The Collapse of the State Bank of South Australia: Causes and Suggestions
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This report examines the collapse of the State Bank of South Australia in 1991. It analyzes the key contributing factors, including ineffective asset management, poor lending practices, and inadequate managerial oversight. The report also provides suggestions for improving the bank's operations and preventing future failures.
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State Bank of South Australia 1
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Table of Contents Introduction......................................................................................................................................3 The Main Causes for the Collapse...............................................................................................4 Suggestions..................................................................................................................................6 Conclusion.......................................................................................................................................7 References........................................................................................................................................8 2
Introduction The State Bank of South Australia was created in the year 1984. It was owned and managed by the Government of Australia. It collapsed in the year 1991. The bank has a part which is now established under the name of Bank SA. The report has been drafted in order to consider the main causes and reasons behind the collapse of the State Bank. The report will develop an empirical understanding of the causes and the suggestions developed in order to resolve the identified issues at the State Bank of South Australia. 3
The Main Causes of the Collapse The bank was established in roots of the ancient Australian history majorly focusing on the community service and welfare rather than profit making as a primary objective. The bank failed in 1919, later an auditor general was appointed in order to conduct an audit for examining the main reasons for the bank’s failure. It was determined that major causes for financial distress were examined to be the ineffective performance of the financial assets claimed by the bank. The loan portfolio of the bank is determined to be one of the greatest reasons behind the billion dollar collapse of the State Bank of South Australia. The auditor general also identified that ineffective assets were property related and corporate loans made by the bank. The loans advanced by the bank were not managed and claimed properly and resulted in the major failure of the bank. Furthermore in the investigation and audit conducted it was observed that subsidiaries acquired by the bank majorly in the time period of 1985 to 1990 did not perform as per the expectations of the bank and were determined as a contributory cause for the failure. The auditor general also examined the managerial aspect of the bank and realised the ineffective management and administration of the bank and its day to day activities resulted in the greater impact and contributory cause for the bank failure. It was analysed that financial position also failed due to the inadequacy of the bank to manage its debts, capital, interest rate and liquidity risks of the bank finances (Adelaide.edu.au. 2018). The auditor general laid emphasis on the policy and procedural inadequacies and defined them as a major defect in the management and administration of the bank and its ancillary activities. As per the discussions provided in The Bold Riders, it was also identified that the ineffective supervision contributed towards the lack of control and administration for the bank activities. The discussions ofSykes provides with the bank was poorly organised and managed. It was identified that credit risk evaluation undertaken in order to execute the risk rates for the credits landed were ineffective. It lacked the expertise of aggressive and in-depth analysis of the loans and advances made by the bank. It also depicts that the lending policies and procedures are undertaken by the bank were not as per the standards and platforms preferred and executed in the other banks and the financial lending industry of Australia. The policies depicted serious errors and omissions in the risk evaluation, interest rate, and capital management aspects etc. The poor 4
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organisation and management of the bank led towards the doom of the once a national expansion bank of Australia. In addition to these contributory reasons for the failure and collapse of the bank, it was also identified that the higher management including the board of directors and the loan approving authority in the bank lagged in the required skills and experience for executing the financial lending activities and undertaking major decisions at the State Bank of South Australia. The auditor general appointed to conduct the audit and investigation research for the failure also realised that the senior management was in a rush to signing the deals and did not undertake the required procedures and analysis of the deals and contracts signed. The financial reports depicted a false understanding of the bank’s budgeted asset growth rate. The budgeted profits for the bank did not exceed each financial year but the reports depicted an increased every year causing misleading expressions and impressions of the financial status for the State Bank of South Australia (Carnegie and O’Connell, 2014.). It was determined that the bank represented its up- front fee as an income in the source of interest on the loans. This resulted in major flaw of raising more loans in order to depict increased income as interest each year. All these major flaws and defects in the financial and managerial aspects of the bank led its way to the doomed and collapsed future of the bank. 5
Suggestions After the reading from The Bold Riders, it has been analysed the bank lacked an ineffective and empirical controlling and managing leadership. The bank must have focused towards the lending policies and procedures in order to scrutinise the methods and approaches applied by the bank. The board of directors and the non-executive directors lacked experience and knowledge in the required fields. The administrative bank affairs and day to day activities of the bank lacked ineffectivemanagementandcontrolofthebank.Themanagementlackedforfinancial management principles and procedures of effective management. It is suggested to appoint experienced and effective managerial authorities for better management and admiration of the financial and managerial aspects of the bank. 6
Conclusion Form the above discussion it can be concluded that the bank majorly failed due to the non- performance of the assets and acquisitions made by the bank at the later stages. It can also be stated that ineffective and lack of controlling power in the administration and management of the bank acted as a contributory factor for the collapse and failure of the bank. The report has suggested better and effective management overcome the issues and defects identified at the bank. 7
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References Adelaide.edu.au. 2018.New insight into State Bank collapse. [online] Available at: https://www.adelaide.edu.au/news/news372.html [Accessed 26 May 2018]. Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s.Critical Perspectives on Accounting,25(6), pp.446-468. Sykes, T., Not Defined. The Bold Riders. Behind Australia’s Corportae Collapses. Allen & Unwin. Second Edition. 8