Banking and Finance Essay: Royal Commission and Banking Issues

This essay provides an in-depth analysis of the banking and finance sector in Australia, focusing on the need for a Royal Commission to address issues of misconduct and governance failures. It begins by outlining the sector's importance to the Australian economy, highlighting its contribution to GDP and employment, and then examines the oligopolistic nature of the market, dominated by the 'Big Four' banks. The essay details various scandals, including money laundering, interest rate rigging, and misleading financial advice, and their negative impacts on consumers, businesses, and the overall financial health of the country. It explores the government's response through the proposed Royal Commission, its objectives, and potential implications. The essay also includes figures illustrating the financial sector's size, demand for banking activities, market share of major banks, and the negative impact on the share values of the 'Big Four' banks. The essay concludes by discussing the need for robust measures to ensure the commission's effectiveness in addressing the identified issues and restoring public trust in the banking sector.

Running head: BANKING AND FINANCE
Banking and Finance
Name of the Student
Name of the University
Author Note

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Introduction
Australia, over the years, has emerged as one of the most influencing and dominating
economies in the global scenario, with the country showing immensely impressive trends of
growth in almost all the economic indicators, in the last few decades. The country, with robust
growth in GDP, high employment and overall industrial and service sectors, is one of the most
developed economies in the contemporary global framework, which is reflected in the overall
high standard of living and welfare of the residents of the country (Dyster and Meredith 2012).
Much of the impressive economic growth and overall development of the country in the
last few decades can be attributed to the spectacular development of the industrial and financial
sector of the country, which in turn has considerably facilitated the consistently increasing
economic activities in the country. Of the primary industries, which have contributed
significantly in shaping up the economy of the country, as it is today, is the banking and the
financial sector. The banking sector of the country has remained one of the most stable and
consistently growing sectors in the country and the same has been considered as one of the
strongest in the global scenario of financial sectors over a prolonged period of time (Schneider
2013). However, in the last one and a half decades, several issues of concern has been cropping
up in this sector of the country, which includes governing weakness, unfair competitions,
misleading advices from the financial sectors and other disputes in the banking and the financial
sectors of the country. This in turn, has created immense concern among the governing
authorities of the country, which has proposed the formation and establishment of a Royal
Commission, for the purpose of vigilance into the issue of banking misconduct, superannuation
funds and the problems in the industry of financial services (Ravenhill 2017).
Keeping this into consideration, the essay tries to discuss the importance of the
establishment of the same in the current confusing situations in the country’s banking industry,
taking into account the industry as well as the wider targets of the commission. The essay also
tries to analyze the positive implications as well as the potential drawbacks of the proposed
commission and tries to recommend measures, which can be implemented in order to make the
Commission robust and efficient in addressing the issues in concern.

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Banking and Financial Sector: Australia
For examining the proposal of implementation of a Royal Commission in the banking
and financial sector of the country and the causes underlying such a proposal and action, it is of
utmost importance to get an overview of the banking industry of Australia. The dynamics
experienced by the same in the contemporary period has also to be taken into account (Joshi et
al. 2013). The banking sector of the country, as discussed above, is characterized by the presence
of competitive, sophisticated, profitable environment operating under a robust and efficient
policy framework of the country.
Figure 1: Size of the financial sector versus per –capita GDP in Australia
(Source: Imf.org, 2018)
As is evident from the above figure, the banking and financial sector of the country forms
an important contributor to the total economic growth of the country over the years. In an
average, the banking sector of the country contributes around 140 billion AUD to the overall

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Gross Domestic Product of the country and created employment for about 450,000 people,
thereby making itself one of the key drivers of the economic growth of the country (Jokipii and
Monnin 2013).
A consistently increasing number of consumers characterize the demand side of the
Australian banking sector. Much of these demand side activities can be attributed to the
increasing economic growth and industrial activities of the country. Over the years, the economic
prosperity and scope of industrial expansion in the country has attracted not only domestic
businesses but also entrepreneurs from all parts of the world to venture in the markets of the
economy (McLean 2012). This in turn has also increased the activities in the financial sector of
the country, which can be seen with the help of the following figure:
Figure 2: Increase in demand for the core banking activities in Australia
(Source: Atkearney.com , 2018)

