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Financial enterprises are institutions which engage in acquiring financial assets and incurring liabilities, for example, by taking deposits, borrowing and lending, providing superannuation, supplying all types of insurance cover, leasing, and investing in financial assets.
Between 1940 and 1959, central banking business was the responsibility of the Commonwealth Bank. The Reserve Bank Act 1959 (Cwlth) established the Reserve Bank of Australia as the central bank, and from 1959 to 1998 the Reserve Bank was responsible for the supervision of commercial banks. From 1 July 1998, APRA assumed responsibility for bank supervision while the Reserve Bank retained responsibility for monetary policy and the maintenance of financial stability, including stability of the payments system.
Banks are the largest deposit-taking and financial institutions in Australia. At the end of June 2004 there were 52 banks operating in Australia. All are authorised to operate by the Banking Act 1959 (Cwlth). Four major banks: the Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank, and the Westpac Banking Corporation, account for over half the total assets of all banks. These four banks provide widespread banking services and an extensive retail branch network throughout Australia. The remaining banks provide similar banking services through limited branch networks often located in particular regions. At 30 June 2003 banking services were provided at 4,858 branches, 2,990 giroPost locations, and 20,339 Automatic Teller Machines (ATMs).
The liabilities and financial assets of the Reserve Bank are set out in table 26.3. The liabilities and financial assets of the banks operating in Australia are shown in table 26.4.
Other depository corporations
In addition to banks, financial institutions such as building societies, credit unions and merchant banks play an important part in the Australian financial system. In the Australian financial accounts, other depository corporations are defined as those, apart from banks, with liabilities included in the Reserve Bank's definition of broad money. Non-bank institutions included in broad money are other authorised depository institutions (building societies and credit cooperatives), cash management trusts, and corporations registered under the Financial Statistics (Collection of Data) Act 2001 (Cwlth) which include money market corporations, pastoral finance companies, finance companies and general financiers.
The Financial Corporations Act 1974 (Cwlth) ceased on 1 July 2002. Corporations previously subject to the Financial Corporations Act 1974 (Cwlth) were then required to report to APRA as Registered Financial Corporations. From 31 March 2003 reporting requirements and categorisation for Registered Financial Corporations changed, reducing the number of categories of other depository corporations to five.
Permanent building societies are usually organised as financial cooperatives. They are authorised to accept money on deposit. They provide finance principally in the form of housing loans to their members.
Credit cooperatives, also known as credit unions, are similar to building societies. As their name implies, they are organised as financial cooperatives which borrow from and provide finance to their members.
Money market corporations are similar to wholesale banks and for this reason they are often referred to as merchant or investment banks. They have substantial short-term borrowings which they use to fund business loans and investments in debt securities.
Other registered financial corporations. This category covers what were pastoral finance companies, finance companies and general financiers categories. These corporations engage in a variety of borrowing and lending activity.
Cash management trusts are investment funds which are open to the public. They invest the pooled monies of their unit holders mainly in money-market securities such as bills of exchange and bank certificates of deposit. As with other public unit trusts their operations are governed by a trust deed and their units are redeemable by the trustee on demand or within a short time. They are not subject to supervision by APRA or registered under the Financial Statistics (Collection of Data) Act 2001 (Cwlth).
Table 26.5 shows the total assets of each category of non-bank deposit-taking institution.
Life insurance corporations
Life insurance corporations offer termination insurance and investment policies. Termination insurance includes the payment of a sum of money on the death of the insured or on the insured receiving a permanent disability. Investment products include annuities and superannuation plans. The life insurance industry in Australia consists of 37 direct insurers, including six reinsurers. As with the banking industry, the life insurance industry is dominated by a few very large companies holding a majority of the industry's assets.
Life insurance companies are supervised by the APRA under the Life Insurance Act 1995 (Cwlth). APRA also regulates friendly societies which offer services similar to life insurance corporations.
Table 26.6 shows the financial assets and liabilities arising from both policyholder and shareholder investment in life insurance corporations and APRA regulated friendly societies.
Pension funds have been established to provide retirement benefits for their members. Members make contributions during their employment and receive the benefits of this form of saving in retirement. There are two basic types of contribution, employer contributions in the form of the superannuation guarantee and voluntary contributions. In order to receive concessional taxation treatment, a pension fund must elect to be regulated under the Superannuation Industry (Supervision) Act 1993 (Cwlth) (SIS Act). These funds are supervised by either APRA or the ATO. Public sector funds, being funds sponsored by a government employer or government controlled business enterprise, are exempt from direct APRA supervision.
The largest number of pension funds comprise self-managed superannuation funds. From 1 July 2000 the ATO assumed responsibility for regulating self-managed superannuation funds.
Self-managed superannuation funds are superannuation funds:
Corporate funds are funds sponsored by a single non-government employer, or group of employers. Industry funds generally have closed memberships restricted to the employees of a particular industry and are established under an agreement between the parties to an industrial award.
Public sector funds are those funds sponsored by a public sector employer. Retail funds are pooled superannuation products sold through an intermediary to the general public. Funds with less than five members but which do not qualify as self-managed superannuation funds are known as small APRA funds.
