Australian Banking System Analysis

This assignment delves into the multifaceted Australian banking system. It examines the historical evolution, regulatory framework, major players like the Reserve Bank of Australia and commercial banks (ANZ), and the system's integral role within the economy. The analysis also addresses contemporary challenges faced by the banking sector in a post-global financial crisis environment.

Running Head: Banking Sector of Australia
Australian Banking System

Banking Sector of Australia 1
Executive Summary:
In this report, the system of banking in Australian is being discussed. The banking system in
Australia is in existence since long back. Various banks were established since the year 1817
when the first Australian bank was incorporated. Banking is considered as the integral part of
Australian economy due to its soundness and efficiency. It not only provides finance to the
Australian communities but also contributes to the revenue generation for the country through
its operations. There are various laws that regulate the banking system in Australia. Those
laws are being discussed below. But even after having a successful system of banking, the
banking sector has to face various challenges in the Australian economy and this report
discusses such problems and the actions that must be taken to overcome such problems.

Banking Sector of Australia 2
Table of Contents
Executive Summary:...........................................................................................................................1
Introduction..........................................................................................................................................3
History of banking sector......................................................................................................................4
Support of banking system in economy...............................................................................................4
Problems faced by banking sector........................................................................................................5
Action and role to solve problem faced by banking system................................................................6
Australian laws that regulate banking sector.......................................................................................6
Services provided by Australian banking.............................................................................................7
Role of banking sector to maintain inflation........................................................................................8
Conclusion.............................................................................................................................................9
References..........................................................................................................................................10

Banking Sector of Australia 3
Introduction
Banking is a system which is mainly concerned about the deposit taking and lending of such
deposited funds to the required parties. But the scope of banking function has a wide scope
and it covers several activities. A banking system is one of most significant part of any
economy as it promotes the effective flow of funds for the development of country’s
economy. The financial system i.e. the banking sector of Australia has a record of successful
existence due to the robustness of its functions. It is considered the central part of Australian
economy due to the soundness, safety and efficiency maintained by it in performing its
overall functions. The concept of banking in Australia was recognised long years back after
which the Australian economy has faced various ups and downs in the areas of its financial
system but it has always managed to come up such fluctuations successfully.

Banking Sector of Australia 4
History of banking sector:
In year 1817, the first Australian bank was established in Sydney with the name of Bank of
South Wales. The Australian banking sector had to face a financial crisis in 1893 due to the
speculative boom in the property market of Australia in 1880s. The crisis occurred in the time
when there was very less governmental or regulatory control on the banks of Australia and
hence it caused failures of various commercial banks (Hickson & Turner, 2002). Until 1910,
private bank notes and the treasury notes were circulated in Australian economy. However, in
1910 Australian pound was issued as the Australian’s legal tender. Then in year 1911, the
commonwealth bank was established by the federal government of Australia. Along with the
other countries, Australia was also the victim of great depression that occurred in 1930 and
caused a series of bank failures in the country. In response to the 1930’s depression, the
Australian banking was made tightly regulated. It was almost impossible for the banks from
foreign countries to set up their branches in Australia and due to this Australian economy has
lesser banks in comparison to other countries like Hong Kong and US (Merrett, 2002). The
Australian banks were bifurcated between savings and trading banks. Majority of savings
banks were state government owned and their activities were confined to provision of
mortgage loans. Trading banks were typically merchant banks that did not offer services to
general public.
Support of banking system in economy
The efficient and effective system of banking is an integral part of economy of the country.
The banks in Australia have supported the nation in all the good and bad times by positively
contributing to the economic growth and national prosperity. Australian banks have served
the employment to the Australian citizens to a great extent. It has provided around 150000

Banking Sector of Australia 5
jobs in the Australian nation
(ABA’s Economic report, 2015). The country’s banks provide loans of around 1 million to
the small businesses for their growth and development. As the Australian banks have sound
capital blocking and also sophisticated safeguards against frauds and other crimes, they
support the household savings of countries citizens. These banks contribute significantly to
the revenue of the government which in turn helps in the overall development of the
country’s economy. In year 2014 banking sector had made the tax payment of around $13.7
billion to the government. Banking industry is the largest service industry in respect of
economic contribution and is contributing almost equal to 9.3% to the GDP of country as the
finance industry has contributed $138.6 billion in 2015 to the economy of Australia
(Kirkwood & Nahm, 2006). The overall banking system of banking offers a wide gamut of
financial services and products to all customer segments such as personal lending, general
insurance, financial advice and credit card facilities etc. so that the customers can arrange
deploy their the funds in the best possible manner.
Figure 1 Multifactor Productivity- Annual Growth%
Source Link: https://www.bankers.asn.au/images/uploads/ArticleDocuments/134/ABA
%20economic_report_final_Oct_2015.pdf

