Financial Stability of Banks in Australia7
Financial Stability of Australian Banks
The banking sector plays a vital factor that determines the financial system and economic development of a country. This study will investigate the 2008 global financial crises and its impact on the Australian bank performance. This study has based its investigations on the key Australian bank performance indicators from 2008 to 2011. Also, it will examine the Australia banks financial stability during and after the financial crisis of 2008 paying particular attention to changes in the rate of return, bank stock prices, and risk. This study aimed at adding to the already existing literature on how the 2008 financial crisis affected the financial stability of banks. To document this impact, this study has used time series data from 2008 to 2011 for Australian banks. For analysis, the researcher has determined liquidity ratios and capital adequacy ratios. Secondly, the researcher has used ANOVA as a tool of testing hypothesis using SPSS. The findings of this study indicates that the 2008 financial crisis had serious impacts on the stability of banks in Australia.
Keywords: banking system, global financial crisis
The investigator has analyzed bank assets, liabilities and capital, and changes in bank management. The banking system was one of the most attractive sectors for both local and foreign investors making bank capitalization to grow rapidly. The 2008 financial crisis was as a result of many factors, including a search for yield, low real interest rates, and distinct excess liquidity. A combination of these factors created over-optimism, over-confidence, and the stifling of contrary opinions.
The country’s banking system is a very system and the one that acts as a country’s basis for its economic development; therefore, the strength and sustainability of this sector is imperative to a country. The performance of the banking system has always been a focus area for research and reviews. The 1990s and 2000s global financial crises have made the investment performance to receive increased attention from researchers, academicians, and the government. The Australian banking system had been experiencing rapid growth regarding the number of banks, the number of loans given to individuals and companies, and the performance of the bank.
Objective of the Study
The aim was to investigate and affirm the effects that the crisis had on the Australian banking system.
Anichshenko (2009) investigated the effects of the crisis on the Kazakhstan banking system. At the time of this study, Kazakhstan was still experiencing numerous problems as a result of the financial crisis. This crisis adversely affected the banking system of the country. The crisis led to an increase in the burden of the debt because of the devaluation of the national currency, a high rise in unemployment, and population’s inability to repay mortgages and loans. In another study, Eken, Selimler, Kale and Ulusoy (2012) investigated how the behavior of European banks was affected by this financial crisis. Eken et al.’s (2012) study found out that banks are very sensitive to financial crisis representing the most affected sector of the economy. The study discovered that the global financial crisis adversely affected banks in Europe. The study also learned that the return on assets and return on equity ratios dropped sharply owing to the sky-rocketed non-performing assets. However, there is another study that figured out that the global financial crisis did not adversely affect the Islamic banks (Tabash and Dhanker 2014). This may be an indication that there was no great effects on the Islamic banks as a result of the 2008 financial crisis.
Data and Methodology
The researcher has used both the qualitative method and quantitative method. Data was collected from the income statements, balance sheet, and cash flow statements published by five of the major banks in Australia. For this study, researcher has calculated some appropriate financial ratios for the period of 2008 to 2011. Most banks adopt ratio analysis as a basis for evaluating their performance (Hempel and Simpson 1998). The researcher divided the time period into two parts namely during and after the crisis. One cannot establish the exact time that the crisis started because the financial crisis did not start at the same time in all parts of the world. Previous researchers, however, incorporated the time before the crisis into their study. The researcher has used the SPSS software to test the hypotheses and assess the extent of the impact. ANOVA measurement tool has been used to test related samples. The researcher further classifies the financial ratios into two categories, that is, capital adequacy and liquid ratios.
The rate at which an organization can manage to convert its tangible assets into cash to meet its demands who in this case are borrowers and depositors is commonly referred as liquidity. This study has employed two ratios namely, Investment Assets Ratio (IAR) and Liquidity Assets Ratio (LAR). The former is a representation of the total assets (in percentage) that are tied up in loans. A higher ratio of IAR indicates that the bank is less liquid whereas the higher the percentage of the latter, the more the liquidity of the bank indicating less vulnerability.
Capital Adequacy Ratios
These ratios are used to test the firm’s capacity to meet risks. This is a measure of financial system’s financial stability and strength. The present study has measured the impact using the Equity/Liabilities (ELR) ratio and Equity Total Assets Ratio (EQTAR). The former represents the amount of protection that a bank has whereas the latter measures how a firm finances assets with debt or with equity.
Table 1 is a presentation of the average Investment Asset Ratio for Australian banks from 2007 to 2011. This is a presentation of assets tied up in loans. A lower ratio is an indication of more liquid banks whereas a higher ratio indicates less solvent banks. From the analysis displayed in Table 1, it is clear that the liquidity of banks in Australia was very low in 2008. Australian banks achieved a higher IAR ratio in 2008 at 1.75.
Table 1: AIR of Banks in Australia (2008-2011)
Average Investment Asset Ratio
Adapted from Trading Economic (2016)
There is a significant difference between the IAR ratio during the financial crisis and after the crisis. The IAR rate reduced by 1.25 for that period.
Testing of Hypothesis
The researcher has used ANOVA to test the two hypothesis of this study.
Ho: There exists a very small difference between ‘during the 2008 crisis’ and ‘after the 2008 crisis’ in AIR of banks in Australia.
