HI5003 Economics Report: Analysis of the Australian Banking Industry

This report analyzes the economics of the Australian banking industry, focusing on its background, market structure, and associated issues. The report identifies the banking sector as a crucial part of the Australian economy, managing financial assets and contributing significantly to the national income. It examines the market structure, characterizing the industry as a monopoly due to its unique services. The study delves into the major issue of the Royal Commission into misconduct in the financial services, banking, and superannuation industry, highlighting its impact on the sector. The analysis covers the commission's findings, including dishonesty and unfair treatment of customers, leading to reduced customer numbers and changes in mortgage broking. It also discusses the implementation of new regulations, such as changes in fees and loan schemes for farmers. The report concludes that the misconduct is changing the sector, with the government implementing new laws and regulations to address these issues.

Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Background of the industry..........................................................................................................1
Market structure which may characterises the industry...............................................................1
Summary of its associated issues.................................................................................................2
Analysis of the impact of the issue..............................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Economics for business can be defined as the field which is analysed by organisations for
the purpose of determine impact of the issues which are taking place within the industry. Main
purpose behind the analysis is to form strategic decisions so that formed plan could be
implemented appropriately (Barnett, Ziegler and Byleen, 2015). The sector which is selected for
this report is banking. This assignment covers various topics such as background of industry,
market structure that characterise it and summary of associated issues with it. Along with this,
impact of the problems affecting banking industry are also covered under this assignment.
MAIN BODY
Background of the industry
Banking sector is the part of an economy which holds different types of financial assets
for others. Different activities are performed by this sector of Australia which includes managing
monetary resources, helping companies to run their business properly by providing them loans. It
plays very important role in the functioning of the country because all the inflows and outflows
of finance are controlled and monitored by it. It is contributing a large amount in the national
income of the country which helps to grow the economy. It is a part of service industry which is
also known as tertiary sector because it is involved in keeping track record of monetary
resources. There are various types of functions which are performed by it. These are accepting
deposits from individuals and institutions, allowing credits, loans, providing facilities of bill
discounting and overdraft etc. In year 2018 it has contributed around 140 billion Dollars in GDP
of Australia and it also provide employment opportunities around 450000 individuals
(Contribution of banking sector in GDP, 2019).
Market structure which may characterises the industry
Market structure can be defined as characteristics of a market in which different
industries are operating their activities. All the features are focused by organisations to determine
level of competition and price fluctuation within the marketplace. There are various types of it
such as perfect competition, imperfect competition, oligopoly and monopoly. All of them
characterises the industries which are related to them (Brickley, Smith and Zimmerman, 2015).
The situation in which there are numerous number of buyers and sellers within the
marketplace and the aspects related to monopoly are absent then it is known as perfect
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competition market structure. When some of the components of monopoly allow clients to
control the price then it is known as imperfect competition structure. It occurs when one of the
condition of perfect industry us not met.
If there is low level of competition in the market and it is shared by limited number of
sellers then it is known as oligopoly structure. On the other hand, when there is a single seller in
the market who is selling products to customers is known as monopoly structure.
From all the discussed market structures monopoly can characterise banking industry
because it is the only sector which is involved in different types of activities. These are lending
money, allowing credit, keeping track record of monetary transactions etc. There is no other
sector which may render such types of services to the customers according to their requirements.
There are various benefits of it to the banking industry as they can modify rates of interest and
generate higher profits from the lenders. In order to attract large number of clients it can also
enhance rates of the interest rate on different deposits such as recurring and fixed. This market
structure also benefit from economies of scale by enhancing size so that lower cost could be
experiences. All the industries which are having scope for specialisation and higher fixed
expenses it is an essential element (Coase and Wang, 2012).
Summary of its associated issues
One of the major issue which is affecting banking industry of Australia is Royal
Commission in to misconduct in the financial services, banking and superannuation industry.
Royal commission was established by Australian government in year 2017. There are various
problems in the report which was submitted by Commissioner to the Governer General on 1 Feb.
2019. These issues are related to different aspects such as it was not able to deal with various
challenges such as resolution of individual's disputes, fix award compensation etc. Due to this all
whole banking industry is dealing with continuous decrement in profits. The royal commission
was established for the purpose of reinforcement of honest and appropriate dealings among
Australian public and banking, superannuation and financial service providers (Gillespie, 2013
Einav and Levin, 2014).
Royal commission examined that there is high level of dishonesty and greed in one of the
oldest financial institute of Australia. It resulted in sudden reduced in number of customers and
low level of cash to execute business operations. The report which was presented has created
various challenges for regulators, lawmakers, community and industry. In order to deal with the
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misconduct which are performed by financial institution of Australia, commissioner focused
mainly on non financial risks, culture and governance in banking sector. Another aspect which
was focused by them was reduction in imbalance of power between consumers and banking
sector organisations (Issue in banking industry, 2019). It also includes different modifications
such as changes in mortgage broking model, broker fees etc. While preparing the report the
commissioner have taken time of 12 months which also includes public hearings and evidences
which were collected from almost 250 individuals.
The report was very long and it has 1000 pages which also includes 76 recommendations
which could be considered by Governor General of Australia to deal with the issue which is
affecting whole banking industry. It also covers 19 referrals of organisations in order to take
further actions. The final report which covers all the details regarding the misconduct was
published on 4th Feb. 2019 (Description of Commissioner's report, 2019).
