This paper was produced under the Funding Australia’s Future project which aims to better understand the changing dynamics of the financial system and its impact on future economic growth. The research from Stage One, provides an evidence base on the current state of the Australian financial system, how it has evolved over the last 10 years and how it is likely to change in the future. The papers also provide an overview of the regulatory and financial infrastructure that governs the system.

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The Global Financial Crisis (GFC) marked a turning point in the dynamic evolution of the structure of the Australian financial sector. A number of pre-existing trends disappeared and many of the changes can be linked directly or indirectly to the GFC. Whether these changes are likely to be transient or longer-lasting is a key question for further research and analysis. Significantly, the disruption caused by that event meant that much attention was diverted from underlying structural changes in financing arrangements which are important for future financial development.

As at 2013 the structure of Australian financing arrangements is marked by a number of characteristics which differentiate it from structures observed overseas and which are important in determining whether the economic functions of the financial sector are performed as efficiently as possible. Some of those characteristics reflect legislative and regulatory influences, while others can be traced to distinguishing characteristics of the Australian economy and historical patterns of financial sector development.

Recognizing that financial sector development is evolutionary (sometimes revolutionary), to assess future prospects it is important to know where we have been and where we are currently.

The objective of this paper is to provide an overview of the current structure and trends in financing patterns and portfolio allocation in Australia plus an initial, high level, assessment of how those factors may affect the efficiency of the financing process and influence its future development.

Much of the analysis of this paper is based around the structure used for the National Financial Accounts which identifies four end-user (or real) sectors (households, non-financial businesses, government, and the rest of the world) as well as the financial sector which facilitates financial flows between (and within) those sectors.

While one of the key roles of the financial sector is facilitating the efficient flow of new savings into new real investments, these (very important) flows are relatively small compared to the aggregate stock of financial assets (arising from past savings and investment decisions) in the economy. Changes in portfolio preferences, including for leverage, which affect asset prices and returns can thus have significant effects on savings and investment. Analysis of sectoral balance sheet sizes, composition, and leverage are thus important in considering how underlying real shocks and financial sector shocks may be distributed and transmitted throughout the economy. A greater emphasis on determinants of balance sheet structures, financial products and financial institutions is the main point of differentiation with the paper by Professor Maddock and Mr Munckton (also in this collection) which pays more attention to real sector flows.

The paper comprises of three sections:

  • An analysis of the major difference between the pre and post GFC environment
  • An analysis of the key characteristics of Australian financing patterns as at 2013
  • An assessment on how financing arrangements and capital flows may develop in the future.

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The Australian Centre for Financial Studies (ACFS) initiated the Funding Australia’s Future project in late 2012 to undertake a stocktake of the Australian financial system, and its role and challenges in facilitating future economic growth within the wider economy.

In an economy that has enjoyed 21 years of consecutive economic growth and shown a resilience through the Global Financial Crisis (GFC) which is the envy of many nations, the financial sector has played a strong and pivotal role. The past decade, however, has been one of significant change. The impact of the GFC and the subsequent wave of global re-regulation have had a profound effect on patterns of financing, financial sector structure, and attitudes towards financial sector regulation. Identifying the extent to which these changes are transitory or likely to be more permanent is crucial to understanding how financing patterns and the financial sector will develop over the next decade or so.

The Funding Australia’s Future project is in three stages, the first of which analyses the interaction between suppliers of funds, financial sector participants, and end users throughout the economy and assesses issues likely to affect the future demand for and supply of finance in Australia.