Australian Financial Institutions Research Articles

Money laundering governance and income shifting: Evidence from Australian financial institutions

This study investigates the relationship between strength in money laundering governance (MLG) and income shifting incentives using a sample of Australian multinational financial institutions. Firms exhibiting strength in MLG are less likely to engage in income shifting arrangements given that strength in MLG can enhance financial transparency around funding sources, transfers and use. Further, we find that firms with 1) tax havens use, 2) lawsuit and 3) business risk suppress the association between MLG and income shifting. Overall, in terms of economic significance, MLG reduces income shifting incentives by some 15 per cent. Our results are robust using additional tests. This study shows that strength in MLG has important implications in terms of firm managements’ incentive to shift income. Finally, these findings suggest that money laundering controls constitute an important governance mechanism required in the achievement of fairness, equity and opacity in international capital and tax markets.

Executive Compensation and Financial Performance Measures: Evidence from Significant Financial Institutions

AbstractWe survey the use of financial performance measures in determining executive pay among significant Australian financial institutions. We document evidence of the pervasiveness with which externally disclosed non‐GAAP (non‐Generally Accepted Accounting Principles) financial measures are also used internally to determine variable remuneration, with the apparent popularity of cash profit after tax in short‐term incentives plans. Our evidence also highlights the increasing use of peer group‐adjusted measures (e.g., relative cash earnings per share and return on equity ranking against a peer group) in determining longer‐run incentives, despite the fact that members of the peer group do not measure financial performance in a directly comparable manner. Detailed analysis of the four major trading banks (Australia and New Zealand Banking Group, Commonwealth Bank, National Australia Bank and Westpac) reveals differences in the way non‐GAAP earnings measures are calculated across the major banks, as well as some variation over time in the way individual banks measure performance. We also document evidence of non‐GAAP earnings restatements, with around 25% of non‐GAAP results subsequently being restated. These restatements are more likely to result in a downward revision of the initially reported non‐GAAP result than an upward revision. We therefore conclude that existing measures of financial performance used to determine senior executive compensation are not as ‘objective’, as might be assumed.

How exceptional is Australian financial sector misconduct? The Hayne Royal Commission revisited

By failing to consider that the types of financial misconduct witnessed in Australia in recent years are relatively commonplace in other countries, the Hayne Royal Commission exaggerates the level of miscreance within the local financial sector. This paper seeks to rectify this neglect by offering an explicit comparison of misconduct in Australian and major British and American banks. It also suggests that the Commission’s work and findings inadvertently provide support for the populist view that Australian financial institutions are exceptionally unethical in their treatment of customers and clients. Given the emergence of Fintech and the potential for Big Tech firms to penetrate financial services markets, large incumbent Australian firms are already facing a serious challenge. If the net effect of the Royal Commission is to deepen mistrust of large Australian banks and insurers, their capacity to resist this challenge will be diminished with potentially far-reaching consequences.

The impact of deposit guarantee scheme on operation of Australian financial institutions

During the global financial crisis (GFC), the Australian government introduced a deposit guarantee scheme to all the deposit accounts with financial institutions. The scheme is very similar to a deposit insurance scheme to a certain extent, though the premium is not paid by the financial institutions or the depositors. This study adopts Data Envelopment Analysis (DEA) and Malmquist productivity index (MPI) to investigate the impact of the funding scheme on Australian financial institutions during and after the GFC. The study measures the productivity and efficiency gains of large financial institutions, regional banks, credit unions and building societies for its analysis. This data spans the period from 2000 to 2014 and uses financial institutions’ input and output variables. The study finds evidence that an ex-ante insurance scheme has a profound impact on the structure and funding of Australia’s current insurance scheme. The research contributes to the body of knowledge of the current literature on the deposit guarantee scheme and the practical understanding of a deposit insurance scheme from an Australian perspective.