Analysis of the impact of the issue
The recent Royal Commission into misconduct in the Banking, Superannuation and
Financial Services Industry has resulted in various negative impacts upon banking sector and the
organisations which are executing business under it. In order to outline the issue a report is
generated by commissioner which are presented in front of Governor General of Australia. It was
very long and have 1000 pages with recommendations and referrals. On 4th of Feb. 2019 it was
released which covers detailed information of dishonesty and unfair treatment financial
institutions of Australia with customers. It was highly focused with culture, governance and
other areas which may leave impact upon the economy. All the major impacts of it are as
follows:
Reduction in number of customers: When Royal commission analysed that financial
institutions in Australia are conducting dishonest activities and giving unfair treatment to the
customers then a report is generated by the commissioner. It was formed by researching the
situation of Australia for one year which also covers 69 days spent for witnessing individuals.
When customers realised that banks are fooling them since a long period of time then they
decided to ignore to keep their money in financial institutions (Granger, 2014). It also affected
their engagement level in banks. There are various other options which were selected by them to
invest their money. These are financial instruments such as mutual funds, shares, bonds etc. Due
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to this banking sector individuals are ignoring to keep their money in banks as they have threat
of being treated with dishonesty by bank.
Changes in mortgage broker: Due to this issue the brokers of mortgage will no longer
have any right to trail commissions. It is one of the main steps which have taken by the
government to deal with the situation of misconduct. It will be effective from July month of
2020. A commission named upfront will be replaced by customer paid fee which will make
changes in payment of fee. After implementation of it the lender will be responsible for the
payment to the brokerage fee rather than borrower. This law will also be applicable on the
financial advisors and they have to follow it to perform their job responsibilities Koellinger and
Roy Thurik, 2012).
Charges for services which are not provided: There are various fees which are charged
by financial advisors which are charged by them on the services which are not provided by them
to clients. After analysing the misconduct the legal authorities have passed a rule that if they ask
for such types of fees from customers then they may have to go to jail for 10 years.
Farmers to get a relief from loan in condition of natural disasters: A new scheme is
also going to be launched by government in which burden of farmers struggling with repayment
of loans will be reduced. In condition of natural disasters they are will not have to be worry
about the amount of loan.
Banks are required to have customer consent: When report of Royal commission was
published in launched in the market then the government have also made a rule that all the banks
have to take written consent from the customers before changing fees for their services. Different
charges which are charged by banks on dishonour, overdraft etc. should be accounted after
agreeing with customers.
Decrement in monetary resources: Due to the misconduct of banking, superannuation
and financial services industry various problems will be faced by these sectors. It has resulted in
decreased monetary resources for the banks as customers have started to ignore banks as a option
of saving their money. Currently it is resulting in reduced funds for business operations.
Modifications in superannuation: banks also charge some fees on my super accounts
and now government have implemented a law in which it is mentioned that the fees will be
banned and there will be only one default superannuation account of the individuals working
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within the companies. The unsolicited sales which is related to superannuation is also required to
be stopped according to governmental regulations (Impact of misconduct on the industry, 2019).
Banks have no right to determine value of land: According a new law which is going
to be implemented by Australian government, value of the land which will be provided as
collateral by borrowers will not be determined by banks. Currently it is analysed by banks but
according to new modifications in law now it could not be valued by them.
From the above analysis it has been assessed that misconduct in banking, financial
services and superannuation industry is changing the sector as government is implementing new
laws, rules and regulations (Leamer and Stern, 2017). Dishonest and unfair behaviour of
financial institutes of Australia has resulted in different challenges for banks such as decreased
monetary resources, reduce number of customers etc. Government of Australia is going to
impose new laws and schemes which will be effective from July 2020. It includes no fees for
brokerage, relief for farmers from loan in situation of natural disaster etc.
CONCLUSION
From the above project report it has been concluded that economics is a area of the study
which is conducted by companies in order to determine the factors which are affecting the
economy. Banking industry of Australia is dealing with various challenges due to misconduct in
financial, superannuation and banking industry. It is affecting the whole sector by creating
different challenges such as continuous reduction in funds, decreased number of customers and
implementation of new rules and regulations.
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REFERENCES
Books and Journals:
Barnett, R. A., Ziegler, M. R. and Byleen, K. E., 2015. College mathematics for business,
economics, life sciences, and social sciences.
Brickley, J., Smith, C. and Zimmerman, J., 2015. Managerial economics and organizational
architecture. McGraw-Hill Education.
Coase, R. and Wang, N., 2012. Saving economics from the economists. Harvard Business
Review. 90(12). p.36.
Einav, L. and Levin, J., 2014. Economics in the age of big data. Science. 346(6210). p.1243089.
Gillespie, A., 2013. Business economics. Oxford University Press.
Granger, C. W. J., 2014. Forecasting in business and economics. Academic Press.
Koellinger, P. D. and Roy Thurik, A., 2012. Entrepreneurship and the business cycle. Review of
Economics and Statistics. 94(4). pp.1143-1156.
Leamer, E. E. and Stern, R. M., 2017. Quantitative international economics. Routledge.
Online
Contribution of banking sector in GDP. 2019. [Online]. Available through:
<http://fintech.treasury.gov.au/the-strength-of-australias-financial-sector/>
Issue in banking industry. 2019. [Online]. Available through:
<https://www.gtlaw.com.au/insights/final-report-royal-commission-misconduct-
banking-superannuation-financial-services-industry>
Description of Commissioner's report. 2019. [Online]. Available through:
<https://apo.org.au/node/132221>
Impact of misconduct on the industry. 2019. [Online]. Available through:
<https://www.huxley.com/en-GB/blog/2019/03/what-is-the-impact-of-the-banking-
royal-commission-on-australia>
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