THE FINANCIAL

SYSTEM

THE FINANCIAL SECTOR

The financial sector consists of:Banks: Financial institutions act as

intermediaries between borrowers and lenders. (Includes RBA, and Australian and foreign owned banks)

Non-Bank Financial Institutions (NBFIs): Merchant banks, building societies, credit unions, finance companies, superannuation funds, Insurance and short-term money market dealers.

MONEY Money is any commodity that is accepted universally

as a medium of exchange for goods and services. Money has four functions:

It is a medium of exchangeActs as a measure of valueIs used to settle debtsIs a store of value

MONEY SUPPLYThe Reserve Bank of Australia supplies the

amount of money required to keep the financial sector operating (called liquidity)

There are two measures of the supply of money in the economy.

M3 = notes and coins held by the non-bank public plus any current and fixed bank deposits, made by the public

Broad Money = M3 + net deposits of savings in Non-Bank financial institutions.

RESERVE BANK AND LENDINGThe Reserve Bank of Australia prints money

and is the lender of last resort to the financial sector if a financial crises occurs.

The financial sector takes money from individuals, companies, funds, and lends it out to the 5 sectors of the economy.

Lending allows consumption or investment in the economy – purchase now, pay back later

FINANCIAL SECTOR AND LENDINGWithout lending, individuals, companies and

government would only be able to consume or invest when they have the cash available.

For many this is not realistic, especially purchasing a house, a car, investing in a factory, building a highway. The economy will be much smaller without lending.

Lending creates a multiplier effect in the economy – called credit creation.