Banking in Australia

Overview
Historically, the Australian banking industry was tightly regulated. Until as recently as the 1980s, it was virtually impossible for a foreign bank to establish branches in Australia; consequently Australia had very few banks when compared with such places as the United States or Hong Kong. Moreover, banks in Australia were divided into two distinct categories, known as saving banks and trading banks. Saving banks paid virtually no interest to their depositors and their lending activities were restricted to providing mortgages. Trading banks were essentially merchant banks, which did not provide services to the general public.

Because of these and numerous other regulatory restrictions on banks, other forms of non-bank financial institutions flourished in Australia, such as the building society and the credit union. These were subjected to less stringent regulations, could provide and charge higher interest rates, but were restricted in the range of services they could offer. Above all, they were not allowed to call themselves "banks".

Originally the role of central bank was performed by the Commonwealth Bank of Australia, then a government-owned but essentially commercially-operated banking organization. This arrangement caused some discomfort for the other banks, and as a result the central bank function was transferred to the newly-created Reserve Bank of Australia on January 14, 1960.

At the time, consumer credit in Australia was primarily loaned in the form of installment sales credit. The arrival of hundreds of thousands of readily employable migrant workers under the post-war immigration scheme, coupled with intense competition amongst lenders, discouraged proper investigation into buyers.^[1] Concerns about the possibly inflationary impact of lending created the first finance companies in Australia.^[1]

No changes were made in parliament to address misallocated capital, even as most Australians were seeing their real incomes declining.

History

Australia's banking history can be divided into four eras: those of the private banks, the Commonwealth Bank, the Reserve Bank and deregulation.

Private Banks (1817-1911)

Governor Macquarie, appalled by the monetary anarchy prevailing in the colony he ruled, gave a charter (which he technically did not have the power to issue) to some citizens in 1817 to form Australia's first bank, the Bank of New South Wales.

The Bank of New South Wales purpose was to issue banknotes so as to provide a sound currency.

It soon had competition and a private banking system developed in Australia. In those days banks took deposits (which were their liabilities) and reloaned the money by discounting bills of exchange (which became assets). The bank could then issue its own banknotes on the security of these assets.

There was no central bank. Each private bank stood or fell on its own credit. As long as its assets were believed to be sound, its notes would be freely accepted.

This was quite pleasant in good times, because a bank could expand its balance sheet rapidly by issuing its own notes. But whenever a panic struck and the notes were presented back for the bank to honour, banks were liable to hit the wall.

This happened with alarming frequency. There were bank collapses in almost every decade of the 19th century. The climax came in 1893 after the failure of fraudulent land banks in Victoria triggered a wholesale run on banks. In the space of six weeks, 12 banks closed their doors. Those banks accounted for two-thirds of the total banking assets in Australia.

Central Banking (1880s-1901)

Central banking came much later in Australia than in those more advanced industrial economies and its initial purposes were very different from those that shaped the character of the older central banks. Here, no bank had naturally evolved as a central bank able to provide a stabilising role.

Commercial banks, known colloquially as trading banks, competed rather than cooperated in the nineteenth century. No bank acquired a strength or specialisation of function that would set it apart from the rest. Governments shared their banking business amongst all the banks, and banks issued their own bank notes.

The fragility of the system without a central bank was shown in stark relief in the 1890s, when nearly all the land banks and building societies, and 12 of the 22 trading banks shut their doors after the collapse of an intense property boom.

Depositors lost confidence in the safety of all banks, strong and weak alike, and rushed to withdraw their gold. There was no institution of any stature able to step in and support those banks whose business was sound.

There were bank collapses in almost every decade of the 19th century. The climax came in 1893 after the failure of fraudulent land banks in Victoria triggered a wholesale run on banks. In the space of six weeks, 12 banks closed their doors. Those banks accounted for two-thirds of the total banking assets in Australia.

The Commonwealth Bank Era (1911-1957)

The bank runs crisis of the 1890s increased pressure on the state governments which had been building for some time -- for the formation of a central bank. The Commonwealth Bank was formed by the Federal Government in 1911 to issue notes which would be backed by the resources of the nation.

The introduction of the Commonwealth Bank solved the currency problem. Notes issued by the CBA and later the Reserve Bank have always been accepted as legal tender, although their exchange value varies internationally.

