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FINC5090 - Finance in the Global Economy
Individual Assignment Outline
Semester 1, 2025
Instructions
1. Read the instructions carefully.
2. This assignment is worth 25% of total marks for FINC5090.
3. The DUE DATE is 04 APRIL 2025. The submission link will stop accepting sub missions at 23:59 on the submission date. Do not send your work via email if you miss the deadline. Submissions after the deadline will not be accepted.
4. Plagiarism is a serious academic offense that will result in receiving zero marks and possible disciplinary action.
5. Ensure that you write your correct Student ID at the top of each page. This is important so that the marker knows who the author of the assignment is.
6. Submit your assignment in PDF format only.
Task
1. In this assignment, you’ll have the opportunity to work with data analysis tools such as MS Excel, Stata, SAS, R, or Python. If you’re new to these tools, I recom mend starting with Excel, as it is user-friendly and provides a great foundation for data analysis. The University of Sydney Library offers a wide range of free re sources to help you get started and enhance your learning experience. Engaging with these tools is a valuable chance to develop your technical skills and build confidence in independent learning. Remember, we’ll also discuss the assignment in detail during tutorials, so you’ll have plenty of support.
2. In this task, you will analyze monthly banking statistics data to answer specific questions about the Australian banking sector. You are provided with data on monthly banking statistics from the this website. For this assignment, you must focus from January 2011 to December 2024.
3. In these data, you will see monthly statistics for each bank operating in Australia.
For this assignment, we are only interested in commercial banks, i.e., banks that, in addition to other activities, also take deposits from households and make real estate loans to households.
4. The dataset contains many variables, but for this assignment, you need only 4 variables: Total Resident Assets, Total Real Estate Loans - Owners, Total Real Estate Loans - Investors, and Total Household Deposits.
5. Using these data, you are required to answer the following five questions:
(a) (5 Marks) The first task relates to the composition of banks’ loan portfolios. Here, you must determine the share of households’ real-estate loans in the
overall loan portfolio of banks. Technically, this corresponds to a ratio:
Share = Real estate loans to households/Total Resident Assets
Please note that the dataset is a panel dataset, meaning it provides time series information for multiple banks. As you work with the data, you can estimate this ratio at the bank level and then present a time-series plot of the mean with 95 percent confidence intervals.1 OR, you can aggregate the data across all banks, estimate this ratio for each month, and present a time-series of this estimate. Your interpretation will differ slightly depending on which of the two you choose.
What are the potential factors driving the fluctuations in the time-series?
(b) (7 Marks) The next task relates to bank size and a core banking activity: taking deposits. We are interested in deposits from households. You arerequired to estimate the Assets-To-Deposit ratio that is estimated as:
Assets-To-Deposits Ratio = Total Resident Assets /Total Deposits by Household
This ratio measures how much of a bank’s assets are funded by customer deposits. A ratio of 2 means that for every 1 dollar of deposits, the bank holds 2 dollars in total assets, implying that half of its funding comes from sources other than household deposits. A high ratio suggests that the bank relies heavily on non-deposit funding, which can increase liquidity risk and funding costs, making it more vulnerable during financial stress. A very low ratio, on the other hand, indicates that the bank is highly dependent on household deposits. While deposits are a stable funding source, excessive reliance may limit the bank’s ability to expand its lending activities, potentially leading to lower profitability and competitiveness. Banks must balance liquidity, profitability, and risk management, ensuring that they have diversified and stable sources of funding while maintaining sufficient lending capacity.
Based on average values over the sample period for each bank, rank the big ,4 Australian banks, i.e., ANZ Banking Group, Commonwealth Bank, NAB, and Westpac.
Next, from ‘StockPricesBig4Banks.xls’, we need to estimate the stocks re turns for big 4 Australian banks. To accurately measure stock returns, we need to account for price changes and corporate actions, such as stock splits and dividends, that affect share prices. A simple price difference does not capture these adjustments correctly, so we use the adjusted price rather than the raw stock price. The formula below ensures that stock returns are cal culated in a way that reflects the true change in an investor’s holdings over time:
. In this formula, prccm represents the monthly closing stock price, while ajexm is the adjustment factor, which accounts for corporate actions. The subscripts t and t-1 represent the current and previous month’s values. Dividing the price by the adjustment factor ensures that stock price changes are measured consistently, eliminating distortions caused by events such as stock splits and dividend distributions. The logic behind this formula is straightforward. First, the numerator measures the change in the adjusted price from one month to the next. The denominator normalizes this change by dividing it by the previous month’s adjusted price, allowing us to express the return as a percentage. Finally, multiplying by 100 converts this return into a percentage format, making it more intuitive to interpret.
