HI5003 Economics for Business: Banking Industry Report and Analysis

This report provides an analysis of the Australian banking industry, primarily focusing on its market structure, which is dominated by four major banks operating within an oligopoly framework. The report highlights the issues associated with this structure, including high-interest rates, barriers to entry for new firms, and the resulting impact on the Australian economy. It examines the role of the Royal Commission in addressing misconduct and fraud within the banking sector. The report discusses the impacts of these issues on the industry, including financial scandals, money laundering, and manipulation of interest rates, and the resulting effects on consumer demand and economic stability. Finally, the report considers government policies and their effectiveness in regulating the banking industry and mitigating these issues.

Running Head: ECONOMICS FOR BUSINESS
Economics for Business
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Executive Summary
The banking industry in Australia us one of the most successful businesses in Australia
which is mostly dominated by four major banks. These banks have dominated the economy by
working as a cartel arrangement which happens in an Oligopoly markets. The banks kept a high
rate of interest and did not allow entry of small or new firms to open up and regulate in the
market. The power of the banks highly affected the economy with adverse effects as it blew the
potential resources and triggered a wide range of disruption in the financial sectors. Eventually,
there grew multiple scandals in the banking sector that led to fall in economic growth.
The Australian government has formed an organization called Royal Commission to stop the
fraud offences that started growing. They were able to expose the disruptions and has been
effective in solving a few cases. However, criticism was faced by the commission as it was
unable to solve most of the problems and charged money for provision of such services.

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Table of Contents
Introduction......................................................................................................................................2
Industry Background.......................................................................................................................3
Market structure...............................................................................................................................5
The industry’s associated issue........................................................................................................6
Impacts of the issue on the industry and on the Australia economy...............................................7
Government policy........................................................................................................................10
Conclusion.....................................................................................................................................11
Reference List................................................................................................................................11
Introduction
Australia is mostly dominated by four major banks. They are banks namely
Commonwealth Bank of Australia, New Zealand Banking Group (ANZ), Australia and Westpac

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Banking Corporation and National Australia Bank (NAB). Each of them has quality ratings in
the world.There a many big financial institutions like building societies, credit unions, mutual
banks, yet the market is mostly shadowed by those four banks. Few among them have a presence
of retail banks (Joshi et al. 2013).
Although there are few smaller banks throughout the country, Australia is mostly centred
with the four reputed banks. The productivity commission estimated these banks to pass huge
costs, by setting high price in order to upgrade the net revenue instead of carrying the burden of
lowering the market share at every stage of the business cycle. Lack of competition in the major
banks creates dead weight loss (Hargovan 2018). This high concentration makes firms makes the
institutions to enact as a single firm with similar rate of interest.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry is an Australian firm that is started by the government of Australia to inspect
and account for any dereliction in the banking operations (Lodhia 2015). The firm is commonly
known as Banking Royal Commission and Hayne Royal Commission. The royal commission
was formed on 14 December 2017, followed by the Royal Commissions Act of 1902 who was
engaged in looking after the matters regarding public concern.
Industry Background
The financial structure of Australia has undergone great deal of changes in the past two
decades due to policy changes. However, trade finance liquidity is a worldwide concern. Since,
the banking sector in Australia is clear and dependable, there occurs practicable and formative
separation from the system of America. Historically, Australian banks did not operate under the
confinement that bounded banks of United States operations during 1933 and the annulment of

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the Glass-Steagall Act (Moradi-Motlagh and Babacan 2015). In Australia, the difference
between investment and retail banks has become immensely obscure.
When the scandal of United States’ bank, Wells Fargo showed an exposure of driven
sales from the Commonwealth Bank of Australia (CBA) with the section of financial planning
which was mentioned as profit compared to cost. The fraud led to the flow of million dollars
from the pockets of thousands of customers as measured by an assembly of committee of the
Labour Senator Mark Bishop.
The senate committee noted the conduct of the Australian Investments Commission
(ASIC). Days later, the chief executive of CBA apologised to the public for the scandal due to
which money of people was misplaced. Yet, several people addressed that the bank did not
provide any immediate solution to the issue (Liu 2015). It was observed that CBA was
consequently related in matters inclusive of laundering money in drug cartels and neglecting the
statutory liability for more than 750,000 accounts in three years.
Later, it was found that financial institutions were contained in money laundering for the
purpose of drug association leading to transformation of blind eye towards terrorism financing.
Moreover, the institutions did not have propriety in foreign trading and exchange and avoided
statutory reporting responsibilities.
The realism of Australia’s “oligopolistic banking system” channels that the biggest banks
are now systematically abusing the performance of existing customers, sustaining their market
stature with persistently gloomy pricing by contrasting recommendation and remuneration
without proper accessible information that directs users to stay loyal to the firms products. They
are also astounding the market with a propagation of thousands of identical financial goods
which are impossible to shift through.

