HI5003 Economics for Business: Banking Sector and Government Policies

This report provides a comprehensive analysis of the Australian banking sector, focusing on its structure, market dynamics, and the significant role it plays in the overall economy. The report delves into the structure of the banking sector, highlighting the dominance of the 'big four' banks and their impact on the financial landscape. It examines the market structure, illustrating the sector's contribution to GDP and the regulations in place to ensure efficiency. The report also identifies key issues associated with the industry, such as misconduct, scandals, and conflicts of interest, and their impact on the sector and the broader Australian economy. It further discusses the government's policies and interventions in response to these issues, including the Royal Commission's findings and subsequent regulatory changes. The analysis also incorporates the demand and supply model to provide a clear picture of the Australian market, along with the impact of supply and demand shocks. The report concludes with an assessment of the sector's future, considering the implications of governmental regulations and the need for ethical standards to maintain operational efficiency.

Running head: ECONOMICS FOR BUSINESS
Economics for Business
Name of the Student:
Name of the University:
Author’s Note:

2
ECONOMICS FOR BUSINESS
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Industry Background...................................................................................................................3
Market Structure..........................................................................................................................4
Issue Associated with the Industry..............................................................................................6
Impact of the Issue on the Banking Sector and Australian Economy.........................................8
Government Policies..................................................................................................................10
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................12

3
ECONOMICS FOR BUSINESS
Introduction
The main purpose of the assessment is to analyse the banking sector which operates in
the Australian market and the overall impact which the business has on overall economy as
whole. The analysis would also be including the significant governmental regulations which
have been brought about in the banking sector and how the same has improved the efficiency of
the sector. The discussion would also be including analysis utilizing the demand and supply
model to get a clear picture of the Australian Market. In addition to this, the governmental
intervention would also be discussed in details.
Discussion
Industry Background
The banking sector can be regarded as one of the most important sector in any economy
and has a vital role to play in the overall growth and development of the economy as a whole. In
the economy of Australia, the banking sector is dominated by four major banks which largely
handles majority of the financial transactions in the economy. Commonwealth Bank of
Australia, Westpac Banking Corporation, Australia and New Zealand Banking Group,
and National Australia Bank are the four major banks which controls all the operations of a
business and contributes to the financial requirements of the country. These four banks have
significantly developed over the years in terms of market capitalization and also in terms of the
number of customers which are served by the bank (DailySabah. 2019). It is also to be noted that
the big four banks of Australia also make it to the list of top 25 safest banks operating around the
world. The banking system in Australia has developed significantly setting up numerous small
banks thereby strengthening the financial sector of the country. It is also to be noted that the

4
ECONOMICS FOR BUSINESS
banks also take additional responsibility for managing the foreign exchange for the people who
are visiting the country. One of the reasons due to which the Australian financial sector is strong
and ready to face any kind of adverse shock is due to the presence of strong banking system
which is further developing and growing. The banks capital ratios are also well maintained by
the banks in comparisons to the minimum which is required.
Market Structure
The market structure of the banking sector has been enormous and the same is still
growing which makes the sector vital in terms of contribution which the sector makes to the
GDP of the country (U.S. 2019). It is to be noted that the growth of the industrial sector and
other sector in Australia is dependent on the efficiency of the banking sector and therefore
appropriate regulations and restrictions are brought in so that effective control can be exercised.
The analysis of the performance of the banking sector from the past has shown the sector
has contributed most to the growth and development of different industries which are operating
in economy and how well the banks have meet the expectations of the customers in creations of
wealth (Reserve Bank of Australia. 2019). In order to effectively show the creation of wealth by
the banking industry over the past 20 years in Australia, a graphical presentation is shown below:

5
ECONOMICS FOR BUSINESS
Figure 1: (Creation of Value by Banks in Australia since 1995)
Source: (Pwc.com.au. 2019)
The above table shows the growth in the assets, ROA and market capitalizations which
are considered to be important benchmarks and therefore the same shows the effectiveness of the
banking sector operating in Australia. The above table effectively shows the growth in all the
elements which are considered in the table above. The trend shows that the banking sector is
likely to achieve more growth in future if all the conditions remains the same. In terms of
revenue generation as well, the banking industry has also earned significant amount of revenues
from operations of the business. This shows that the banking sector are also contributing to the
money creation process of a business. In order to effectively demonstrate the interest revenue
which the sector has been generating from the past few years are effectively demonstrated in the
figure which is presented below:

