Economics for Business: Australian Banking Industry Analysis

This report analyzes the Australian banking industry, its market structure, issues, and government policies. It also discusses the impact of the Royal Commission on the industry and the economy.

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Contents
Introduction......................................................................................................................................1
Banking Industry background..........................................................................................................1
Market structure...............................................................................................................................2
Banking Industry Issue....................................................................................................................3
Impacts of Issues on Australia Economy.........................................................................................4
Government Policy..........................................................................................................................6
Conclusion.......................................................................................................................................6
List of References............................................................................................................................8

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Introduction
The objective of the report is to enlighten the reader about the banking industry present in the
environment. The Australian banking sector is discussed in the paper to elaborate details about
the market and its impact on the economic aspects of the country as well. Every industry present
at the marketplace affects the economy of the country in either good or bad ways. The banking
sector is the sector that transacts in money and cash equivalent goods so this industry plays the
lead role in affecting level of the customers in the environment. The market structure of the
industry, government intervention and issues present with the industry are discussed in the paper.
More details about the report are discussed below:
Banking Industry background
The banking sector of Australia is majorly dominated by four organization that are
Commonwealth Bank, National Australian Bank, Australia and New Zealand Bank and Westpac
Banking Corporation. These are four major banks present in the country that highly affect the
whole banking industry of the country. Along with these banks, the industry also holds several
small banks, financial institutions, mutual banks etc. These banks provide limited services to the
people in the environment and are called authorised deposit-taking institutions (Matthews 2016).
The central bank of the country is Reserve Bank Australia (RBA). From the beginning of the
year 2008, the government of the country has guaranteed deposits up to $250,000 per customer
per against the banking failure. The banks of the country require license under the banking Act
1959 so as to operate its business functions in Australia. Religious Charitable Development
Funds (RCDFs) does not form a part of this license requirement procedure (RBA.Gov 2019).
The financial sector of the country is profitable as well as competitive and the government of the
country hold strong grip on the banking activities as well. The banking sector of the country is
the largest part of the financial system of Australia. The segment of the nation comprises of 147
authorised deposit-taking institutions that collectively hold more than 55% of the financial assets
of Australia. The ADIs are corporate body that has been granted authority by the Australian
Prudential Regulation Authority (APRA) to initiate the banking business activities. The heritage
bank of Australia is largest customer-owned bank of the country that further changed its name to

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Heritage Building Society in the year 2011 (The Stand 2019). The government of the country
states that the banking system of Australia is transparent and reliable. Also, there are differences
in this banking system of the country if compared to American banking system. The difference
between the retail and investment bank has almost nullified with the initiation of several
regulations in the environment. Currently, the banking system of the country is undergoing
deregulation and privatization and the government has started allowing foreign banks to enter in
the country and operate the business functions. The scope of functions for retail banks has started
to increase as now they provide a wide range of financial services along with corporate and
consumer loan services as well. These activities of retail banks increase the level of competition
with the merchant banks and brokerage houses as well. The government of the country has
allowed international banks to work under the wholesale market and the retail banking services
are allowed only to locally incorporated subsidiary (Export.Gov 2018).
The RBA is the body that set monetary policies and regulations for the financial system of the
country. APRA looks after the functions of credit unions, private health insurance, building
societies, life insurance general insurance and reinsurance companies. The segment held by
APRA includes assets worth USD3.7 trillion of 24 million depositors, superannuation fund
members and policyholders of the country (Steen, McGrath, and Wong 2016).
Royal Commission into misconduct in the Banking, Superannuation and Financial Services
Industry that is also known as Banking Royal Commission as well as Hayne Royal Commission
was established in the year 2017 by the government of Australia following to the Royal
Commission Act 1902. This body was formed to scrutinize and report the misconduct in the
banking sector, superannuation and financial services sector. This commission was established in
the environment so as to reveal the greedy culture prevailing in the Australian banking sector.
The banks and other financial institutions have started to forget their ethical code of conduct due
to which it had become an emergent need to form a commission to monitor the activities of such
bodies (Royal Commission 2018).
Market structure
The Australian industry has oligopoly market structure as a group of specific companies present
in the environment leads the market. Oligopoly and monopolistic competition are the two types

