victoria university melbourne

• With respect to learning outcomes, you should be able to: • a. Understand the significance of market risk and interest rate risk for financial institutions; • b. Gain an understanding of the influence of credit risk on financial institutions; • c. Understand the emphasis placed on liquidity risk management by financial institutions; • d. Learn the importance of various risks of financial institutions.

• With respect to learning outcomes, you should be able to: a. Explain how the Reserve Bank of Australia (RBA) influences the level of interest rates in the economy; b. Discuss the implementation of monetary policy by the RBA; c. Explain the transmission mechanism of monetary policy; d. Use graphs to show the effects of monetary policy on real GDP and the price level.

• Payment systems • Definitions • ‘Payment’ - the tender and acceptance of some act which discharges a monetary obligation • ‘Money’ – the quality of money is to attributed to all chattels which, issued by the authority of the law, and denominated with reference to a unit of account, are meant to serve as universal means of exchange in the State of issue.

• Payment under mistake • Common payment mistakes include: • Bank pays a cheque overlooking a stop order • Bank pays a cheque mistakenly believing there are sufficient funds available • Person mistakenly pays an invoice twice

• Mainly used in International Trade. • Known as a ‘negotiable instrument.’ • Common example is a cheque • Legislation • Bills of Exchange Act 1909

• Cheques • Introduction • Electronic and card access method have largely replaced the cheque as the way to access bank accounts • Although there has been a decline in use there are still about 500,000 cheques written per day and they give rise to a number of legal issues

Insolvency (a) An insolvent person or business is one that is unable to pay its debts when they fall due for payment. (b) For banks, the insolvency of their customers can be significant in terms of the ability of the customers to repay their debts.

• If an Australian exporter sells goods to an overseas buyer, the following problems may arise: • The seller wishes to be paid early, the buyer wants to pay as late as possible • The seller and the buyer will be concerned of the other’s solvency • The buyer will be concerned the goods meet contract specifications

Deregulatory steps taken since 1980's include: - removal of official controls on all bank interest rates - floating of the exchange rate and removal of exchange rate controls (1983) - entry of new players such as foreign banks and new domestic banks (1985) introduction of new system of regulation based on prudential guidelines and monitoring ( based on Wallis Report, 1997)

• Introduction • Most accounts are either, current, savings or term deposits • Current account payable on demand • E banking has blurred the distinction between current and savings accounts • For accounts in credit – the bank is loaned funds by customer: Foley v Hill (1848)