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The Structure of Australia’s Financial Market

In an economy as complex as ours, there is a lot of money changing hands every day. There are many institutions that have been developed to try and manage the constant exchange of money in Australia. You will need to understand the different types of institutions, and also the way in which they interact.

The Reserve Bank of Australia: This is the “central bank”; all authorised deposit holding institutions are required to have accounts with the RBA, and they also act as the banker to the government. Importantly, the RBA is also responsible for implementing monetary policy. This means that the RBA board will decide when interest rates need to change.

Banks: A bank is a special type of financial institution, and it is probably the type with which you are most familiar. The Commonwealth Bank, Westpac, the ANZ and the National Australia Bank are the main members of this group, although there are over fifty other banks that have a license to operate in this country. To be classified as a bank, an authorised deposit holding institution must comply with the requirements of the Banking Act (1959). This Act was amended in 2006. In very general terms, a bank must have a significant amount of funds under management, and they must gain approval to use the word “bank”, “banker” or “banking” from the Australian Prudential Regulatory Authority (APRA). Using these words to describe your business without permission is a very serious criminal offence.

Non-Bank Financial Institutions (NBFIs): There are many other financial institutions that are authorised to hold deposits from the public, but which do not meet the very strict set criteria to be classified as a bank. The key terms that you need to know are:

Building Societies: Like a bank, a Building Society is responsible for accepting deposits from households, and for making these funds available for borrowing. Building Societies are often owned by co-operative groups, and they are smaller financial institutions than banks.

Credit Unions: Generally associated with certain professions or groups, there are over 160 Credit Unions in Australia. These organisations function like a small bank, but tailor their services to specific sectors. For example, there is a credit union that targets teachers.

Insurance Companies: As you would expect, an insurance company is responsible for holding money so that sufficient funds are made available in the event that an accident occurs. As a result, they deal primarily in financial assets and liabilities (assets in the form of policy payments received, and liabilities in the form of payments owing to people who have made a successful claim).

Superannuation Firms: These are firms which hold investments which are held until our eventual retirement. At that time, the funds which are being managed are used to pay to maintain our lifestyle after our regular income has stopped.

These different financial institutions combine to form the financial sector. The structure of this sector can be simplified to appear as it does in the following model. Taking the time to understand this model now will help you to follow the way in which monetary policy is implemented when you study that topic in Unit 4.


As you can see, the government deals exclusively with the Reserve Bank. Any dealings that they would like to have with other financial institutions must be done via the RBA. All financial institutions are required to have an account with the RBA. This is a special type of bank account known as an Exchange Settlement Account (or ESA). On the other hand, members of the general public (like us) will have dealings with both banks and NBFIs, but we won’t deal directly with either the RBA or the financial arm of the government.

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