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of characteristics that the Australian banking industry possesses. The four big firms mentioned
above are the market leaders who regulate the major activities in the whole banking
environment. All the other small and medium organizations follow the regulations possessed by
the four major banks present in the environment. Oligopoly refers to the market structure in
which a small number of firms possess a large share of the whole market. Resulting in which,
these companies dominate the market and the other companies follows the activities conducted
by these market in the environment (Hanrahan 2018).
Market entry and exit under this type of structure is really difficult. Further, it should be noted
that oligopoly market structure is similar to the monopolistic market structure; the only
difference is that in monopolistic structure, one organization is market leader and in oligopoly
market, a group of firms are market leader. The goods and services produced in the form of
oligopoly market can be differentiated or homogenous. 85% of the market share of the
Australian banking environment is shared by NAB, ANZ, CBA and WBC. The market
capitalization of these companies is five times to the market share of all the other banks present
in the country (Lui 2016). These four financial institution have created a cartel arrangement as
majority shareholders are concentrated with these four banks only. The objective of the
shareholders of the banks is to increase the profitability that is possible only when the banks
works under the monopolistic market structure but presence of four major banks create a cartel
position for them. JP Morgan Chase, HSBC and Citibank hold major shares of these four banks
(Stannard 2019).
Banking Industry Issue
With the occurrence of Royal Commission in the business environment of Australia, the degree
of law enforcement has increased in the industry. Although, the fact is true that before this
commission, the companies were performing several unethical activities on a regular basis.
However, interim report of Royal Commission is directly submitted to the Governor and then
circulated to financial service and public. Resulting in which, the people of Australian started
losing trust from the big four banks of the country. The report submitted to the official consists
of four rounds of hearing that are consumer credit, financial services, offering to small and

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medium companies and experience with the remote as well as regional communities (Brown, and
Loosemore 2015).
The commission that received near to 10,000 submission that are majorly related to banking
(67%), superannuation (12%), and financial advice (9%). The key issue in this industry is that
companies have started giving more importance to profits than people have in the Australian
environment (The Conversation 2019). The companies are working solely to increase their level
of profitability and they do not care about the interest of employees and people in the
environment. Poor culture has started to affect the satisfaction level of its employees in the
environment because of ineffective remuneration policies. Misconduct in HRM activities is
implemented to increase the monetary benefits for the organizations. Further, the Royal
Commission stated that greed is visible in the behaviour of the activities of the banks but they
have performed such actions because the regulatory bodies have them to do so. The big four
banks are perform wrongful actions in the environment, so the commission cannot expect
anything better from the small and medium banks present in the industry (The Conversation
2019).
CBA and NAB have agreed to the fact that have initiate misconduct in the environment and they
are aware about these activities performed by them from past 5 years. Stability in the industry
has reduced because of the transitions occurring in the industry. Changes in policies has started
to reduce the power present in the hands of major four banks due to which banking sector of the
country has become unstable. Last 12 months has completely changed the structure of the
Australian banking sector because scrutiny has increased in the industry because of which
unethical practices of the institution has reduced and companies have started to monitor their
actions on a regular basis (Fairbrother, et. al., 2018).
Impacts of Issues on Australia Economy
Greed in the banking industry, dodgy financial advice, irresponsible lending, bribery and lying to
the regulators are some of the issues identified by the Royal Commission against the Australian
banking sector. These issues have rotted the competent activities of the financial institutions
present in the nation. The Royal Commission has uncovered all these truths in the environment
as before that no person knew about the unethical actions performed by the organization in spite

