Economic Principles in Finance Industry

Running head: ECONOMIC PRINCIPLES OF FINANCE INDUSTRY
Economic Principles in Finance Industry
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ECONOMIC PRINCIPLES OF FINANCE INDUSTRY
Table of Contents
TASK 1: Oligopoly in Australian Banking............................................................................................2
TASK 2....................................................................................................................................................4
QUESTION 1.......................................................................................................................................4
QUESTION 2.......................................................................................................................................5
QUESTION 3.......................................................................................................................................5
QUESTION 4.......................................................................................................................................5
QUESTION 5.......................................................................................................................................6
QUESTION 7.......................................................................................................................................6
QUESTION 8.......................................................................................................................................6
QUESTION 9.......................................................................................................................................7
4.3 Activity.............................................................................................................................................7
REFERENCE LIST...................................................................................................................................10

ECONOMIC PRINCIPLES OF FINANCE INDUSTRY
TASK 1: Oligopoly in Australian Banking
Oligopoly in the banking industry is not an unusual phenomenon. The involving
characteristics of banking industry such as economies of scale and small retail margin of
banks. Banking industry in Australia has become increasingly concentrated with four major
banks dominating the industry. It has been determined by the Australian Government that the
four major banks have a significant pricing power. In case of an oligopoly market where only
few firms compete. The “Big four banks” of Australia which have the largest share of the
market are National Australia Bank, Westpac, Commonwealth Bank and Australia and New
Zealand Banking Group(Andrievskaya and Semenova, 2016.). These four banks dominate
the banking industry. However, Australia has a very profitable and competitive financial
sector. The four financial sectors in order to increase their profits can set any prices without
the fear of loosing the market share. These four famous banks of Australia form a cartel
arrangement in a way that the shareholders tries to maximize profits acting as a monopoly
market structure. The cartel formation therefore acts as a barrier to entry for the new entrants
in the banking industry of Australia. These banks have a higher interest margins which makes
them even more profitable. The banking sector of Australia is oligopolistic in way that they
maintain their position in the market with the help of opaque pricing. In case of an oligopoly
market the firms usually depend upon each other while deciding the price(Salim, Arjomandi
and Seufert, 2016). The banking sector in Australia is therefore oligopoly. The four major
banks of Australia comprises of eighty five percent of the banking industry. Due to the
oligopolistic market in the banking sectors of Australia, it is very difficult for any new entrant
to compete with the “big four”.
There is also a presence of market concentration within the four banks. According to a
recent research the biggest four banks of Australia will make a profit of around A$6.2 billion

ECONOMIC PRINCIPLES OF FINANCE INDUSTRY
over the next four years. As a result of the rise in market concentration in the banking
industry of Australia , there has been decrease in the market competition which lead to
increase in inefficiencies. As a result of these the banks acts as a monopoly and charges a
similar interest rates thereby decreasing market competition(Andrievskaya and Semenova,
2016). The government also supported the oligopoly market of the banking sector in
Australia where the finance minister claimed to support oligopoly in the banking industry.
High level of concentration in the market also reported to have higher prices along with
decrease in the competitiveness in the market. As a result of this the customers used to have
blind faith in these banks and therefore, it also resulted to huge profitability. In the year 2010,
the banks of Australia had also increased its lending rates in case of housing loans.
Oligopolistic markets tends to set up high barriers for entry and also depends on how the
other firms in the market depends. The Australian banking sector therefore has the similar
characteristics. According to the Australian Banking and financial report, the financial
institutions of Australia has both cost and scale advantages along with investment advantage.
The banking industry of Australia had a highly concentrated Herfindahl Hirschman
Index. As a result of the acquisition taken place by Westpac and the Commonwealth Bank of
Australia, there had been increase in the market concentration over the years. As a result of
market concentration there has been rise in the profitability(Turner and Nugent 2015). The
market leaders are therefore able to manipulate the market. The shareholders of the ‘big four”
are similar though the “ big four” are the different entities altogether. However, there had
been a lot of reform in the banking sector of Australia. As a result of rise in the con centration
in the market, there had been a lot of reports of the economic inefficiencies. There had been
also a result of increase in the consumer surplus due to the monopolistic behavior of the
banks. The four pillar policies were made by the Australian government in order to avoid the
mergers of the four major Australian banks. The policies had also been criticized for not been