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Word Count: 697
Regulation of financial markets and interest rates Australias financial system was once divided into banks and non-banks however this convention has disappeared over time and now many financial intermediaries offer almost all services banks do However as banks still control the majority of the financial system they remain the most important asset to the financial system One of the two major changes Australias financial system has undergone through recent decades is the involvement of financial regulation This important development in the late 1990s aimed to improve the efficiency of the system by reacting to changes to financial markets that have occurred since deregulation Although there are many regulators in Australia the three main ones include the Reserve Bank of Australia RBA the Australia Prudential Regulation Authority APRA and the Australian Securities and Investments Commission AISC As Australias central bank the RBA has the important role of controlling Australias money and banking system The RBA is responsible for formulating and implementing monetary policy the regulation of the payments system as well as maintaining systemic stability of a volatile Australian economy The RBAs decision making involving monetary policy involves setting the cash rate on overnight loans in the money market The RBA uses its domestic market operations to determine the cash rate in the money market as a result of the interaction of demand for and supply of overnight funds On the days when monetary policy is being changed market operations are aimed at moving the cash rate to the new target level By accomplishing this other interest rates in the economy are influenced A lowering of the cash rate will lead to a cheaper cost of borrowing funds in the cash market and this leads to banks reducing their borrowing and lending rates while an increase in the cash rate will lead to a higher cost of borrowing funds where banks will raise their borrowing and lending ratesThis controlling of interest rates influences
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