And for a while it looked as though the unsound bank lending problem had been solved. From 1894 until 1979 only three banks failed in Australia, all in 1931.

In the 1920s, the Bank of England promoted itself as an appropriate model for an Australian central bank.

The private banks in Australia had little respect for their Commonwealth Bank counterparts so it was unlikely that the 'moral suasion' employed with such effect by the Governor of the Bank of England in the City of London could apply in Australia.

The absence of a large short-term money market in Australia between the wars meant that the principal policy weapon of the Bank of England, raising or lowering its 'bank rate', would not operate in this country. The private banks for their part wanted to be left alone.

The impasse over the introduction of central banking following the 1937 report of the Royal Commission on money and banking was resolved decisively in 1939. The government imposed a set of rules on movement of money in and out of the country in 1939, and on almost every aspect of bank business in 1941.

Banking became more tightly controlled during World War II, with the central bank dictating overdraft rates and, later, statutory reserve deposit ratios and liquid asset ratios.

The Reserve Bank Era (1957-1983)

The CBA's central banking powers were transferred to the Reserve Bank of Australia when the RBA was created in 1959. In this era, banking was tightly controlled, but safe. As the post-war boom of the 1950s developed, the banks began chafing under these restrictions. Finance companies were growing quickly, untrammelled by central banking controls and able to lend on anything from domestic appliances to cars, houses and companies.

The banks formed finance companies or invested in them and became players in this rapidly expanding market. The finance companies began lending to the corporate cowboys of the era. FCA, an offshoot of the Bank of Adelaide, financed Alan Bond's first property speculation in 1960.

A whole fringe banking system began to emerge. The licenced banks were still controlled, but finance companies, merchant banks, foreign banks and (to a large degree) state banks were not subject to RBA supervision.

There was a natural affinity between these fringe bankers and the plethora of corporate cowboys and speculators who grew up in the 1970s and 1980s. A speculator who is hoping to make 100% on his deal is not too fussy about whether his financier is lending to him at 10% or 20% and will cheerfully pay a fee as well.

The speculators generated huge profits for the financiers (including the banks) but sometimes the profits were only paper. The interest and fees would be capitalised as part of the loan to the speculator and sometimes the speculator would collapse and the loan would never be repaid. It could take a decade for the loss to be realised and by that time the banker who made the original loan - and earned a commission and promotion on the deal - may well have retired.

Banks and especially fringe banks were making increasingly unsound loans, for two reasons. The first was high profits which could be reported (but not always collected) from high risk business. The second was competition to get or maintain market share.

From the 1970s, the financial system began suffering serious tremors. The Mineral Securities collapse of 1971 sparked the most serious money panic in Australia since 1893. In 1974 Mainline and Cambridge Credit collapsed. In 1977 there were panic runs on building societies in South Australia and Queensland and two bank-owned finance companies had to be rescued by their parent banks. In 1979 Associated Securities collapsed and FCA got the Bank of Adelaide into so much trouble it had to be taken over by ANZ.

Deregulation of the banking industry

The Australian financial industry began to deregulate in 1983, following the Campbell Inquiry. Apart from the general loosening of regulations on banks, the distinction between savings banks and trading banks were abolished; foreign banks could open branches in Australia more easily; and the NBFIs were allowed to offer a broader range of services.

The abolition of banking restrictions increased credit availability amid the asset price boom in the 'roaring 80s', fuelling uncontrolled credit lending and poor screening practices as banks geared up with ambitious plans to maintain competitiveness.

Eventually many of the smaller NBFIs disappeared, while some of the largest building societies (such as St. George) officially attained the status of banks.

Current situation

The four major banks

Currently, the Australian banking sector is dominated by four major banks: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.

