Monopoly Banking Sector in Australia

This article discusses the monopoly structure of the banking sector in Australia and its consequences. It explores the role of the Australian Competition and Consumer Commission (ACCC) in regulating the industry and suggests ways to address the monopoly structure and improve competition in the banking sector.

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Introduction
The market structure in Australia is in nature of Monopoly. Most of the service sectors
operates together starting with the industry for retail banking. The banks actively work together
and share the profits among themselves. The Australian Competition and Consumer Commission
(ACCC) has two most important query regarding the competition in banking industry.
ACCC Chairman, Rod Sims has addressed that the sections addresses the oligopoly
market structure of the banking industry. Yet, the cases of the banks formation of cartel is not
alleged. Till date the market structure is influenced by mainly four banks creating monopoly
power. However, that is not the only concerned case because there are other factors that comes
into existence and effectively challenging the banks. Simon has also mentioned how the ACCC
findings on exchange would be analytical to understand the type of competition (Altman &
Ward, 2018). The aim of this paper is to understand the working structure of Australian banks
and the suitable measures to be taken in order to solve the issues of monopoly banking sector.
Australian Competition and Consumer Commission (ACCC)
The commission is an autonomous authority of the Australian government, established in
1905. The prime objective is to look after the business rights, consumer rights, regulation of
industries, monitoring of prices and stop illegal anti-competitive behavior. ACCC does not favor
anyone, be it consumers or producers and seeks to reach a competitive market structure without
unreal restriction. They have the power to bring about court actions against firms that rupture the
Competition and Consumers Act and would be fined by the Federal Court (Bakir, 2013).
Scandals by Australian Banks

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A national investigation into Australia’s financial section had reportedly shown sweeping
changes over the last ten years and has engaged in scandals. This has been done after twelve
months of research by an organization named Royal Commission Misconduct in the Banking,
Superannuation and Financial Service Industry. They revealed that banks have been charging
fees without providing services. 76 recommendations were objected towards the banking
industry for the series of scams performed which lost confidence among people. Banks have
collected fees even for dead customers and customers who lost everything; including country’s
biggest moneylender, Commonwealth Bank of Australia (Banks et al., 2015).
According to media reports, the Commonwealth Bank of Australia (CBA has made profit
of billion dollars by paying huge dividends to its shareholders. The scenario is same in other
three important banks as well. These deep seated problems arising due to way Australians buy
insurance, advice and superannuation and for poor management standards. CBA has been
involved in matters relating to money laundering for drug syndicates, ignoring legal
responsibilities and impudent foreign exchange trading. The bank led its smart money depositing
machine to be used by money-laundering syndicates associated to drug distribution and
importation networks. The bank received a penalty of about 375 million dollars which the bank
has underestimated.
A report by the Productivity Commission made it clear that the big financial institutions
exploited the loyal customers and faced a constant public caning. The institution is suspected to
finance for suspicious matters such as terrorism. They failed to provide terrorism financing
suspicions within 24 hours, did not monitor risk of 38 instances and neglected over 54 cases
under law enforcement investigation. Westpac triggered Australia’s interest rates and secretly
lending money to elderly pensioners. The National Bank of Australia (NAB) had to pay millions

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of dollars for giving wrong advices to business planners which eventually led to immense losses
(Buckley & Ooi, 2015).
Monopoly Banking Sector
The banking industry in Australia is influenced by four major banks such as the
Australia and New Zealand Banking Group, Westpac Banking Corporation, National Australia
Bank and the Commonwealth Bank of Australia. Although the country has a large number of
smaller banks and many other financial institutions, the banking industry is influenced by the
working structure of these particular banks. Presence of large foreign banks are there, yet a few
among them has a functioning on retail banking. Smaller financial institutions like credit unions,
mutual banks and building societies are there which have little banking services and is
considered to perform under authorized deposit taking institutions (Chaly et al., 2017).
The productivity commission has reported these banks to generate huge costs, by putting high
price for upgrading the net revenue instead of carrying the burden of lowering the market share
at every stage of the business cycle. Dead weight loss is created due to lack of competition in the
major banks. This high concentration makes firms makes the institutions to enact as a single firm
with similar rate of interest.
Consequences of monopoly structure
The central four banks have organized a cartel arrangement because the greater chunk of
the shareholders are from those important banks. Thus, a common enthusiasm and interest exist
in the same banks. The shareholder’s work is to take away the maximum profit from the firms by
creating a monopoly market structure such that they can dominate and influence the market
price. Profit maximization is achievable by the formation of cartel. About 450,000 people are