6
ECONOMICS FOR BUSINESS
Figure 1: (Interest Income Generated by Banks in Australia since 1995)
Source: (Pwc.com.au. 2019)
The chart shows that the banking sector has been generating consistent revenue in terms
of interest and other sources of income. This shows that the different banking businesses has
been generating consistent revenue from the operating process. It is also to be noted that in case,
the banking sector wants to continue making such revenues in the future period but for the same,
the authorities need to maintain an efficiency level in the operations of the business.
Furthermore, the banks also need to ensure that ethical standards are maintained in the
operational process of the business.
Issue Associated with the Industry
The banking sector also experiences from abuses and scandals which has affected the
industry severely. It is therefore for such reasons that regulations have been brought into the

7
ECONOMICS FOR BUSINESS
industry so that proper control and accountability can be maintained in the industry. Numerous
banking scandals have come to light which have affected the integrity of the industry and it is for
these reasons that the government had to step in so that proper control can be maintained in the
sector. Another issue which have been highlighted is the conflict of interest in the top executives
of banks which provides an opportunity to such officials to engage in misconduct. This has been
the issue which is faced by the banking sector and the same needs to be reduced so that the
banking sector can function in an effective manner. It is therefore for these reasons that the royal
commission has brought about changes in certain regulatory policies and also asked the banks
including the big four banks that they would be requiring submit a report to the royal
commission (East Asia Forum. 2018). This is done so that the royal commission can look into
the workings of the banks and ensure that there has been no misconduct in the operations of the
business. Even three of the big four banks Commonwealth Bank of Australia, New Zealand
Banking Group and National Australia Bank has been charged with misconduct after a detailed
review of the operations of the bank and the banks would to be subjected to punishment as
deemed fit by the Royal Commission.
The banking officials can also expect strict regulations ton brought in so that such
misconduct does not take place in future. The major issue which is identified in the sector is the
issue of misconduct which impacts the entire financial sector and its operations (BBC News.
2019). The banking sector also faces. It is also to be noted that the enquiry in the workings of
different banks which are operating in Australia also revealed that significant amount of money
was also being provided for the cause of money laundering and financing terrorism. This misuse
of resources made it clear that the banking sector required strict regulations so that better
accountability can be expected from the banking sector (Cohn, Fehr and Maréchal 2014). There

8
ECONOMICS FOR BUSINESS
are various other examples which can be provided regarding the misconduct in the banking
sector in Australia. The prominent ones being that of the Commonwealth bank of Australia
which had a culture of sales driven strategy in the financial planning section of the bank and the
objective of this section was to make profits at all costs (Beatty and Liao 2014). This resulted in
the business to apply all means to enhance the sales of the business and therefore was considered
to be a misconduct in the operational process of the bank.
Therefore, the discussion clearly shows the major issues which is faced by the banking
sector which is operating in Australia and also the inquires which were made into the working of
such banks so as to ensure that the operational process of the business is efficient and also free
any sort of misconduct.
Impact of the Issue on the Banking Sector and Australian Economy
The Australian economy withstood the global financial crisis in terms of the operations of
the financial sector in the economy. However, the banking sector has suffered from allegation of
misconduct and the same are mostly related to sales of products which are unsuitable, non-
adherence to responsible lending standards, improper financial advice provided to the clients,
attempted manipulation of financial benchmarks. In addition to this, the financial sector has also
been accused of non-compliance with anti-money laundering tactics and Know Your Customers
Policies (Guo and Liang 2016). It is to be noted that focus of such misconducts are the big four
banks which operate in Australia and this is because they hold around 80% of the transactions in
the country. The misconduct in banking sector has also affected the integrity of the financial
system and has led to significant decrease in the share prices of the banks during the time span
when the inquiries were actually being held. It was evident from the conduct of the banking

