stability of a volatile Australian economy. The RBAs decision making involving monetary policy involves setting the cash rate on overnight loans in the money market. The RBA uses its domestic market operations to determine the cash rate in the money market as a result of the interaction of demand for and supply of overnight funds. On the days when monetary policy is being changed, market operations are aimed at moving the cash rate to the new target level. By accomplishing this, other interest rates in the economy are influenced. A lowering of the cash rate will lead to a cheaper cost of borrowing funds in the cash market, and this leads to banks reducing their borrowing and lending rates while an increase in the cash...