FinTech Challengers and Incumbents’ Responses: A Window into Innovation Management Strategy Modes within Australia’s Financial Services Sector

FinTech (financial technology) is asserted as a disruptive paradigm with digital technologies driving authentic innovation within the financial services industry. Much attention and hyperbole has been attributed to startup FinTech developers and the potential of applications for consumers of financial products and financial markets. Substantial emphasis has been given to the perceived vulnerabilities of industry incumbents facing disruption from technology-enabled platforms (‘BigTechs’) and entrepreneurial start-ups. However, institutional incumbents command large market franchises and possess deep financial and technical resources. Incumbents also have most to gain from leveraging FinTech developments. As the financial services industry is saturated with information systems, innovative technologies which have the potential to re-configure industry markets and institutional logics, inevitably confront regulatory boundaries. Given intense competition for technological advantage, strategic and corporate activity closely follows FinTech development. This article examines FinTech within Australia’s financial services sector and offshore. It provides a stringent scientific definition of the FinTech phenomenon, addressing a lacuna within the extant research. Recognising that disruptive FinTech deepens the financial services industry’s core intermediation function, it presents a taxonomy for readily locating innovations within the industry’s value chain, and assessing their transformational potential (and thus, systemic impact). Focusing upon the incumbent’s perspective, this article examines three collaboration strategies using exploratory case studies, to show how Australian financial institutions incorporate and appropriate FinTech innovations. The article discusses insights and suggestions for further research directions relevant to academics, industry participants, and policymakers.

The Hayne Royal Commission and Trust Issues in the Regulation of the Australian Financial Sector

The issue of how trustworthy Australia’s financial institutions, especially its banks are, has been an increasingly controversial issue in recent years as a succession of financial scandals engulfed many of the financial sector’s most significant players. A recurring theme in debates about Australia’s financial sector has been concern about weak enforcement of existing laws and regulation. Criticism has been directed at all of Australia’s financial regulators, but especially the market conduct regulator, the Australian Securities and Investments Commission (ASIC). After spending years resisting intense pressure from many segments of the community, (including some of its own backbenchers), to establish a royal commission of inquiry to investigate misconduct in Australia’s financial sector, the conservative Commonwealth Coalition Government finally capitulated in late November 2017. Retired former High Court Judge Kenneth Hayne was appointed to investigate misconduct in Australia’s banking, superannuation and insurance industries. As 2018 has progressed a series of public hearings has revealed an appalling picture of systemic abuse and misconduct by both small and large scale Australian financial institutions. A key question has been what were the regulators, especially ASIC doing, or not doing? This paper discusses the Hayne Royal Commission, especially in relation to Australian regulatory (in)activity. Also, the paper reports on the findings of the 2018 Deloitte National Survey on Trust in Banking regarding the views of Australians on how well banks are held accountable by regulators in Australia.

Thinking like Capital markets – Financialisation of the Australian Construction Industry

The concept of financialisation has not yet become a major subject in mainstream construction economics research. This is surprising since construction risk, risk management and project financing have long been important issues for researchers and practitioners. This paper introduces the concept of financialisation, outlines its causes in the construction industry and identifies some effects. An important dimension of financialisation in the construction industry can be seen in the growing conversion of illiquid built assets into liquid financial instruments that have become a distinct global asset class. These liquid construction assets have become important to current risk management and profit strategies of developers, major construction firms and capital market investors. Five key drivers of financialisation in the construction industry are identified. The article finds that a principal effect of financialisation in construction is to intensify competition for access to global capital, which in turn reinforces long-established tendencies for risk shifting in the contractual chain. The Australian construction industry has been an early adopter of the key drivers of financialisation and is used in this article as a case study. In developing the case study analysis the article also draws on observations by major Australian construction industry associations and financial institutions.