Using this approach ensures that stock returns are estimated accurately. It provides a true measure of an investor’s gains or losses, accounts for struc tural changes in stock prices, and allows for fair comparisons across different stocks and time periods. This methodology is standard in financial analysis and widely used in both academic research and industry practice.
From Ken French’s Data Library, click on ‘International Research Returns’ and download file named ‘Fama/French Asia Pacific ex Japan 5 Factors’. This zipped folder contains monthly returns for factors known to system atically affect stock returns. We are interested in the sum of Mkt_Rf and RF, which will yield a monthly return series for the market. Next, subtract this sum from each stock’s return for each period, which yields a market adjusted return. We do this operation to subtract factors affecting all stocks in a given month.
The output for this task should include a 2x2 panel of figures: one figure for each bank. Each figure will contain a time series of the change in a bank’s Asset-To-Deposit Ratio and market-adjusted stock returns.
In your write-up, explain how you think the market perceived changes in this ratio.
(c) (10 Marks) The next task has two parts and relates to the competitiveness of the Australian banking sector. Your main task is determining the evolution of the banking sector’s competition between January 2011 and December 2024. In finance, a measure of market concentration and competition is Herfindahl–Hirschman Index (HHI). A higher HHI indicates a less competitive market. The HHI is defined as:
Here, Xi equals either total loans (for loan markets) or total deposits (for deposit markets) for bank i. We will focus on real estate loans to/deposits from households. When you repeat this calculation for each time period, you will end up with two time-series for HHI based on loan and deposit markets.
For example, in market there are total deposits of 4 dollars, and Bank A and B has deposits of 3 dollars and 1 dollar, respectively. Thus, Bank A and B have a deposit market share of 75 ( = 3/4) and 25 ( = 1/4) percent. Then, HHI for this market is 752 + 252 = 6, 250. In your judgment, whether competition is high or low, you should use the following classification:
Value Classification
HHI <= 100 Highly competitive industry
HHI <= 1500 Unconcentrated markets
1500 < HHI <= 2500 Moderately concentrated markets
HHI > 2500 Concentrated markets
• Based on HHI, you are required to understand and interpret the competition dynamics in the Australian banking sector. (5 marks)
• In June 2022, ANZ Banking Group Limited announced the takeover of Suncorp-Metway Group. In August 2023, the Australian Competition and Consumer Commission (ACCC) blocked the deal, stating that this deal would further entrench the banking oligopoly, but ASIC later un blocked the deal. For your own understanding, use data to evaluate the potential impact of this merger on the competitiveness of the Australian commercial banking sector. (5 marks)
(d) (3 Marks) What are the key drawbacks of your analysis in (a)-(c).
6. The word limit for this project is 2,000 words. This word limit includes your write-up only and excludes all other sections like references, section headings/sub headings, and figure descriptions, et cetera. Write on A4 sized page, single spaced, 2.5cm margins (top, bottom, left, and right) with the Times New Roman font with size 12.
7. Refrain from writing stories. Make your point as quickly as possible. A succinct write-up of analysis is always appreciated by the readers. Note that this is academic work. You must substantiate your claim either by your analysis or by providing a reference from an academic journal (not random websites or blogs).
The referenced work must be peer-reviewed (academic journals) or reputable (the Australian Financial Review, the Economist, the Time, Wall Street Journal, et cetera). You have access to all sources via the University’s library. Follow APA citation style.
8. We will discuss these questions in detail in the first three tutorials (Weeks 2, 3, and 4). Please make sure you attend these tutorials.
Sample Assignment Format
Note: The text below is a dummy text to highlight a sample format for the assignment.
Question 1
TimeSeriesPlotQuestion1.pdf
Figure 1: Insert brief description of this figure here.
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Question 2
bank1.pdf
(a) Bank 1
bank2.pdf
(b) Bank 2
bank3.pdf
(c) Bank 3
bank4.pdf
(d) Bank 4
Figure 2: Insert brief description of this figure here.
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Question 3
HHILoanMarkets.pdf
(a) HHI based on loan markets
HHIDepositMarkets.pdf
(b) HHI based on deposit markets
Figure 3: Insert brief description of this figure here.
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HHILoanMarkets.pdf
(a) HHI based on loan markets - Effect of bank mergers
HHIDepositMarkets.pdf
(b) HHI based on deposit markets - Effect of bank mergers
Figure 4: Insert brief description of this figure here.
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Question 4
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References
Citations must be in an APA format. Example:
Rajan, R. G., & Zingales, L. (2001). The influence of the financial revolution on the nature of firms. American Economic Review, 91(2), 206-211.
