Regulation of Australian Banks

This report provides a comprehensive analysis of the regulation of Australian banks, examining its historical development, current framework, and future prospects. It highlights the roles of key regulatory bodies like the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) in maintaining financial system stability. The report discusses the licensing and prudential supervision of Australian banks, including the four major players: National Australia Bank, Westpac Banking Corporation, New Zealand Banking Group, and Commonwealth Bank of Australia. Furthermore, it delves into the future challenges and potential reforms in the Australian banking regulatory landscape, considering issues such as the interconnectedness of large banks and the need for effective mechanisms to handle potential failures. The report concludes by emphasizing the importance of maintaining a robust and adaptable regulatory framework to ensure the continued stability and competitiveness of the Australian banking sector.

REGULATION OF AUSTRALIAN
BANKS – PAST, PRESENT & FUTURE

EXECUTIVE SUMMARY
Present study has been focused on evaluation of historical, current and future aspects of
Australian Banking regulations by considering its significant changes over time. Study shows
that Australia’s banking is subjected under four primary banks ie. National Australia Bank,
Westpac Banking Corporation, New Zealand Banking Group, and Commonwealth Bank of
Australia. Further, banking regulation have been operated by RBA and APRA to maintain
stability in overall entire financial system stability by considering licensing as well as
prudential supervision of all NOHCs and ADIs. Study concludes that the Australian banking
system has sufficient liquidity and developed but it supported by competitive edge.

Table of Contents
Introduction................................................................................................................................1
History of Bank Regulation in Australia....................................................................................1
The Current Regulatory Regime Applicable to Australian Banks.............................................2
Future of Banking Regulation in Australia................................................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................7