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employed in the financial service sector that contributes a humongous number to economic
growth. A banking sector requires huge amount of capital investment to start with their business.
Most of the people are enlightened to work and deposit for big companies which reduces
chances for small firms to operate. The seller in the monopoly market is known as a monopolist.
He has control over the price and market output. A cartel is the market structure where a
gathering of firms that has the same goals and targets take joint venture to make equilibrium
price and output decisions. These strategies give rise to an oligopolistic system which are
dependent on the formation of cartel which operate with few companies, having a powerful share
on the economy (Gilligan et al., 2017).
The operation by the arrangement of cartel has been prohibited by CCA under a civil law
and has marked it as a criminal offence if businesses work in a cartel. Firms found guilty of
cartel strategy are penalized both by civil and criminal ways. The dignitaries are charged with
fines of 420,000 dollars along with sentence of imprisonment up to ten years. Pecuniary penalties
for provision of civil contravention and cartel offence has to provide over 500,000 dollars. It is
not legal for corporations to indemnify its agents against financial fines and legal costs (Gitman,
Juchau & Flanagan, 2015).
Dead-weight loss of Monopoly Structure
The structure in monopoly markets is marked by barriers to entry of new firms and no
competition is being faced due to lack of substitutes. Although monopolies have huge profits, yet
there are huge dead weight losses faced by the economy. The maximum level of profit is
measured by the intersection of marginal revue with marginal cost curves and keep price as
determined by market demand curve (U-Din, Tripe & Kabir, 2017).

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The monopolist can influence the market power simultaneously such that it can change
relatively low price if the monopolist chooses a high output level and vice-versa. The marginal
revenue curve is a downward sloping due to law of diminishing marginal returns while the
marginal cost curve is horizontal as firms are price makers and the marginal cost curve is upward
sloping (Huang & Liu, 2013).
Figure 1: Dead-weight loss in Monopoly Markets
Source: bbc.com, 2019
In monopoly, price exceeds marginal cost and violates the economic efficiency.
Australian banks have created a monopolistic competition. Higher price makes customers to
consume less of the commodity. In the short run, monopoly markets are able to gather huge level
of profits. However, in the long run the firm tends to become less innovative and inefficient due
to lack of competitions and regulation. The market contracts output so as to gain maximum
profits. These firms operate with excess capacity such the profit maximizing output is lower than
the average minimum cost.

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The consumer surplus is the profit earned by consumers as measured by area under the
demand curve and producer surplus is the surplus of producer estimated by the area above the
marginal cost curve. The firm sets equilibrium price above the price in perfectly competitive
markets. The consumer surplus is marked by the ‘pink’ portion, while producer surplus is the
blue portion. The area represented by yellow color is the deadweight loss as no one receives that
area due to high price of the monopoly markets (Joshi, 2013).
As the Australian banks imposed a high rate of interest, many people reduced the quantity they
borrowed leading to a fall in demand. Customer confidence weakened and they were not
satisfied.
High rate of interest facilitated greater supply of money for lending. Banks operated by
giving huge amounts of loans at a high rate. They were unable to find any long-term solution to
the problem as their debts got abolished. The effect could be faced by customers as they had to
sell their houses, to make ends meet. Many victims devoted to hardship relief for providing the
huge amount of money taken as loans (Lumsden, 2019).
Interest rates of banks
The average interest rate of Australian banks is about 2.75 percent. Concentration of
market has significant effect on the economy that includes financial aspect, economic efficiency,
profitability, stability and economic efficiency of Australia. Increase in market concentration
cause inefficiency in markets due to less competition. Generation of huge producer surplus by
low cost of production and low consumer surplus is not good for economic well-being. The
lending rate specifically increased for housing loans to more than the official cut rate in Reserve
Bank of Australia (RBA). Due to this domination, customers were forced to accept the rate for
the lack of options (Smyth, 2019).

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An increase of cash price gives a good stimulus to businesses, while a high rate of
interest leads to losses for the repayment of mortgage and loans. Australians had difficulty in
borrowing money as they had to give huge amount as loan and personal finances were rendered
expensive. The official cash rate must be kept low so that banks are able to borrow money from
other banks. A high interest rate leads other banks to keep raising their rates as well (Maddison
& Denniss, 2013).
Ways to stop the monopoly structure of banks
In monopoly markets, firms have huge power both financially as well as legally. The
government has to play a crucial role in the market so as the preserve the interest of the
customers and reduce the dead weight loss received by the economy. The banks must keep a
high interest rate on deposits so that consumers deposit money which will lead to increase in
money supply of banks (Meng, Hoang & Siriwardana, 2013).
Loans must be given at a lower interest rate such that customers who are in need of
money can take it without worrying on the rate of return. Monopoly firms have little incentives
to build quality service. Improving the service system of the smart machines and provide new
schemes for the customers without getting indulged in crimes. A strong government structure is
also required to keep tract of the performance and functioning of the monetary institutions
(Pakhchanyan, 2016).
Conclusion
The ACCC Chairman has mentioned about the cozy oligopoly market structure of
Australian banks as there are only a few banks who influence the market structure. The banks
perform in a cartel making one single high interest rate and creating monopoly power in

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Australia. This power has led banks to get engaged in illegal practices and the ACCC working
actively to understand the misconducts made to the clients. Rod Sims, ACCC chairman has
warned the big firms to avoid illegal offences by break the enlisted laws leading to potential
court actions.
Formation of cartel has to be avoided otherwise strong actions would be taken against the
firms. The misconducts made by the banks has negative impacts on the society.
The frauds escorted billions of dollars out of Australia’s account making a downfall of growth
and GDP. Thus, it is to be concluded that regulators are in need of more organized powers.
Markets perform more efficiently as monopoly power gets reduced along with lower dead weight
lost and higher benefits.

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Reference List
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