In addition to separately constituted funds, the SIS Act also provides for special accounts operated by financial institutions earmarked for superannuation contributions, known as Retirement Savings Accounts, that also qualify for concessional taxation under the supervision of APRA.
The liabilities represented by these accounts are liabilities of the institutions concerned and are included with the relevant institution in this chapter (e.g. retirement savings accounts operated by banks are included in bank deposits in table 26.4), but are also footnoted in table 26.8 for completeness.
The number of pension funds at 30 June 2004 is shown in table 26.7. The assets of pension funds are shown in table 26.8 and include unfunded pension claims by pension funds on the Australian Government where these have been formally recognised in accounting systems. The assets in the table do not include any provision for the pension liabilities of governments to public sector employees in respect of unfunded retirement benefits. At 30 June 2004 the ABS estimate for claims by households on governments for these outstanding liabilities was $147.3b.
Other insurance corporations
This sector includes all corporations that provide insurance other than life insurance. Included are general, fire, accident, employer liability, household, health and consumer credit insurers.
Private health insurers are regulated by the Private Health Insurance Administration Council under the National Health Act 1959 (Cwlth). At 30 June 2004 there were 40 private health insurers, including health benefit funds of friendly societies. Other private insurers are supervised by APRA under the Insurance Act 1973 (Cwlth). At 30 June 2004 there were 109 insurers authorised to conduct new or renewal general insurance supervised by APRA. There are 10 separately constituted public sector insurance corporations with significant assets. Table 26.9 shows the financial assets and liabilities of other insurance corporations at 30 June 2004 and the preceding two years.
Central borrowing authorities
Central borrowing authorities are institutions established by the state governments and the Northern Territory Government primarily to provide finance for public corporations and quasi-corporations, and other units owned or controlled by those governments, and to arrange investment of the units' surplus funds. The central borrowing authorities borrow funds, mainly by issuing securities, and on-lend them to their public sector clientele. However, they also engage in other financial intermediation activity for investment purposes, and may engage in the financial management activities of the parent government.
Table 26.10 shows the financial assets and liabilities held by the central borrowing authorities at 30 June of the past three years.
Financial intermediaries not elsewhere classified (n.e.c.)
This subsector comprises all institutions that meet the definition of a financial enterprise and have not been included elsewhere. It includes:
In addition to enterprises which engage directly in intermediation, the subsector also includes enterprises which undertake activity closely associated with intermediation such as:
Table 26.11 shows the financial assets of selected groups of financial intermediaries n.e.c.
Economic development corporations - are owned by governments. As their name implies, these bodies are expected to provide finance mainly in their home state or territory.
Common funds - are set up by trustee companies and are governed by state Trustee Acts. They allow the trustee companies to combine depositors' funds and other funds held in trust in an investment pool. They are categorised according to the main types of assets in the pool, for example, cash funds or equity funds.
Public unit trusts - are investment funds open to the Australian public. Their operations are governed by a trust deed which is administered by a management company. Under the Managed Investments Act 1997 (Cwlth), the management company has become the single responsible entity for both investment strategy and custodial arrangements; the latter previously had been the responsibility of a trustee. These trusts allow their unit holders to dispose of their units relatively quickly. They may sell them back to the manager if the trust is unlisted, or sell them on the Australian Stock Exchange (ASX) if the trust is listed. Public unit trusts are categorised according to the main types of assets in the pool; for example, property or equity. Only those which invest primarily in financial assets - mortgages, fixed interest, futures or equity securities - are included here. While public unit trusts are not subject to supervision by APRA or registered under the Financial Statistics (Collection of Data) Act 2001 (Cwlth), they are subject to the provisions of corporations law which includes having their prospectus registered with ASIC.
Wholesale trusts - are investment funds that are only open to institutional investors - life insurance corporations, superannuation funds, retail trusts, corporate clients, high net worth individuals - due to high entry levels (e.g. $500,000 or above). They may issue a prospectus, but more commonly issue an information memorandum. Only those which invest in financial assets are included here.
Securitisers - issue short and/or long-term debt securities which are backed by specific assets. The most common assets bought by securitisation trusts/companies are residential mortgages. These mortgages are originated by financial institutions such as banks and building societies or specialist mortgage managers. Other assets can also be used to back these securities, such as credit card receivables and financial leases. Securitisers generally pool the assets and use the income on them to pay interest to the holders of the asset-backed securities.
Investment companies - are similar to equity trusts in that they invest in the shares of other companies. However, investors in investment companies hold share assets, not unit assets.
Cooperative housing societies - are similar to permanent building societies. In the past they were wound up after a set period, but now they too are continuing bodies. They raise money through loans from members (rather than deposits) and provide finance to members in the form of housing loans. Over recent years many cooperative housing societies have originated mortgages on behalf of securitisers.
Fund managers, insurance brokers and arrangers of hedging instruments - are classified as financial auxiliaries as they engage primarily in activities closely related to financial intermediation, but they themselves do not perform an intermediation role. Auxiliaries primarily act as agents for their clients (usually other financial entities) on a fee-for-service basis, and as such the financial asset remains on the balance sheet of the client, not the auxiliary. However, a small portion of the activities of auxiliaries is brought to account on their own balance sheet, and these amounts are included in table 26.11.