The Hayne royal commission and trust issues in the regulation of the Australian financial sector

The issue of how trustworthy Australia’s financial institutions, especially its banks are, has been an increasingly controversial issue in recent years as a succession of financial scandals engulfed many of the financial sector’s most significant players. A recurring theme in debates about Australia’s financial sector has been concern about weak enforcement of existing laws and regulation. Criticism has been directed at all of Australia’s financial regulators, but especially the market conduct regulator, the Australian Securities and Investments Commission (ASIC). After spending years resisting intense pressure from many segments of the community, (including some of its own backbenchers), to establish a royal commission of inquiry to investigate misconduct in Australia’s financial sector, the conservative Commonwealth Coalition Government finally capitulated in late November 2017. Retired former High Court Judge Kenneth Hayne was appointed to investigate misconduct in Australia’s banking, superannuation and insurance industries. As 2018 has progressed a series of public hearings has revealed an appalling picture of systemic abuse and misconduct by both small and large scale Australian financial institutions. A key question has been what were the regulators, especially ASIC doing, or not doing? This paper discusses the Hayne Royal Commission, especially in relation to Australian regulatory (in)activity. Also, the paper reports on the findings of the 2018 Deloitte National Survey on Trust in Banking regarding the views of Australians on how well banks are held accountable by regulators in Australia.

Do regulatory standards help align CEO compensation and banks performance association?

This study aims to assess the impact of APS 510 standard on CEO remuneration-performance association in Australian Authorized deposits taking institutions (ADIs). Using panel data GLS and dynamic GMM estimation models, a key objective of this research is to investigate the role of regulatory standards on the empirical association between executive compensation and firm performance. The research uses data from 45 listed Australian financial institutions for the period 2004-2015. We observe no statistically significant evidence to show that CEO cash bonus is excessive in banking sector as claimed by various financial press and business media. Further analyses reveal the differing but substantial functions of APS 510 in shaping the association between a firm’s CEO short-term incentives and corporate performance depending on the nature and characteristics of the firm (ADIs vs non-ADIs). As the regulatory standard is legally binding for all ADIs and not necessarily for non-ADI companies, CEO’s annual variable remuneration for the ADI category is somehow lower. This implies that the standard plays a critical role in reducing the level of CEO short-term incentives in the ADI group of firms. Empirical results show no significant statistical influence of the standard in shaping the relationship between CEO long-term incentive and market based performance of the Australian banking system. Our findings here are consistent with prior studies in developed countries such as the US. Policy-wise, we conclude that regulators should encourage corporate board of firms to increase long-term incentives in CEO remuneration in order to align managements’ actions and shareholders interest of enhancing firm value.

Effect of corporate governance on ceo pay - risk taking association: empirical evidence from australian financial institutions

This study explores the impact of board structures on risk taking-CEO pay association in Australian financial institutions. Using a panel data of 45 listed Australian financial institutions for the period 2004–2015, we examine the empirical relationship between firms expected default probability and CEO pay. Our results show that deposit taking institutions with a greater number of nonexecutive directors on the board generally have an expected default probability (EDP) that is more sensitive to CEO short-term employee benefits. However, a lower response of EDP to changes in CEO short-term employee benefits in non-deposit taking institutions is observed. To a large extent, this phenomenon is explained by the existence of moral hazard problem in banking industry. As depositors are insured against losses, nonexecutive directors may fail to monitor executives taking on risky investments that generate short-term gains in order to boost their cash bonus and other short-term risk remuneration. Our results suggest that boards associated with more nonexecutive directors’ increase (reduce) the responsiveness of expected default probability to changes in CEO short-term employee benefits (long-term variable remuneration pay). We observe that Australian financial institutions with large boards are linked to EDP which is sensitive to both CEO short-term and long-term remuneration incentives. Institutions with larger boards motivate their CEOs to invest in high risk financial assets, consequently escalating the level of CEO risk-taking. Finally, independence of the board members plays a critical role in reducing the level of CEO risk-taking only if CEO remuneration is largely made of long-term incentives remuneration such as options and share restricted payments. In line with other studies from US, boards should use long-term incentives in CEO remuneration to reduce agency costs and increase firm value.