The Australian government has a "four pillars" policy that prevents mergers between the four major banks. This is long-standing policy rather than formal regulation, but it reflects the broad political unpopularity of bank mergers. A number of leading commentators have argued that the "four pillars" policy is built upon economic fallacies and works against the nation's better interests. [ Recently, Australia's "big four" banks are in fact in the worlds top 12 banks, due to recent collapses of large banking corporations.^{[citation needed]}

 | last = Marks
 | first = Bob
 | author-link = 
 | last2 = Young
 | first2 = Owen
 | author2-link = 
 | title = Four pillars debate needs refining: AFR Economic Briefing
 | date = 2005-08-22
 | year = 
 | url = http://www2.agsm.edu.au/agsm/web.nsf/Content/News-MediaReleases-FourPillarsDebateNeedsRefiningAFR
 | accessdate = 2008-01-24}}</ref>

List of Australian-owned Banks

• AMP Bank Limited
• Australia and New Zealand Banking Group Limited
• Bank of Queensland Limited
• BankSA, owned by St George Bank
• Bankwest, recently purchased by CBA. (From a UK based bank)
• Bendigo and Adelaide Bank Limited
• Commonwealth Bank of Australia
• Commonwealth Development Bank of Australia Limited (a subsidiary of Commonwealth Bank of Australia)
• Elders Rural Bank Limited
• Macquarie Bank Limited
• Members Equity Bank Pty Limited
• National Australia Bank Limited
• St George Bank Limited, now owned by Westpac (Westpac purchased St George Bank Limited in 2008. Recently all the shares of SGB have merged with WBC. As part of the merging contract St George Bank Limited will still be able to retain its familiar brand. Westpac customers can use St George ATM's without fee, and vice-versa.)
• Suncorp-Metway Limited
• UBank, a division of National Australia Bank
• Westpac Banking Corporation

Top four banking groups in Australia

The top four banking groups in Australia ranked by market capitalization at share close price 30 July 2009:

Other retail banks

Competitors to the 'big four' banks are Bendigo Bank, Suncorp-Metway and the Bank of Queensland. There are several smaller regional banks that have had a traditional regional base in one state, although most of the banks are expanding more broadly in Australia.

Foreign banks

There are a number of foreign subsidiary banks, however only a few have a retail banking presence; HSBC Bank Australia, Bank of Cyprus Australia Limited, Laiki Bank (Australia) Ltd and Citibank Australia have a small number of branches.

Foreign banks have a more significant presence in the Australian merchant banking sector.

Foreign Subsidiary Banks

• Arab Bank Australia Limited
• Bank of China (Australia) Limited
• Bank of Cyprus Australia Limited
• Citigroup Pty Limited
• HSBC Bank Australia Limited
• ING Bank (Australia) Limited
• Investec Bank (Australia) Limited
• Laiki Bank (Australia) Ltd
• Rabobank Australia Limited (a subsidiary of Rabobank Nederland from October 1994)

Branches of Foreign Banks

• ABN AMRO Bank N.V.
• Allied Irish Banks, Public Limited Company
• Bank of America, National Association
• Bank of China Limited
• Bank of Scotland plc
• Bank of Tokyo-Mitsubishi UFJ, Ltd
• Barclays Capital (the trading name of Barclays Bank PLC)
• BNP Paribas
• Citibank, N.A.
• Credit Suisse
• Deutsche Bank Aktiengessellschaft
• Fortis Bank SA/NV
• HSBC Bank plc
• Industrial and Commercial Bank of China Limited
• ING Bank N.V.
• JPMorgan Chase Bank, National Association
• Mega International Commercial Bank Co., Ltd.
• Mizuho Corporate Bank, Ltd.
• Oversea-Chinese Banking Corporation Limited
• Rabobank Nederland (the trading name of Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.)
• Royal Bank of Canada
• Société Générale
• Standard Chartered Bank
• State Bank of India
• State Street Bank and Trust Company
• Sumitomo Mitsui Banking Corporation
• The Hongkong and Shanghai Banking Corporation Limited
• The Northern Trust Company
• The Royal Bank of Scotland Plc
• The Toronto-Dominion Bank
• Taiwan Business Bank
• UBS AG
• United Overseas Bank Limited
• WestLB AG

Industry regulation

The banks are regulated by the Australian Prudential Regulatory Authority (APRA). APRA is responsible for regulating much of the financial industry, including insurance and superannuation companies.

Statistics of banks are published on the APRA website as well as in the Reserve Bank of Australia Bulletin.

See also

• Financial system in Australia
• List of banks in Australia
• Timeline of banking in Western Australia
• Economy of Australia

External links

• Australia's Banking History, ABC
• Current Bank fees & rates., Banks.net.au

References

This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (January 2007)