1.1 Part I (50 marks)
The Australian banking system was largely unaffected by the Global Fi- nancial Crisis (GFC) and fared well. A widely held view is that the re- silience of the Australian banking system stems from the regulatory struc- ture that underpins the financial system. Following is the excerpt from the Lowy institute article authored by Dr Andy Schmulow:
”Australia’s model for the regulation of the financial system – the Twin Peaks model – is being emulated world-wide. So-called because the model is characterised by two equal and independent peaks: the Australian Secu- rities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA)………
…..at the advent of the GFC Australian banks were preoccupied with their home market and therefore less exposed internationally. The banks
had a ’vanilla’ investment profile, which is to say they were less exposed to esoteric, highly leveraged and highly derived financial products. This is partly why Australia fared well during the GFC. Future adopters, with more internationally inter-connected banking systems, may fare worse under the same crisis conditions.
That was certainly the case with the Netherlands, the second country to adopt Twin Peaks, in 2002. The GFC proved catastrophic for the Dutch banking sector, with total foreign claims on Dutch banks amounting to 300% of GDP. Yet if you look across the characteristics that explain Twin Peaks’ success in Australia, you see the same characteristics strongly evi- dent in the Dutch state. All except for a vanilla banking sector.”
Source: https://www.lowyinstitute.org/the-interpreter/financial-regulation- australias-twin-peaks-model-successful-export
You are required to discuss the above statement in the context of the ”Twin Peaks” regulatory structure applicable to both Aus- tralia and the Netherlands and reflect on why the GFC proved catastrophic for the Dutch banking sector. (1200 words)
1.2 Part II (20 marks)
Among others, Litterman and Schenkman (1991) demonstrated that three attributes of the yield curve – ”level”, ”slope or steepness” and ”curvature” – responsible for the performance of any fixed income instruments cover- ing the entire term-structure. Subsequent empirical and theoretical work widely support this argument.
Source:Litterman, R.B. and Scheinkman, J. (1991) Common Factors Affecting Bond Returns. Journal of Fixed Income, 1, 54-61.
You are required to discuss the above statement in terms of short, medium and long maturity baskets of bonds that form the term-structure of interest rates (300 words).
1.3 Part III (20 marks)
Using the yield curves appended on pages 7 to 16, you will ex- plore yield curves in Australia and the Netherlands, including what they mean and why they compare as they do (provide any economic intuition for the shape) (300 words).
Notice that the term “Yield Curve” does not refer to the graph of yield over time, but rather to a snapshot of yield at a point of time (2017; 2012; 2008; 2005 and 2000).
1.4 Part IV (10 marks)
It is expected that each student contributes actively to the group task maintaining a team spirit. The ability to demonstrate team- work in the learning environment is an important component of your university education. Therefore, each student is expected to contribute to the team until the final group submission is made. Each member is required to provide an individual writ- ten reflection on “Team Formation” and your “Commitment to Team”. Please refer to the document entitled “Teamwork Cat- egories” in the assignment folder on the Cloud site. A separate Dropbox will be set up for you to upload your individual team assessment, which will be separately marked. Please ensure that you submit your Teamwork reflective piece in the individual As- signment Dropbox provided (200 words).
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