INTRODUCTION
Australia’s banking is subjected under these four banks; National Australia Bank,
Westpac Banking Corporation, New Zealand Banking Group, and Commonwealth Bank of
Australia. Sectors of banking are inclusive of licensing of the bank in accordance with
Banking Act 1959, licensing of foreign banks are operated through a division in Australia and
incorporated foreign bank subsidiary in Australia. In addition to, there is a lot of financial
institutions like mutual banks, credit unions and building communities that offer only a
certain type of banking services (Cummings and Wright, 2016). The system of banking is in
the form of liquid and developed yet competitive. The regulation offers the best level
summary of banks’ supervision and governance inclusive of authorities, international
standard rules, liquidity rules, requirements of from foreign investments, liquidation
management and current trends in banking regulation.
HISTORY OF BANK REGULATION IN AUSTRALIA
The Commonwealth Bank of Australia was established by the country’s legislation in
1911. This original body was then preserved in 1959 as the Reserve Bank of Australia (RBA)
in the law, especially to undertake the central banking functions. The savings and commercial
banking functions, at the same time, were shifted to a novel body, which continued with the
old name, i.e. Commonwealth Bank of Australia. The Australian Parliament undertook
authority to formulate laws related to currency and banking with the Federation of Australian
States into the Commonwealth of Australia. The preliminary Commonwealth Bank Act in
1911, provided the Bank just basic functions of savings and commercial banking; it did not
have a central banking remit and also did not have the responsibility for issuance of notes.
The Governor was in charge of the Bank’s management. The Department of Treasury
administered note issues.
In 1920, the authority of note issuance was shifted to a Notes Board from the
Treasury. The Bank’s Governor was ex officio a member of this Board. Hence, the Bank
undertook the administration for the issuance of notes, although the Notes Board and the
Bank were officially independent of one another. The Commonwealth Bank Act was
modified in 1924, and the power of note issue was then vested in the Bank. Management was
then governed by a board consisting of 8 directors (Docherty and Viort, 2014). From then till
1945, the Bank progressed its central banking activities gradually, primarily in response to
the economic turmoil of the 1930s and later on by official, albeit transient, expansion of its
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authority owing to the wartime regulations. Resultantly, exchange control and several other
controls came under its purview.
The Banking Act and the refined Commonwealth Bank Act of 1945, institutionalized
the powers of the Bank pertaining to the administration of the banking and monetary policies
and forex control. Under these Acts, the board ceased to exist and was substituted by an
advisory council comprising of six members belonging to the Treasury and the Bank.
According to this legislation, the Governor had the responsibility to manage the Bank.
Nonetheless, a new law in 1951 set up a novel board which included the Governor, Secretary
of Treasury and Deputy Governor, and continued the Governor’s responsibility to manage the
Bank (Cox, Hillman and Langevoort, 2016). With slight variations in member counts, this
has been the standard structure of the Board since then.
THE CURRENT REGULATORY REGIME APPLICABLE TO
AUSTRALIAN BANKS
The overall regulation of Australia’s finance and banking system is segregated
between Australian Securities and Investments Commission (ASIC) and the Reserve Bank of
Australia. The RBA is the central bank of Australia and carries the long-standing
accountability for the wholesome stability of the monetary policy and the country’s financial
system. The RBA policies are determined and implemented by the Payments Systems Board
and the Reserve Bank Board. Nonetheless, the RBA does not have any role to play in
prudential supervision of the ADIs (Gitman, Juchau and Flanagan, 2015). Technically, RBA
is also responsible for exchange control, nonetheless, at a pragmatic level, RBA approval is
not mandatory where foreign exchange transactions are undertaken via forex dealers and
money market dealers having RBA’s authorization.
When the Autonomous Sanctions Regulations 2011 was introduced under the
Autonomous Sanctions Act 2011, the responsibility for administering sanctions pertaining to
forex control no longer fell under the purview of the RBA. The Department of Foreign
Affairs and Trade is now responsible for this. RBA has no responsibility for the protection of
banking interests of depositors or any of the creditors of banks; instead, its mission is to
address with coercion to the financial consistency that is likely to fall over to the confidence
of investors and consumers and to the economic activities. At the point of these threats, the
bank holds its flexible role of last report lender for immediate liquidity assistance. When
there is providing such assistance, the RBA first choice will be to make finance available to
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market completely by its familiar market operations. In some situations, the RBA will be
ready to loan directly to institutions in front of difficulties of liquidity. The financial
institutions will have to be managed by ARPA and will have to be solvent, and a threat is the
failure to make payment in the entire stability system of finance. ARPA opinion regarding the
primary reliability of institutions in a suffering will be crucial to any of the RBA assistance.
The RBA, according to the support of the Payments System Board, along with this it
has a direct to endorse safety, efficiency and competitiveness in the payments system of
Australia, and also contains the backup, powerful regulatory powers. For instance, if RBA
considers developing entrance to, safety or efficiency, of a specific payment system it can
assign that system in relation to the regulation. It can after, public interest, oblige and retain
to command on the system or standard for safety and effectiveness. The government
predicted that these authorities and powers would be practised with a wide approach of
regulatory, with safety for operations of private sectors. The bank also stays liable for
performing Exchange Settlement Accounts for members in the system of payments.
According to the new regulatory provisions of the FSR Act, RBA has the duty to
ensure the settlement and payment facilities performing the affairs in such a way that is stable
with entire financial system stability. Being a part of this, RBA has the authority to impose
and observe agreement with standards of financial stability for payment and settlement. ASIC
is liable for all the issues regarding these facilities, like those concealing corporate
governance, security of investor, market reliability and for imposing an agreement with the
standards of RBA in case, it is mandatory. In March 2002, the ASIC and RBA agreed an
MOU (Memorandum of Understanding) that establishes a structure for assistance for these
two agencies regarding licence payments and settlement facilities. The purpose of MOU is to
support clearness, assist in avoiding a needless replica of efforts and reducing the stress on
facilities, it hides the sharing of information, notification and any other provisions aimed to
attain these aims.
The APRA was founded under the Australian Prudential Regulation Authority Act
1998 to regulatory bodies in the financial domain. This body overlooks licensing as well as
prudential supervision of all NOHCs and ADIs which the APRA authorizes. Australian
