Is our financial system robust?

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Is our financial system robust?

A financial system includes three very important pieces in the “puzzle”. Most people don’t know enough about why we need a financial system that is regulated and what makes a comprehensive system that ensures that the growth of an economy is sustained.

The system includes a range of financial institutions, a range of financial instruments and various markets that allow the free flow of funds.

Overseeing that the system works efficiently and without any corruptions or frauds, the Reserve Bank of Australia and APRA (prudential supervisor) play an important role.

Those who have money want to invest it to earn a return that is commensurate with the risk they are prepared to take. Money is an asset and the asset has mainly four attributes:  return on the asset (yield), risk taken against the expected return, how liquid is the asset and the return, and the cash flow emanating from the investment.

Risk is related to uncertainty. In other words risk is the probability or let us say the possibility that an actual outcome will differ from an expected outcome.

Liquidity is whether the investor has access to cash and other sources of funds to meet its day to day obligations and expenses.

The cash flow refers to the frequency of periodic cash flows (interest and principal) associated with a financial instrument.

Changes in the structure of and responsibility for regulation and prudential supervision have been a significant driver of change within the financial systems in Australia.

The RBA is responsible for the soundness of the payments system and overall financial system stability. The Australian Prudential Regulation Authority (APRA) is responsible for the prudential supervision of authorised deposits taking institutions. The Australian Securities and Investments Commission (ASIC) is responsible for market integrity and the Australian Competition and Consumer Commission (ACCC) is responsible for competition policy and consumer protection.