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This shows the improvement in the bank’s productivity in areas of labour and capital
utilisation and hence it can be said that banks are contributing positively to the growth of
economy since last many years.
Figure 2: Banks’ interest paid ($bn)
Source Link: https://www.bankers.asn.au/images/uploads/ArticleDocuments/134/ABA
%20economic_report_final_Oct_2015.pdf
The above figure shows that the retails banks are paying considerable interest to the account
holders on term and savings deposits etc. which becomes the part of their income from other
sources.
Problems faced by banking sector:
Though the banking system of Australia is quite strong and safe, it has to face some
challenges in the post period of global financial crisis (Sathye, 2001). The banks have to face
longer periods of lower rates of interests. The profitability of the banks is deeply pressurised
due to the lower interest rates and weakens the operating environment. These lower interest
rates also exert pressure on rise in housing prices (Australian Government, 2015). The
sensitivity of bank towards housing market shocks has been increased since 2008 as longer

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period of lower interest rates can cause more credit flow to housing market. After the global
financial crisis, there have been imposed heavy regulatory reforms on the banking sector
which creates pressure on the banks and thereby causes them to underperform. Due to the
technological advancements, the customers of the banks are abandoning the use of traditional
banking services and relying on the online services and banks fails to offer them the desired
services (Joseph, McClure & Joseph, 1999). Also increasing introduction of Fin-tech
companies which are providing financial services with the use of software is causing heavy
competitive pressure on the banking sector. Therefore, the banks are pressurised to adopt the
environment of digital banking (Lichtenstein & Williamson, 2006). Moreover, for every
banking institution operating in the market, data held by it is of significant importance
whereas in the case of digital banking, the financial data maintained by them is prone to
various risk exposures such as data loss, data manipulation etc.
Action and role to solve problem faced by
banking system
The competitive pressures must be enhanced in the banking industry to increase the
efficiency in the market. But such competition must be kept balanced with maintaining
stability. The pressure from the Governmental bodies in the form of various reforms must be
released. To enhance the accountability and increasing the independence of banking sectors
some areas are to be improved. The regulatory perimeters need to be changed in Australia to
cope up with the changes in the economic environment of economic system. The
superannuation assets have been expanded rapidly

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Australian laws that regulate banking sector
The prime acts that regulates the banking institutions such as banks incorporated in Australia,
representative offices set up in Australia and branches of various foreign banks, specialised
credit institutions or unions and the building societies of Australia are regulated by following
laws:
Banking Act 1959: All the banking companies incorporated in Australia, are controlled and
regulated by the banking act.
Reserve bank act, 1959: The reserve bank of Australia is regulated by the reserve bank act.
The said act gives specific powers and obligations to the reserve bank (Bade & Parkin, 1988).
Corporations act, 2001: This act is a principle legislation that sets out regulations and laws
that applies on Australian business entities at both federal as well as interstate level. It mainly
emphasises on the corporate bodies but also entails some laws applicable on partnership
firms.
Financial Sector Act, 2001 (Collection of data act): This act was commenced in 2001 and it
vested the responsibility of registration of Australian financial corporations to the Australian
Prudential Regulatory body. However, it does not give powers to APRA to oversee the
activities of registered financial incorporations. The act is meant to primarily facilitate the
statistical data collection.
Financial Sector act, 2001 (Shareholdings): This act is applicable on the financial sector
companies which are subject to the limit of 15% shareholding. It majorly deals with the
acquisition of shares by persons in the company.
Services provided by Australian banking:

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The banking sector of Australia provides a wide range of services:
Financing and investing activities: The banks in Australia provide finances to the business
entities to expand and develop their businesses. These banks also facilitate deposits of the
surplus funds or savings of the business entities or individuals so that returns can be
generated on such deposits (Reserve Bank of Australia, 2018).
Transactional services: Banks also performs various collection services for their clients under
which the banking organisations collects payments from the debtors of their clients directly to
their banks accounts and intimates them on time to time basis about the collection process.
They also manages the payment mechanism of their clients through the modes of cheques,
direct transfers or through electronic fund transfer schemes.
Risk management services: Australian banks provides solutions to safeguard the Australian
business entities against the currency fluctuation and also the movements in interest and
commodity rates.
Superannuation and insurance: The Australian banking sector provides superannuation
services and it also provides insurance services to the clients.
Advisory services: The banks provide advices on financial investments and protection from
various financial risks and they also provide advices to corporate on potential mergers and
acquisitions and capital markets etc. (Australia and New Zealand Banking Group Limited
2015).
The banks also issue credit or debit cards to their customers and then performs processing of
electronic debit and credit card transaction their behalf.
These banks also facilitate the maintenance of foreign exchange reserves so that the
customers can buy the foreign exchange to enter into foreign transactions.