Prudential Regulation Authority has finished it's important refurbishment of its prudential
standards for the industry of general insurance. The transformation is inclusive of vital
increment in capital requirements, solid reinsurance planning, and supporting of suitable risk
and threat management strategies and policies (Howell, 2015). The transformation also
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initiated a powerful ‘healthy and sophisticated’ system for insurer’s management regarding
their actuaries and auditors.
In accordance with recommendation provided by group, and to divide the review
taken by the Productivity Commission and announced by government in 2002 October, that it
will impose several reforms is a worldwide regime of licensing, by which every ARPA
regulated trustee of superannuation fund, permitted funds of deposit and mutual
superannuation trust will be needed for licensing by ARPA and to meet the term with
requirements of licensing on a continuing manner (Bajada and Trayler, 2015). Trustees are
required to organize and propose to ARPA a management strategy for risks and planning for
all funds and trust on which they work.
One more significant aspect improvement for the purpose of prudential supervision
strengthening of superannuation was an amendment of the reporting structure for the
superannuation firms. The new and revised forms of reporting pooled the ARPA
requirements of reporting and ABS; they also broad the variety of prudential details gathered
and lined up the requirements, close to Australian accounting standards. The extra data
gathered will help ARPA to conduct more effectively the funds and trusts of superannuation,
and will be able to determine that might not be facing problems or are not managed in a
prudent way. The reputing requirements revisions will be provided authorized effect under
Reporting Standards identified in according to Financial Sector Act 2001. Further industry
recommendation regarding the requirements occurred in 2003 first half, and the revised
structure will be applicable hugely for the fiscal ending years during and after 30 June 2004.
FUTURE OF BANKING REGULATION IN AUSTRALIA
Banks require to re-evaluate and refine their approach to their regulators and the
regulations. Majority of the banks in Australia strive to maintain collaborative, honest and
open regulatory relationships. However, there is a need to do go beyond this, realizing their
part in safeguarding Australia’s reputation for fair dealing and sound finance. One of the
concerns emerged out of the global economic downturn was acknowledgment that there are
considerable interconnections between banks, especially the big, complex banks, which
implies that if they fail or are engulfed in financial turmoil, it will create spillover impacts
which will affect the functioning of the financial and economic systems in Australia (Dungey
et al., 2015).
This has given rise to concerns in the banking regulatory circles regarding what is the
best way to address and regulate the important banks. The regulators in Australia’s banking
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sector have made a lot of efforts in the past some years to put together good mechanisms and
planned to handle bank failures. These are some strategic moves. However, the regulatory
bodies are still not sure about how to handle one of the big four – if they are in difficulty in
Australia or in their New Zealand subsidiaries. The issue with the big four is that they are
extremely large to swallow and hence it is difficult for other banks to smoothly and quickly
take over.
The several measures recommended to try and mitigate the adverse social
externalities related to SIBs encompass steps like preventing them from growing so
interdependent and huge. There are recommendations for compulsory sell-offs or
restructuring. Some reports have even advocated for retail ring-fencing, i.e. dissociating retail
banking from other parts so that there is no spillover effect. There are also suggestions of
imposing taxes on big banks, compelling them to turn smaller (Docherty and Viort, 2014).
There is also some advantage in obligating SIBs to maintain a minimum extent of
contingent capital. This capital takes the shape of hybrid securities that compulsorily turn into
equity on some triggers being hit when a SIB is in difficulty. This has two merits. Firstly,
extra equity is formed automatically when required. Secondly, such security holders are
likely to exert and monitor market discipline over the banks provided their exposure to it.
Unquestionably the suitable design of these securities needs to be thought through
meticulously (Cummings and Wright, 2016).
In order to improve its process of prudential supervision and also train the best of
their resources, ARPA has improved a PAIRS (Probability and Impact Rating System). It
contains a stable risk consideration tool that incorporates risk of likely failure and its likely
effects on a sole measure of entire concerns of supervisory. PAIRS works in combination
with SOARS that is a Supervisory Oversight and Response System, by which the measures of
PAIRS of concerns of supervisory is converted in a suitable manner; that is restricted,
normal, improved and oversight. PAIRS illustrate a universal practice and build up harmony
on the aspects of ARPA ancestor bodies. In terms of considering the potential of failure, these
are on the basis of risk types acquired by financial in institutions, and for considering likely
impacts are on the basis of size and scale of a financial institution (Yan et al., 2014).
CONCLUSION
Present study shows significant revolution in banking regulatory norms of Australia in
order to ensure transparency, fairness and ethical aspects in transactions. Sectors of banking
in Australia are inclusive of licensing of the bank supported by provisions of Banking Act
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1959. Banking system is in the form of liquid and developed yet competitive. In regulation,
RBA and APRA have crucial role as RBA has the duty to ensure the settlement and payment
facilities performing the affairs in such a way that is stable with entire financial system
stability while APRA overlooks licensing as well as prudential supervision of all NOHCs and
ADIs which the APRA authorizes. There are six effective and solid factors that are handling
the Australia banking sectors today; technology, behaviour and attitude of customer, varying
demographics and a passive universal economy. These factors are addressing change timely
when traditional value drivers for the industry- development and growth of asset to a low
extent, influence are dissolving and can even overturn. Subsequently, expectations of
outcome and future position of industry are modified along with each announcement of
earnings.
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REFERENCES
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industry. In The Handbook of Service Innovation (pp. 319-343). Springer London.
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materials. Wolters Kluwer Law & Business.
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costs of Australian banks. Australian Economic Review, 49(1), pp.44-53.
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Dungey, M., Doko Tchatoka, F., Wells, G. and Yanotti, M.B., (2015). Mortgage choice
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Gitman, L.J., Juchau, R. and Flanagan, J., (2015). Principles of managerial finance. Pearson
Higher Education AU.
Yan, X., Skully, M., Avram, K. and Vu, T., (2014). Market discipline and deposit guarantee:
evidence from Australian banks. International Review of Finance, 14(3), pp.431-457.
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