Connecting the dots: Econometric methods for uncovering networks with an application to the Australian financial institutions

Abstract This paper connects variance–covariance estimation methods, Gaussian graphical models, and the growing literature on economic and financial networks. We construct the network using the concept of partial correlations which captures direct linear dependence between any two entities, conditional on dependence between all other entities. We relate the centrality measures of this network to shock propagation. The methodology is applied to construct the perceived network of publicly traded Australian banks and their connections to domestic economic sectors and international markets. We find strong links between the big four Australian banks, real estate and other sectors of the economy, and determine which entities play a central role in transmitting and absorbing the shocks.

Connecting the Dots: Econometric Methods for Uncovering Networks with an Application to the Australian Financial Institutions

This paper connects variance-covariance estimation methods, Gaussian graphical models, and the growing literature on economic and financial networks. We construct the network using the concept of partial correlations which captures direct linear dependence between any two entities, conditional on dependence between all other entities. We relate the centrality measures of this network to shock propagation. The methodology is applied to construct the perceived network of the publicly traded Australian banks and their connections to the domestic financial sector, real economy, and international markets. We find strong links between the big four Australian banks, the financial services sector and the other sectors of the economy and determine which entities play a central role in transmitting and absorbing the shocks.

High and low performers' intention to leave: examining the relationship with motivation and commitment

By studying intrinsic sources of motivation, the current research extends theory development in the motivation and commitment field to examine when employees of varying performance intend to leave their organisation. Based upon a nation-wide study of retail banking employees in one of the largest Australian financial institutions (N = 784), we found that for high-performing employees with either a promotion focus or affective commitment, there was significantly reduced intention to leave. The relationship between affective commitment and intention to leave was not significantly strengthened by increases in promotion focus. Implications for development of theories focused on intrinsic sources of motivation and commitment as well as the practical implications for talent retention are discussed.

The Dark and the Bright Side of Global Banking: A (Somewhat) Cautionary Tale from Emerging Europe

What are the costs and benefits of cross-border banking integration and how has the balance between the two shifted in the aftermath of the global financial crisis? This question is not only of academic interest but also pertinent to policy discussions in the wide range of countries that have opened up their banking sectors to foreign investors over the past three decades. The process of financial globalisation during this period has resulted in high levels of foreign ownership of banks across the world. To name but a few examples, Spanish and Portuguese banks developed a presence in Latin America on the back of the strong cultural and trade links between this region and the Iberian Peninsula. Nigerian and South African Open image in new window Figure 2.1 Global banking across the globe Note: Foreign bank assets as a percentage of total banking assets. Source: Claessens and Van Horen (2014) and EBRD (2009). banks created pan-African networks, while many of New Zealand’s banking assets are currently owned by Australian financial institutions.

Currency Demand During the Global Financial Crisis: Evidence from Australia

Australian financial institutions remained healthy throughout the global financial crisis and their deposits were guaranteed by the Federal Government. Nevertheless, demand for currency increased abnormally quickly in late 2008, resulting in an additional $5 billion (or 12 per cent) of Australian banknotes on issue by the end of that year. The rise in currency demand began in mid October 2008, around four weeks after the collapse of Lehman Brothers and concurrently with policy responses of the Reserve Bank of Australia (RBA) and the Federal Government. The surge in currency demand did not have any destabilizing effect on the banking system – indeed bank deposits also rose during the period. However, the rise in currency demand did raise some issues for the RBA's banknote distribution operations. Traditional methods of currency demand suggest a role for interest rate reductions and the Federal Government stimulus payments to households in explaining the increase in currency holdings. We estimate that these factors can only account for around 20 per cent of the observed increase in currency holdings. The remainder of the rise could be due to an increase in precautionary holdings by people concerned about the liquidity or solvency of financial institutions and by financial institutions as a contingency. This is consistent with the disproportionate rise in demand for high-denomination banknotes at this time.

MEASURING THE AWARENESS OF AUSTRALIAN MUSLIMS TOWARDS SHARI'AH COMPLIANT BANKING PRODUCTS.