H1: There exists a very large difference between ‘during the 2008 crisis’ and ‘after the 2008 crisis’ in AIR of banks in Australia.
The p-value on the ANOVA was 0.042 which is less than (0.05) level of significance and made the investigator disregard the null hypothesis. This means that there exists a significant difference in IAR during the crisis and the IAR after the global financial crisis. These results indicate that the financial stability of Australian banks was affected by the 2008 global financial crisis. This is a clear indication that the Australian banks are not stable especially in the event of a major financial crisis.
Liquid Assets Ratio (LAR)
The researcher has calculated and recorded the average Liquid Asset Ratio of banks in Australia from 2008 to 2011. Australian banks achieved a subtle (LAR) ratio of 14.97 percent in 2008.
Table 3: Average Liquid Asset Ratio – Australian Banks
Average Liquid Asset Ratio
It is apparent from Table 3 that the IAR ratio was petite in 2008 and achieved a slight increase in 2009 reaching 16.75. There was a significant increase as the financial crisis approached its end in 2010 reaching 24.12 and finally rising again to 26.80 in 2011. This is an indication that banks in Australia would not have adequately taken care of any sudden withdrawal by its customers showing the extent to which the financial crisis affected banks in Australia.
Testing of Hypothesis
The researcher has used ANOVA to test the following hypothesis:
Ho: There is no great difference in Liquid Asset Ratio of Australian banks during the crisis and after the crisis.
H1: There is a great difference in Liquid Asset Ratio of Australian banks during the crisis and after the crisis.
Based on the ANOVA, the p-value is 0.0352 which is more than (0.05) level of significance which makes the investigator disregard the null hypothesis. It is clear that the difference in LAR for the banks during the time of crisis and after the crisis was great and noticeable. These results indicate that the Australian banks were adversely affected by the 2008 financial global crisis. These results are also an indication that the Australian banks were holding little liquid assets thus being more prone to liquidity risk.
Equity Total Assets Ratio (EQTAR)
The researcher has calculated and displayed Equity Total Assets Ratio of all banks in Australia from 2008 to 2011. From Table 4, is clear that the EQTAR of the Australian banks significantly differs between during the crisis and after the crisis. This means that the financial stability of the Australian banks is very vulnerable to global financial crisis.
Table 4: Average Equity Total Assets Ratio (2008-2011) in Australia
Average Equity Total Assets Ration
From the table 4 above we see that the Australian banks had a very low (EQTAR) ratio (15.91) during the financial crisis in 2008. The (EQTAR) rate is increased later after the global financial crisis reaching 24.85 in 2011. These results show that the Australian banks experienced petite (EQTAR) during the crisis and high (EQTAR) after the crisis. This indicates that the Australian banks are more financed compared to the period during the global financial crisis.
Testing of Hypothesis
The researcher applied ANOVA to test the following hypothesis
Ho: There exists a very small difference between ‘during the 2008 crisis’ and ‘after the 2008 crisis in Equity Total Assets Ratio of banks in Australia.
H1: There exists a very large difference between ‘during the 2008 crisis’ and ‘after the 2008 crisis in Equity Total Assets Ratio of banks in Australia.
Based on ANOVA, the p-value (0.089) is less than (0.1) level of significance which makes the investigator disregard the null hypothesis. This leads the researcher to infer that there exists a significant relationship in (EQTAR) between both time periods. This shows that banks in Australia are not very protected in the event of a crisis, and this displays that the Australian banks are rather unstable.
The researcher has calculated and displayed the Equity Liabilities Ratio of all Australian banks from 2008-2011 in Table 5. These results imply that the banks in Australia do not have a greater ability or capacity of absorbing financial shocks and crisis in the market.
Table 5: Average Equity Liabilities Ratio (2008-2011) in Australia
Average Equity Liabilities Ratio
Testing of Hypothesis
Ho: There exists a very small difference between ‘during the 2008 crisis’ and ‘after the 2008 crisis in Equity Liabilities Ratio of banks in Australia.
H1: There exists a very large difference between ‘during the 2008 crisis’ and ‘after the 2008 crisis in Equity Liabilities Ratio of banks in Australia.
In the present study, it has been explained that the stability and performance of banks in Australia. The 2008 international financial instability adversely affected the banks in Australia exposing their vulnerability and uncertainty in the times of crisis. The performance indicators have shown that Australian banks are very exposed to liquidity risks in the event of financial shocks because they are holding less liquid assets. Other results have shown that, just like other conventional banks in other countries, the Australian banks only have a little capacity to absorb financial shocks. This implies that the Australian banks did not perform well during the global financial crisis.
Eken, M., Selimler, H., Kale, S., and Ulusoy, V. (2012). The Effects of Global Financial Crisis on the Behavior of European Banks: A Risk and Profitability Analysis Approach. ACRN Journal of Finance and Risk Perspectives, Vol. 1, No. 2, pp. 17-42.
Tabash, M. and Dhankar, R. (2014). The Impact of Global Financial Crisis on the Stability of Islamic Banks: An Empirical Evidence. Journal of Islamic Banking and Finance, Vol. 2, No. 1, pp. 367-388.
Trading Economics (2016). Bank Liquid Reserves to Bank Assets Ratio (%) in Australia. Available at http://www.tradingeconomics.com/australia/bank-liquid-reserves-to-bank-assets-ratio-percent-wb-data.html.