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Figure 3: Products on market
Source Link: https://www.bankers.asn.au/images/uploads/ArticleDocuments/134/ABA
%20economic_report_final_Oct_2015.pdf
The above figure shows that banks are providing maximum proportion of financial services
to the customers than other bodies such as unions and building societies (CUBS) or non-
authorised deposit-taking institutions (non-ADIs)
Role of banking sector to maintain inflation:
Inflation is the economic situation in which the prices of goods and services increase over a
period of time. The price instability can lead to severe instability in the overall financial
system of the country. The financial shocks due to inflation can adversely affect the economy
of the country. A weak financial system can make it difficult for the economy to achieve
growth and pursue its objective of price stability. The financial system especially the banking
sector has undergone significant changes to influence the system’s efficiency and stability
(Debelle, 1996). The financial system’s stability is well- established responsibility of Reserve
Bank. In fulfilling the overall responsibility, Reserve bank has a vital role to play in reducing
the risk of financial disruptions and in responding to the situations of financial disturbance
due to the extreme inflationary forces. The reserve banks of Australia continuously formulate
and monitor various monetary policies to maintain the inflation in the country. The RBA
communicates its views with the relevant agencies. A forum called Council of Financial

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11
Regulators has been formed to maintain financial stability in the system. The CFR takes
together the reserve bank, APRA and ASIC to contribute to the effectiveness of stability of
financial system by stabilising the inflation in the country (Reserve Bank of Australia, 2018).
Conclusion
Therefore, it can be concluded that banking sector plays significant role in the economic
development of the Australia. The financial system is also found to be quite stable and sound
to nurture the growth of the economy. Its role in the economic development of the country is
significant. However, even after the efficient functioning and performance, the banking
sector of the country has to face various challenges due to the digitisation and modernisation
in the economy. These challenges need to be overcome to strengthen the economy of
Australia. The Australian must make efforts to reduce the challenges faced by the finance
sector by lessening the overall burden of fiscal reforms on the banking sector. It must make
the banking system more independent and transparent to generate the trust of Australian
community in the banking sector.

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12
References
ABA’s Economic report, 2015. Australia's banks: an integral part of the economy and the
community. Retrieved from <
https://www.bankers.asn.au/images/uploads/ArticleDocuments/134/ABA
%20economic_report_final_Oct_2015.pdf> Accessed on 24-1-2018.
Australia and New Zealand Banking Group Limited (ANZ) 2015. Products and services.
Retrieved from: < http://www.anz.com/corporate/products-services/> Accessed on 24-1-
2018.
Australian Government, 2015. The Australian banking system: Challenges in the post global
financial crisis environment. Retrieved from : < https://treasury.gov.au/speech/the-australian-
banking-system-challenges-in-the-post-global-financial-crisis-environment/> Accessed on
24-01-2018.
Bade, R. and Parkin, M., 1988. Central bank laws and monetary policy. London, ON:
Department of Economics, University of Western Ontario.
Debelle, G., 1996. The ends of three small inflations: Australia, New Zealand and
Canada. Canadian Public Policy/Analyse de politiques, pp.56-78.
Hickson, C.R. and Turner, J.D., 2002. Free banking gone awry: the Australian banking crisis
of 1893. Financial History Review, 9(2), pp.147-167.Joseph, M., McClure, C. and Joseph, B.,
1999.
Merrett, D.T., 2002. The internationalization of Australian banks. Journal of International
Financial Markets, Institutions and Money, 12(4), pp.377-397.
Service quality in the banking sector: the impact of technology on service
delivery. International journal of bank marketing, 17(4), pp.182-193.

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Kirkwood, J. and Nahm, D., 2006. Australian banking efficiency and its relation to stock
returns. Economic record, 82(258), pp.253-267.
Lichtenstein, S. and Williamson, K., 2006. Understanding consumer adoption of internet
banking: an interpretive study in the Australian banking context. Journal of Electronic
Commerce Research, 7(2), p.50.
Reserve Bank of Australia, 2018. Banking Services. <
https://www.rba.gov.au/fin-services/banking.html> Accessed on 24-1-2018.
Reserve Bank of Australia, 2018. Role of the Reserve Bank in Maintaining Financial
Stability. Retrieved from < https://www.rba.gov.au/fin-stability/reg-framework/role-of-the-
reserve-bank-in-maintaining-financial-stability.html> Accessed on 24-01-2018.
Sathye, M., 2001. X-efficiency in Australian banking: An empirical investigation. Journal of
Banking & Finance, 25(3), pp.613-630.
Sathye, M., 2001. X-efficiency in Australian banking: An empirical investigation. Journal of
Banking & Finance, 25(3), pp.613-630.