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 Two drills down into the issues challenging the financial sector and culminates in a set of recommendations for improving Australia’s Financial System. 

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This paper addresses the importance of international capital inflows and outflows to Australia. As identified in Stage 1 of the Funding Australia’s Future project, international capital flows have played a key role in Australia’s development throughout our history.

International capital flows can be facilitated directly through market based transactions or indirectly through intermediaries including banks and investment managers. In both cases, the financial infrastructure available to financial sector participants plays a key role in determining the efficiency and fairness of the transactions. Therefore, financial infrastructure has a direct impact on the cost of capital and returns on investment for both Australian businesses and investors. Furthermore, the literature has shown that greater international integration of financial markets has a positive impact on domestic financial market participants by increasing the total pool of capital available to domestic firms and the investment and diversification opportunities for domestic investors.

The efficiency and fairness of financial infrastructure is a function of the technology available to infrastructure providers, the regulation which governs the financial market participants or intermediaries, the availability and dissemination of information, the number and nature of participants in the market and the instruments provided.

This paper explores the efficiency and fairness of the financial markets most important to Australia. This includes the markets for Australian equities, the domestic and international fixed income markets most utilised by Australian firms, the listed and OTC derivative markets and the inter-dealer foreign exchange market. The implications of key trends in financial markets and infrastructure will be addressed, including the move toward international markets no longer reliant on geographic location, the foreign ownership and consolidation of major exchanges, the move toward third-party owned central clearing and settlement providers, advances in information collection and dissemination technologies, and the advent of non-government controlled currencies and payment systems.

The paper also addresses the important role that Australian financial institutions play in intermediating international flows. In doing so, their performance in conducting these operations are analysed and inadequacies in the available financial infrastructure to perform this function are discussed.


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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 second of which assessed how well Australia’s financial sector serves the economy, and how effectively it links the sources and uses of finance for the benefit of Australian society.