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Market structure
The major big banks have created a cartel arrangement as the greater part of the
shareholders are from the similar banks. Thus, there exists a common enthusiasm and interest in
the same banks. The shareholder’s work is to extract the maximum profit from the firms by
creating a monopoly market structure such that they can dominate and influence the market price
(Salim, Arjomandi and Seufert 2016). Profit maximization is achievable by the organizing cartel.
About 450,000 people are employed in the financial service sector that contributes a humongous
number to economic growth.
A cartel is the market structure where a group of firms that has the same goals and targets
take joint venture to make price and output decisions. These strategies give rise to an
oligopolistic system which are dependent on the formation of cartel which operate with few
companies, having a powerful share on the economy.
Joining a cartel leads to an increase in market power as member firms function together
to collectively determine the output level that each representative will supply at the price charged
by individual firm. The optimum profit maximizing decision in a cartel is equivalent to a
monopolist. The member firms enact in such a way so that the combined marginal cost is equal
to marginal revenue (Arsov, Shanahan and Williams 2013).
As a result, entry barrier is given by the banking institutions for new institutions to
operate Australia. The banking industry in Australia is reported to have the biggest barriers to
entry. Moreover, new entrants find it impossible to battle against big firms without considering a
minimum risk and cost. There is very little competition pressure for the cartel formation because
banks were able to easily depart the fleeting of full cut in interest rate to the borrowers in 2012.

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Having a huge interest margin with low costs rendered bigger revenue level and profit margins.
Government’s support help in dominating the market with huge benefits.
The industry’s associated issue
Concentration of market has significant effect on the economy that consists of economic
efficiency, financial aspect, economic efficiency, stability and profitability of Australia. Rise in
market concentration cause inefficiency in markets due to less competition. Generation of huge
producer surplus by low cost of production and low consumer surplus is not good for economic
well-being. In 2010, the rate of lending specifically for housing loans has increased more than
the official cut rate in Reserve Bank of Australia (RBA). Due to this domination, customers were
forced to accept the rate for the lack of options (Fisse 2018).
Although the four banks ruled the economy with high interest rates, customers blindly
trusted the banks. They had the idea that banks on deposition of money, banks would allow low
rate of interest and raise the rate of interest for loans. This assumption increased the profitability
of banks for spread of interest rate (Daly et al, 2015).
In Australian society, the Royal Commission is the biggest form of inspection on cases
regarding the matters of public attention. They are enunciated with the task of gaining peace, to
look into the matters of concerned pubic, demonstrate good government performance with
creation of power for Commonwealth. The element that differentiate royal commission and other
public inquiry industries is the establishment under definite constitution that converse explicit
powers of analysis on them. In Australia, Royal Commission operates both at the
Commonwealth and state level whereas in United Kingdom, royal commission equivalents have
been delegated under the legislation. All the stated inquiry would not be assigned under the royal
commission and in few cases it goes under commission of inquiry. It signifies the issue of patent

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letter from the representative of Crown or from the Crown directly. The newly formed reform
laws made in Australia reviews under the Commonwealth Act. The commission has huge powers
to assemble data, instructions and assist them with the inquiry as well as investigations (Marsh
and Phillips 2019). However, it is reported that the commission is unable to give fair share of
benefits to the people. It many cases, it has charged people for the service and has been
unsuccessful in delivering them and left issues unresolved.
Impacts of the issue on the industry and on the Australia economy
Although, the Banks performed really well in terms of economic surplus and GDP
growth. Later, it was found that financial institutions were contained in money laundering for the
purpose of drug association leading to transformation of blind eye towards terrorism financing.
Moreover, the institutions did not have propriety in foreign trading and exchange and avoided
statutory reporting responsibilities (Lipton 2017).
The National Australia Bank (NAB) was involved in an array of scandals by the financial
planners who admitted that NAB secretly refunded millions of dollars for coverage of hundreds
of clients for improper financial planning between 2009 and 2015. ASIC took away license of
the NAB staff members who provided financial advice in the past (Ellis and Littrell 2017).
Westpac received allegations in terms of rigging one of Australia’s key interest rates
known as the bank bill swap rate. They regulated a scheme by which automatically lending rates
could be determined according to people’s home lone lending criteria (Tomasic 2018). They
were reported to lend millions of dollar to elderly pensioners fraudulently. Westpac repaid 65
million dollars top 220,000 customers for its inability to provide benefits written in packed deals.
Even the ANZ Bank was involved in the scandal of bank bill swapping rate and settled with
ASIC for convocation of legal proceedings.

