Economics Assignment: Australian Banking Sector and ACCC's Role

Running Head: ECONOMICS ASSIGNMENT
Economics Assignment
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ECONOMICS ASSIGNMENT1
Introduction
Australia has four major banks who have a market domain of about 75 percent
domestically. The banking sector is in nature of Oligopoly where the market is mostly governed
by four financial institutions. The chairman of ACCC (Australian Competition and Consumer
Commission) has addressed Australia’s banking sector to be too cosy and competition in the
market is not intense enough for manipulating the benchmark interest rate. The productivity
commission has expressed that the major banks generate enormous costs by setting a high price
for increasing the net revenue instead of taking the pressure of decreasing the market share at
every stage of the business cycle (Erbenova et al., 2016).
ACCC has proposed a final report relating to the high mortgage prices which is
detrimental for the borrowers for housing. ACCC will keep track of the banking institutions and
its operations. The carelessness and fraudulent lending system made it difficult to borrow money
by clients. The main aim of the paper is to understand the structure of Australian banks, the
economic issues faced due to market power and the work of ACCC in removing the issues
(Muzio et al., 2016).
The issue of Australian Banks
Rod Sims has accused banking sector to have no moral or mentality as it has been driven
by greed to capture and force customers for drawing huge profits. Australia has four central
banks who influence the banking sector by creating an oligopoly market structure. ACCC began
its first criminal case against Australian banking company. It focuses on the misuse of market
power or combined practices of financial institutions. It has planned to investigate and enforce

ECONOMICS ASSIGNMENT2
action against banking oligopoly due to lack of price competition. Rod Sims is intended to look
after consumer complaints and punishing banks with penalties for unfair practices.
Rod Sims has warned the banking industry against the limited growth opportunities they
are about to encounter in the upcoming years. Expansion of opportunities will be restrained due
to significant acquisitions in wealth management for lowering the competition subsequently
(Chaly et al., 2017). At a panel of Australian Securities and Investment Commission, Rod Sims
has mentioned ACCC’s concern about the banking sector. Although Mr Sims was unable to
point any particular issue regarding the actions which requires enforcements and government
regulation. He highlighted about the increased profits of banks and the share of the market in
recent times so as to indicate that the competition in the market is not developing. Due to the
global financial crisis, the share of the assets from the major banks as a part of all banks assets
went up to 78 percent from 65 percent.
Misconduct by the Australian banks
Many Australian banks and financial institutions have exposed for the widespread of
wrongdoing in the industry. The common malpractices done by the banks of Australia are
corporate fraud, actions to deceive regulators, bribery rings at banks and reckless practices
(Fudenberg & Tirole, (2013)). Although the large banking and financial sector of the country has
several banks and financial institutions but it is mainly dominated by the four major banks of
Australia such as Westpac Banking Corporation, Commonwealth Bank of Australia, National
Australia Bank and New Zealand Banking Group. Many foreign banks are also operating in the
country whereas some of it are operating on retail banking. There are financial institutions like
mutual banks, credit unions and building societies which worked under authorized banks and
financial institutions.

ECONOMICS ASSIGNMENT3
To maximize the profit level major banks of Australia formed cartel. It helped the banks
to fix prices and competition on price is avoided (Geras’kin & Chkhartishvili, 2017). The main
attraction of the cartel formation is that the members will follow the rules set by them. The
negative effects of cartel formation on consumers are as follow:
 It leads to higher prices as all the cartel members raised prices together. Hence, elasticity
of demand of any single member will reduce.
 The possibilities of lack of transparency are there, as members try to withhold
information or hide prices. The misuse of power by the Australian banks resulted in
financial loss in the sector.
 Members may control the output onto the market which affected the Australian banking
industry.
 To avoid competing in other’s territory, cartel members break up the market into
territories or regions.
To reach equilibrium the financial institutions under cartel have same goals and strategies.
These strategies give rise to the oligopoly market which formed cartel (U-Din, Tripe & Kabir,
2017).
Structure of the oligopoly market
The oligopoly market structure is characterized by few sellers and many buyers, where
the sellers control the price of the product. The firms under oligopoly may produce homogeneous
or heterogeneous products. The banks of Australia is operating in oligopoly structure. Therefore,
banks and financial institutions of Australia are dominating the industry by controlling the price
of the product.