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of themselves. Talking about the impact of these issues in the environment, it should be noted
that collective unethical activities of four major banks of Australia led other organizations to
perform similar unethical actions in the environment to increase their profitability (Schneeberger
2019).
Resulting in which, the companies started defrauding the customers that affected their level in
the environment. Power was already shared by a group of people in industry that was further
restricted to big four banks only because of their increasing profitability attained from
performing wrongful actions in the environment. These activities resulted in emergence of Royal
Commission in the banking environment. These four banks were ranked in the list of 25 globally
safest banks in the world. Further, it should be noted that biggest impact of issues in banking
sector of Australia is the formation of Royal Commission in the environment (Sourdin, and
Atherton 2019).
The impact of Royal Commission acted positive for the customers and negative for the
institution present in this segment. Limited power is present in the hands of this commission but
it welcomed the banks to scrutinize their activities and submit the report to the commission.
Resulting in which, positive changes in the remuneration started to occur because of the focus of
Royal Commission on the activities of banks. The banks started regulating their actions and
changing them according to the favourableness of the customers. Increasing regulations started
to put more pressure on the profitability of the banks (Winter 2019). The awareness regarding
misconduct aroused in the nation due to which the customers also became aware about the
misshaping occurring with them and the companies also started focusing more on their front line
as well as back office actions in the environment. Increasing pressure on the bank resulted in
their better functioning because now they knew that a regulatory body is governing all their
actions in the business environment. This aspect increased the degree of penalties for the banks
as now the companies themselves scrutinized the actions performed by them because they have
to report it to Royal Commission due to which the level of penalties faced by companies also
increased (Lumsden 2019). Thus, it should be noted that with the initiation of such issues in the
environment, the government officials and bodies became more concerned about the activities
happening in the country. Resulting in which, change in the culture of the industry was enforced
that will bring positivity in future for the industry.

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Government Policy
ASIC, APRA and RBA are the three major bodies who govern the actions in the banking
industry. Occurrence of Royal Commission in the industry has changed the face of the Australian
banking industry. The commission has started amending the rules and regulation so as to
increase the integrity of the banks and protect the interest of the consumers as well. The
commission has given total 76 recommendations to the government to implement changes in the
banking industry. It is believed that these recommendations will certainly reshape the regulatory
compliance and will enforce the landscape of the entire Australian industry as well (Clifford
Chance 2019).
Talking about structural improvement, it should be noted that the banks should simplify the
structure by eliminating the exceptions and initiating self-reporting process as well. The banks
should start cooperating with and should start sharing information with APRA and ASIC. The
banks should also focus on changing the culture according to the norms of Banking Executive
Accountability Regime (BEAR). The banks should aim to change the remuneration practice
along with culture and corporate governance as well. The parliamentary has also increased the
civil and criminal penalties so as to threaten the banking companies to consider their actions
before performing any mistake. ASIC has also planned to litigate the responsibilities present in
the hands of major banks (Ellis, and Littrell 2017).
The government has released regulation in the Australian banking sector under the impression of
above mentioned recommendation and agreed to implement all the 76 recommendations. The
objective of the government is to restore the trust of Australian financial system and implement
legal and regulatory changes in the environment. AUD 10.5 million should be applicable on the
body corporates and if avoided the penalty then it would be multiplied by 3. It is crucial for the
banks to provide their reports about the structure and functioning of the business (Lattin, and
Etheredge 2019).
Conclusion
Thus, in the limelight of above mentioned event, the fact should be noted that the above
mentioned paper highlighted details about the Australian banking system. The whole industry is
disturbed due to the unethical activities of the banks. The greedy behaviour of the banks have

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started affecting the interest of the consumers and the integrity of the Australian banking sector.
The above mentioned report elaborated details about the market structure, industry environment
and issues present in the Australian industry as well. Issues have been discussed in the paper
along with the analysis of the government regulations implemented against the banks present in
Australia. Thus, it should be noted that the introduction of Royal Commission in the Australian
banking environment has made the institutions present in the industry responsible and ethical as
well. In this way, the government would be able to change the negative actions and will convert
them into profitability for consumers and society on a whole.