This paper seeks to find out the demand for Islamic finance among the Muslim community in Australia. A survey was conducted in Adelaide during the first half of 2004 covering Muslims attending Friday prayers. Of the respondents, 58.3 percent stated that they were aware of Islamic financing. With the Australian Muslim community growing in number, the results of this survey represent opportunities for Australian financial institutions to provide financing to Muslims who previously have stayed away from conventional interestbearing loans. Keywords: Australian Muslims, Islamic Finance.

Relationship Marketing in a Self-Service Context: No Longer Applicable?

To explore the impact of the use of self-service technologies on interfirm relationships, a grounded theory study was conducted. This article reviews the results and implications of an exploratory study conducted with a sample of Australian business bank customers and interviews with 6 Australian financial institutions. Findings indicate that 2 customer segments exist—a transaction-oriented segment and a relationship-oriented segment. Unlike existing literature that states that bank customers prefer relationships (K. Eriksson & R. Marquardt, 2001), the present findings indicate that this is only the case for 1 segment of business customers.

Do Australian Banks Use Credit Derivatives to Reduce Risk?

This paper examines the use of credit derivatives by Australian Banks and/or financial institutions to reduce risk. Unlike the surge in the use of credit derivative instruments by banks in other countries, Australian banks preferred less use of derivative instruments because of their complexity, liquidity issues, and other cultural reasons etc. A credit derivative is a security/contract that allows investors to transfer credit risk to other investors who are willing to take it. The essence of the contract is concerned with hedging and transferring credit risk from one party to another. Recent years have witnessed astronomical rise in the credit derivatives market because it meets needs to a great extent and carries great benefits. The use of this instrument has definitely improved market efficiency and financial stability.

Exploring Australian financial leaders' views of corporate social responsibility

AbstractThis paper reports an exploratory and qualitative study of the corporate social responsibility (CSR) beliefs of leaders of large Australian financial institutions. The findings are presented in four sections. The first discusses whether leaders have a mental model of the firm that is most closely aligned with the traditional shareholder or the stakeholder view of the firm. It then examines how they frame the organization's responsibilities, particularly as they relate to balancing the needs of shareholders and other stakeholders. The third section identifies how they view CSR and the fulfilment of potential economic, legal, ethical and philanthropic responsibilities of organizations. The final section examines the driving factors that lead to their promotion of corporate social responsibility. We find that although many leaders support the wealth creation model's central premise that the organization's primary responsibility is to maximise its value in order to meet its fiduciary obligations to its shareholders, they also believe that CSR activities benefit the organization financially and in building corporate sustainability, employee engagement and performance, and social capital. CSR activities are also believed to increase the legitimacy of the organization, although philanthropy is not supported unless there is a business case. This has implications for those seeking support from organizations for community causes. We also find the view of employees as primary stakeholders is strong and widespread; an implication of this is that employee influence is a strong lever for positive change towards CSR behaviour in a firm.

Exploring Australian financial leaders' views of corporate social responsibility

AbstractThis paper reports an exploratory and qualitative study of the corporate social responsibility (CSR) beliefs of leaders of large Australian financial institutions. The findings are presented in four sections. The first discusses whether leaders have a mental model of the firm that is most closely aligned with the traditional shareholder or the stakeholder view of the firm. It then examines how they frame the organization's responsibilities, particularly as they relate to balancing the needs of shareholders and other stakeholders. The third section identifies how they view CSR and the fulfilment of potential economic, legal, ethical and philanthropic responsibilities of organizations. The final section examines the driving factors that lead to their promotion of corporate social responsibility. We find that although many leaders support the wealth creation model's central premise that the organization's primary responsibility is to maximise its value in order to meet its fiduciary obligations to its shareholders, they also believe that CSR activities benefit the organization financially and in building corporate sustainability, employee engagement and performance, and social capital. CSR activities are also believed to increase the legitimacy of the organization, although philanthropy is not supported unless there is a business case. This has implications for those seeking support from organizations for community causes. We also find the view of employees as primary stakeholders is strong and widespread; an implication of this is that employee influence is a strong lever for positive change towards CSR behaviour in a firm.