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The above figure clearly asserts that over the last few decades, due to the overall
expansion of the economic activities, industrial sectors and commerce, the banking sector of the
country has been experiencing a consistent increase in the number of clients, both domestic as
well as international. This in turn has led to a considerable increase in the demand for the core
activities of the banking sector of the country.
The supply side of the banking sector of the country, in spite of the presence of a number
of players, shows the nature of an oligopolistic industry, with four major players enjoying the
lion’s share of the market and the clientele. The “Big Four” banks dominating the financial
sector of the country are namely the Commonwealth Bank, Australia and New Zealand Banking
Group, the Westpac Corporation and the National Australia Bank. These four major banks of the
country, evidently enjoys strikingly larger market shares in the economy than the other
comparatively smaller players in the supply side of the industry (Scott and Cadman 2018).
Figure 3: Market share of the four major banks in Australia
(Source: Theaustralian.com.au, 2018)
This highly oligopolistic nature of the banking and financial market of the country gives
immense controlling and decision making power in the hands of these banks, which with its
increasing clientele and profit base have together, in a collusive manner, dominated the banking

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scenario in the country in the contemporary period. These banks have experienced sustained and
consistently increasing profitability and market prospects. However, in the recent period, several
issues of concern have cropped up in this sector of the country, much of which can be attributed
to the unequal distribution of market power, unfair uses of those powers and a governing
framework incapable of combating the same (Beatty and Liao 2014). These aspects and their
negative implications on the banking sector as well as the overall financial health of the economy
and its residents are discussed in the following section of the essay.
Issues in the financial sector in contemporary periods: Need for Royal Commission
The presence of a prominent oligopoly in the banking and financial sector of the country,
in the recent times, has been the cause of several concerning issues in the sector itself as there are
evidences of misconduct and misusage of the already unequal market power by the big players in
the supply side of the economy. The banking industry, in the recent times, have been plagued
with several occurrences of considerable negative implications, which have in their turn led to
the decrease in the economic welfare of the clientele and a considerable loss of financial
prosperity of the economy, thereby decreasing the credibility of the industry alarmingly (Cohn,
Fehr and Maréchal 2014).
One of the major issues of concern in the contemporary banking and financial industry,
which have been bothering the governing authorities of the country, is a series of alarming
scandals in the industry in the last few decades. One of the biggest scandals in this industry is
attributed to the Commonwealth Bank of the country, which was accused of money laundering
and breaching the legal framework more than 50,000 times. The Commonwealth Bank has not
been only involved in these activities. The other big players in the supply side of the banking
sector of the country have also been subjected to major criticisms for unfair and unethical
practices.
The “Big Four” banks, together enjoying nearly four fifth of the total market share of the
industry and experiencing record profits over the years are in the recent times accused of the
formation of a lobby. The main objective of the lobby has been maximization of their personal
profit and incentives, even at the cost of the overall welfare of their clients and the economy of
the country as a whole (Ferguson 2018). For attaining their personal profit maximizing goals,

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these banks have emerged in activities like interest rate rigging, misleading financial advice to
their clientele and also huge insurance frauds and scandals, which have been facilitated by their
significant market power and political influence through different lobbies and interest groups.
Over the last few years, these four banks have engaged themselves in various forms of
serious corporate misconduct, which includes forging of signatures of their clientele for the
purpose of usage of the same for their own unethical benefits. The banks have also created a
huge number of unauthorized investment accounts in the name of the customers without asking
for their consent. This was primarily done to distort their market credibility by over-exaggerating
their market dominance and attracting more customers as well as investment, both domestic as
well as international, by providing false statistics to the potential customers
(Dailytelegraph.com.au, 2018). Another unethical activity, which the players in the banking
industry engaged into, was that of misleading their clients with false hopes and forcing them to
indulge into speculative investments, for their vested profit maximizing interests, which in turn
resulted in the loss of hundreds of millions of their client’s money.
All these activities had immense negative repercussions in the financial and banking
sector of the country, as huge amount of money was lost from the economy. The banking
misconduct led to bankruptcy of many businesses in the economy, among which the collapse of
the WestPoint developers is of utmost significance. As fallout of the malpractices and false
speculations created in the banking sector of the country, in 2006, the WestPoint property
developer collapsed and went bankrupt, with an outstanding loan of 388 million AUD which it
had to pay to its 4,300 investors. This, as per the report of the Parliamentary Joint Committee,
led to immense negative implications on the investment market of the country.
Apart from the collapse of the WestPoint and several other businesses as a byproduct of
the banking sector mismanagement, the residents of the country, who formed a significant share
of the clientele of these banks as well as the foreign investors, were immensely affected by the
scams and scandals cropping up in the country’s financial sector. This in turn led to substantial
loss of credibility of the banks in the country as people started losing trust over these institutions.
Over the last few years, these scandals and negative occurrences in the banking and financial
sector of the country, has led to the loss of a significant share of clientele as many of them are
shifting to other banks and investing in financial aspects outside the country, which in turn has