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List of References
Brown, J. and Loosemore, M., 2015. Behavioural factors influencing corrupt action in the
Australian construction industry. Engineering, Construction and Architectural
Management, 22(4), pp.372-389.
Clifford Chance., (2019) How the Banking Royal Commission will change the Australian
regulatory landscape [online]. Available from <
https://www.cliffordchance.com/hubs/regulatory-investigations-financial-crime-insights/our-
insights/How-the%20Banking-Royal-Commission-will-change-the-Australian-regulatory-
landscape.html> [Accessed on 23 September 2019].
Ellis, L. and Littrell, C., 2017. Financial Stability in a Low Interest Rate Environment: An
Australian Case Study. Monetary Policy and Financial Stability in a World of Low Interest
Rates. Reserve Bank of Australia, Sydney.
Export.Gov., (2018) Australia - Banking Systems [online]. Available from <
https://www.export.gov/article?id=Australia-banking-systems> [Accessed on 23 September
2019].
Fairbrother, P., Rafferty, M., Douglas, N. and Wang, L., 2018. Retiring Hurt? The Long-term
Costs of Structural Conflicts of Duty and Interest in the Superannuation Industry.
Hanrahan, P.A.M.E.L.A., 2018. Legal framework governing aspects of the Australian
superannuation system. Background Paper, 25.
Lattin, A., and Etheredge, A., (2019) Australia: Australian Financial Services Royal
Commission: Developments Since The Final Report [online]. Available from <
http://www.mondaq.com/australia/x/819416/Financial+Services/Australian+Financial+Services+
Royal+Commission+Developments+Since+The+Final+Report> [Accessed on 23 September
2019].
Lui, A., 2016. Financial stability and prudential regulation: a comparative approach to the UK,
US, Canada, Australia and Germany. Routledge.

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Lumsden, A., 2019. The Wider Implications of the Hayne Report for Corporate
Australia. Available at SSRN 3342855.
Matthews, A., 2016. The financial services industry: Whistleblowing and calls for a royal
commission. Precedent (Sydney, NSW), (136), p.35.
RBA.Gov., (2019) Financial Stability Review April 2019 [online]. Available from <
https://www.rba.gov.au/publications/fsr/2019/apr/> [Accessed on 23 September 2019].
Royal Commission, 2018. Royal Commission into Misconduct in the Banking Superannuation
and Financial Service Industry. First Round of Public Hearings: Consumer Lending.
Schneeberger, C., (2019) Banking in Australia [online]. Available from <
https://orbium.com/orbium-insights/the-impact-of-the-banking-royal-commission-on-australian-
banks/> [Accessed on 23 September 2019].
Sourdin, T. and Atherton, M., 2019. Vulnerability and dispute resolution in the banking and
finance sector. Social Business, 9(1), pp.69-91.
Stannard, J., 2019. Budget 2019-20, the Royal Commission and the regulators. Superfunds
Magazine, (445), p.14.
Steen, A., McGrath, D. and Wong, A., 2016. Market failure, regulation and education of
financial advisors. Australasian Accounting, Business and Finance Journal, 10(1), pp.3-17.
The Conversation., (2019) Banking Royal Commission’s damning report: ‘Things are so bad that
new laws might not help’ [online]. Available from <https://theconversation.com/banking-royal-
commissions-damning-report-things-are-so-bad-that-new-laws-might-not-help-104058>
[Accessed on 23 September 2019].
The Conversation., (2019) The problem with Australia’s banks is one of too much law and too
little enforcement [online]. Available from < https://theconversation.com/the-problem-with-
australias-banks-is-one-of-too-much-law-and-too-little-enforcement-103996> [Accessed on 23
September 2019].

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The Stand., (2019) The future of Australia’s banking sector and what you as a consumer can do
[online]. Available from < https://stand.uow.edu.au/banking-sector/> [Accessed on 23
September 2019].
Winter, J., 2019. Financial services Royal Commission-impacts on our profession?. Australian
Restructuring Insolvency & Turnaround Association Journal, 31(1), p.10.