The Interrelation Of Financial Structure, Financial Environment And Financial Function

The Global financial crisis has once again highlighted the importance of sustainablefinancial development. Meanwhile, it has also pressed the mankind to reconsider therelationship between financial structure, financial environment and financial function.Starting with a survey of existing literature, the thesis explored and tested the relationshipthrough a historical examination of Australia’s nearly200years financial evolution.Specifically, the thesis answered three questions: first, how has the financial structure inAustralia changed in the past200years; second, what has shaped the structural change,what roles have different environmental factors played in the course; third, how hasfinancial function been affected throughout the structural change, and what interrelationscan be found between financial function improvement and financial structure change.To ensure an all-round and multi-layer description and explanation of Australia’sfinancial evolution, and to evaluate its effects, the thesis mainly employed a qualitativeapproach of thick description and analytical narrative, and supplemented it with cross-country comparative analyses and regressional analyses.Based on the research, it has been concluded: first, financial evolution in Australiagenerally complies with the common pattern of financial development, which verifies theknowledge of the existing literature. However, it also demonstrates some unique features:1) after the accelerating development of stock market and fund management in the1990s,the relative importance of banks does not decline, instead it seems to experience a turningback;2) the corporate bond market has generally been small in size, and witnessed asluggish growth; the business finance was dominated by bank loans before the1980s,and was led by equity financing after the1990s;3) state banks that had played importantroles in the first half of the20th century somehow declined in importance and eventuallydisappeared;4) Australia has long been dominated by the big four banks, and maintainedrelatively high bank concentration level above the average of the developed countries.Second, the uniqueness of Australia’s financial evolution was partly attributable toits special geographical position, its natural resource endowment and in turn the industrystructure and the financing needs of enterprises. Being surrounded by water and isolatedfrom the world major markets, Australia enjoyed a natural protection of its industries.Therefore, for a long term in history, it can simply rely on its rich natural resources and form an economy mainly based on agriculture, mining and tourism. The fact that thesethree industries are subject to the influence of natural environment and seasonal change,determines that their cash flow and risk management should exhibit strong intertemporalfearure, and hence a greater dependence on financial intermediaries. This being said, themore important and direct reason for Australia’s unique financial development path is thegovernment intervention and regulation, and behind it, the tradeoff between protectionand opening-up. The economic protectionism between early20thcentury and the1970s,had not only surpressed the development of domestic manufacturing industry, but alsogave rise to the high operation cost, liftless and rigid working attitude, and resistance totechnological innovation. These factors, combinely restricted the direct financing needsof enterprises, and determined the comparative advantage of financial intermediaries inrisk management. The heavy regulation on financial sector, which is consistent with theprotectionism policy, has more directly repressed the banking sector development,reinforced oligopolistic market structure, and accounted for the exit of state banks. Thelimited domestic market and financial resources posed a dilemma to Australia. On onehand, it requires the country to open itself to overseas market and capital; on the other, itrequires the government to protect the competitiveness of domestic financial institutionsso that they can fulfil their mission in raising the needed funds. The extreme protectionistpolicy in the early20thcentury and the bold deregulation reform since the1980s, thoughseem to be conflicting, actually unite in the tradeoff between national benefits and costs.Thirdly, the government-led financial transformation in Australia has significantimpacts on financial efficiency and function. The stringent financial regulation before the1980s had not only hurt the micro-efficiency of financial factors, but also driven thefinancial supply to bypass the regulation to meet financial demand, which resulted in theloss of internal financial efficiency and ultimately the banking crisis. After the financialderegulation and supervision system reform, financial repression was mitigated, withmicro, internal and external financial efficiency all improved. However, an in-depthinvestigation on agriculture finance indicated that commercial finance failed to fill all thegaps of financial demand, and financial exclusion still exists. In terms of the interrelationbetween financial structure and financial function, the Australian experience attests totwo important pieces of knowledge:1) there is no fixed one-on-one relationship betweenfinancial structure and financial function. Australia’s financial structures at the turn of thepast two centuries show a great deal of resemblance, however they differ markedly in functions;2) the change of financial structure does not immediately result in the changeof financial function; the latter needs more time to adjust. As seen in the1983financialderegulation, financial function did not improve straight away; instead it dropped to somedegree.Last but not least, the lessons and experience from Australia’s financial reform canbe learned to guide our country’s correction of financial structural imbalance, develop-ment of financial opening-up strategy, and transformation of policy finance.