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Macquarie Bank was charged guilty of having a scandal in foreign exchange trading. The
bank was made to donate the charity with an amount of two million dollars for opening up of
foreign exchange arm for surveillance as ASIC uncovered range of ruptures by the traders.
The chief executives of the four big banks mentioned that many of senior and junior bank staffs
were dismissed for misconducting operations in banks (Cusbert and Rohling 2013). Customers
asked to review an estimated amount of 84 dollars taken for loans when the interest rate was very
high.
Figure 1: Effect on consumer demand due to high interest rates
As the Australian banks imposed a high rate of interest, many people reduced the
quantity they borrowed leading to a fall in demand. Customer confidence weakened and they
were not satisfied. The demand curve shifts leftward from its initial position. As fall in demand
for lower-yield drops down, the equilibrium interest must go down from I1 to I2. People lower
the amount of money they take as loans from M1 to M2. This posed a disastrous effect on the
market as they were losing interest and confidence of the consumers.

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High rate of interest facilitated greater supply of money for lending. Banks was engaged
in giving huge amounts of loans at a high rate. The effect could be faced by customers as they
had to sell their houses, to make ends meet (Evans and Bratton 2015). They were unable to find
any long-term solution to the problem as their debts got abolished. Many victims devoted to
hardship relief for providing the huge amount of money taken as loans.
Figure 2: Effect of interest rates on aggregate demand and supply
Generally, as the demand in financial institution goes down negative impacts can be seen
on the economy with a fall in Gross Domestic Product (GDP). The aggregate demand in the
economy decreases when rate of interest is high as demand for goods and services lowers.
Leftward aggregate demand can be seen from AD1 to AD2, while supply remains fixed at AS,
causing a fall in aggregate price level and output. As output in the economy contracts along with
the price level, real GDP goes down in the economy (Hayne 2018).

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Government policy
The four pillars policy was engaged in the role of rejecting any mergers within the four
major banks. The policy was long standing in regard of the economic fallacies against better
incentives. The prevented small firms to compete against them and banned entry of such firms
(McCombie and Thirlwall 2016).
The adoption of the four pillar policy by the Australian government restricted merger or
acquisition of banks among themselves. The aim of the policy was to obstruct the oligopolistic
structure in which firms are working by separating their objectives and goals with the rejection
of mergers or acquisition (Kamalnath and Lin 2019). However, having both the effects of four
pillar policy and cartel arrangement lowered competition within the firms, giving greater dead
weight loss.
Under the Act of 1959, banks required a license to conduct business in forcing branches
and incorporate the subsidiaries in them. In regard to that Act, the government introduced the
Royal Commission (Wishart and Wardrop 2018). The government arranged for the policy of
Royal Commission to resolve the disputes of the banking sector. The commission required to
organize an inquiry for resolving the individual disturbance and is unable to award or fix
compensations for making orders to a party regarding disputes and not taking any action.
The formulation of the authority experienced exposure from the media of a voracious
culture among various financial institutions of Australia. A consecutive analysis by the
parliament advocated a royal commission, citing the negligence of government intervention and
regulation in the banking sector (Sheedy and Jepsen 2018). In 2017 federal budget, a bank tax of
100 billion dollars was proposed so as to stop fraud offences by the banks.

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Conclusion
The four biggest pillars have grabbed hold of the banking industry since the 1990s and
prevented other mergers from entering the market. The banking structure is said to be of
oligopolistic nature due as only few firms operate with huge number of buyers who are forced to
use it due to unavailability of substitutes. These banks have a collective range in share of
deposits and loans that prevented competition and growth of new firms.
The major Australian banks are all ranked among the top 25 safest banks in the world.
They have been included in the most profitable and revenue earning banks globally. Australia's
monetary sector is the largest donor of the domestic economy with a net value around 140 billion
dollars to GDP per year.
In an attempt to protect the interest if the consumers, the commission was formed. In
April 2016. It was able to build trust and grow confidence among people which they initially
lacked due to bank scandals. However, comprehensive criticism was found against ASICs for the
inability to meets the desired targets to its full extent. ASICs was blamed for taking fees for
services they did not procure. Reports also reveal that government organizations were not fully
effective to supervise financial institutions and solve customer issues.
Reference List
Arsov, I., Shanahan, B. and Williams, T., 2013. Funding the Australian resources investment
boom. RBA Bulletin, March, pp.51-61.