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led to a drain of resources from the country. This can be seen from the falling share value of the
bug four banks (indicating the decrease in their credibility) as can be seen from the following
figure:
Figure 4: Negative dynamics in the share values of the Big Four Banks
(Source: Abc.net.au, 2018)
Owing to the negative dynamics in the banking industry and the malpractices of the
financial sector, which have been facilitated by the mismanaging and inefficient policy
framework and political lobbies and interest groups, the same has led to lack of trust and
immense unrest among the civilians. The government of the country has proposed the
establishment of the Royal Commission in this aspect.
Royal Commission: Needs and Implications
To address the misconduct and negative occurrences in the banking sector of the country,
the Royal Commission was proposed on 30 November 2017. The main purpose of this
Commission includes investigation of the misconduct of the financial sector of the country and

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the cultures and governing framework of these institutions, which led to the creation of such
malpractices and issues in these sectors. The Commission is also expected to investigate the
breaching of the community standards in relation to the use of superannuation retirement
savings. One of the primary needs of establishment of the Royal Commission is to monitor and
investigate the inefficiencies of the current existing regulations and policy frameworks of the
Australian government and the loopholes in them, which has facilitated the lobbying, anti-client
and scandalous practices in the financial sector of the country (Matthews 2016). It is also needed,
as part of the responsibility of the commission, to assess the adequacy of the existing legal
framework and the internal controlling and managing construct of the financial institutions,
which are required to prevent such negative implications and redress for the customers who have
been the direct as well as the indirect sufferers of such banking misconducts. The tasks of the
proposed Commission also include framing of the reports on the overall evaluation of the current
situations prevailing in the banking and financial sector of the country. The Royal Commission is
also bestowed with the responsibility of forming recommendations and prescriptions of changes
for the concerned laws and corporate behaviors of the financial institutions (as and when
required) such that the misconduct and unfair practices are reduced as far as possible (McIlroy
2016).
The need for the establishment of the Commission has been felt for a prolonged period
for addressing the above-discussed issues as much of the credibility and welfare restoration in
the financial sector and their future profitability and sustainability are dependent on how
efficiently the bothering issues of malpractices and misconducts are addressed and resolved. One
of the primary causal factors behind the call for such a commission was the increasing public
concerns and lack of trusts on the primary banking companies, owing to their faulty financial
advice, insurance frauds, rigging and money laundering activities (Tanzer 2016). These, being
the key focal points of emphasis of the Royal Commission, make its effective establishment and
operation extremely important in the current banking and financial sector of the country.
Royal Commission: Superiority over other inquiries
There have been several inquiries, which have been conducted regarding the misconduct
of the banking sector of Australia, which notably includes the Financial System Inquiry of 2014.
However, the proposed Royal Commission is different from the same in the sense that the latter

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is specifically targeted to investigate the problems regarding the misconduct in the industry. All
the former inquiries could only address the issue partially, while the Commission incorporates a
more wide-ranging and farsighted inquiry. The Commission is capable of compelling the
witnesses to be present and to provide the documents as asked for by the inquiry. The
recommendations of the Commission are expected to be considered with considerable
importance by the policy makers as well as by the financial institutions themselves (McIlroy
2017).
Expected Limitations of the Royal Commissions
Though the proposed Royal Commission shows potentials in addressing the issues of
misconduct in the banking industry of the country, the Commission may face hurdles and
challenges in several aspects. The corporate environment being already inclusive of many
regulations and committees, the addition of another committee can make the system even more
cumbersome and confusing. The actions proposed for the Commission have high chances of
turning it into a bank bashing mechanism, with little productive outcomes if not implemented
and operated appropriately. There are lot of confusions regarding the exact roles and boundaries
of the Royal Commission and the areas where they would or would not intervene (Hand 2018).
There are also vague notions regarding the feasibility and future achievements of the
Commission, which makes the implementation of the proposal even more difficult.
Recommendation and Conclusion
From the above discussion, it is evident that the banking and financial sector of Australia,
in the contemporary period, is burdened with huge allegations of misconduct, scams and
malpractices. Much of this can be attributed to the unequal distribution of power, presence of
lobbies and interest groups, misuse of political influences and the legal and policy loopholes
present in the governing framework of the country. All these, clubbed together, adds to the need
of the establishment of the proposed Royal Commission in the country, which will be bestowed
with the responsibilities of investigating into the issues of concern, of identifying the problems
and of recommending the changes and improvisations in order to mitigate the same. There are
however, several limitations regarding the establishment of the Commission, which if not taken
into account can increase the negative implications in the concerned sector. Therefore, for an

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effective working of the Commission it is of immense importance to define its boundaries of
operations, responsibilities and powers. It has also to be kept into account that the Commission
needs to operate in an unbiased framework and should be free from the influence of the lobbies
and interest groups of the influential defaulters in the banking sector.

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