9
ECONOMICS FOR BUSINESS
sector that the major banks were driven by greed in managing the operations of the business and
thereby affected the banking system and Australian economy as a whole.
It has been alleged by many of the customers of the banks that the banks are more
dedicated towards profits rather than maintaining honesty in the operational process of the
business. One of the major impacts which has affected the operations of the banking sector is the
lack of interest of the banking sector to manage information regarding the customers as per the
requirement of Know Your Customers Regulations (Adapa and Cooksey 2013). This shows that
the banks are more driven by profits than by providing proper services to the customers of the
business. It is also revealed that the banks have a predatory nature when it comes to client and
the same is evident when one of the largest banks in the country charges fees from customers
who are already dead for insurance policies. The inquiry of the royal commission also reveals
that the banks are engaged in corporate fraud, bribery rings at banks, actions to deceive
regulators and reckless practices. All these practices have hampered the growth of the banking
sector and people are moving towards investment in shares and bonds due to the lack of ethical
conduct of the banking sector.
The model of demand and supply can be related to the flow of currency in the economy
and the same also relates to the flow of foreign currency in the economy. The supply and demand
shocks have an impact on the foreign currency flow in the domestic country and the same
impacts the banking sector significantly (Wu and Shen 2013). The supply shocks are experienced
by banks mostly after a few months from a financial crisis and this is the situation when the
banks need to sustain their operations and also ensure continued existence of the business. The
impact of demand and supply shocks on the banks which are operating in Australia are shown
below:

10
ECONOMICS FOR BUSINESS
Therefore, the discussion shows that the issues which are present in the Australian
banking system significantly affect the banking system in Australia and also causes demand and
supply shocks which affect the industry. In addition to this, the foreign transaction has also been
affected due to the misconduct which has been noticed in the financial sector of Australia. In
addition to this, the Australian banks have also been affected in terms of stocks of the business.
Government Policies
In view of the Australian Banking misconduct, the government has also taken necessary
steps for ensuring that such a misconduct does not takes place in future. The regulators of the
banking sector were instructed to bring about strict regulations in the banking system so that
such a misconduct does not occur in future. In addition to this, the Royal commission also was
formed so that review of the workings of the four major banks can done and any unethical
practices of such banks can be brought to light. In addition to this, the government has also
brought about significant penalties and fine in case any misconduct is detected in the operations
of the business. The authorities deemed that the inquiry was necessary as such scandal which

11
ECONOMICS FOR BUSINESS
demean the banking industry need to be highlighted and appropriate measure also required to be
undertaken by the government so that appropriate measures are taken by the banking authorities
(Sain, Rahman and Khanam 2016). Therefore, it is clear from the analysis that the strict
regulations were brought about by the banking regulators so that ethical practices can be initiated
in the banking sector and the banking system can regain the confidence of the public once again.
Conclusion
The analysis of the banking system in Australia revealed that the banking industry has
attained significant growth over the last decade but the same has been affected by misconduct in
the banking industry. The banking industry also has been affected due to the practices of the top
four banks and therefore, it is necessary for the government to bring about strict regulations in
the operations of the banks. The discussion further shows the issues which are faced by the
banking sector and how the same can be resolved by the regulators which are operating in
Australia. The analysis also reveals how the issues which are faced by the banking sector impact
the Australian economy and the demand and supply shocks which is faced by the economy in
terms of foreign exchange flow in the country. Further the discussion also shows the
governmental policies and introduction of review of the royal commission which was brought
about to bring in some accountability in the operational process of the banks.

12
ECONOMICS FOR BUSINESS
Reference
Adapa, S. and Cooksey, R., 2013. Factors affecting consumer's continued use of internet
banking: Empirical Evidence from Australia. Australasian Journal of Information
Systems, 18(1).
BBC News. (2019). Australian banking abuses 'driven by greed'. [online] Available at:
https://www.bbc.com/news/world-australia-45674716 [Accessed 22 Aug. 2019].
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.
Cohn, A., Fehr, E. and Maréchal, M.A., 2014. Business culture and dishonesty in the banking
industry. Nature, 516(7529), p.86.
DailySabah. (2019). Largest Australian banks under scrutiny over misconduct. [online]
Available at: https://www.dailysabah.com/business/2019/02/04/largest-australian-banks-under-
scrutiny-over-misconduct [Accessed 22 Aug. 2019].
East Asia Forum. (2018). Bad behaviour in Australia’s banking sector | East Asia Forum.
[online] Available at: https://www.eastasiaforum.org/2018/04/14/bad-behaviour-in-australias-
banking-sector/ [Accessed 22 Aug. 2019].
Guo, Y. and Liang, C., 2016. Blockchain application and outlook in the banking
industry. Financial Innovation, 2(1), p.24.
Lau, M.M., Cheung, R., Lam, A.Y. and Chu, Y.T., 2013. Measuring service quality in the
banking industry: a Hong Kong based study. Contemporary Management Research, 9(3).