HI5003 Economics for Business: Australian Banking Report

This report provides an in-depth analysis of the Australian banking industry, focusing on its economic aspects and market dynamics. It begins with an introduction to the major players and the oligopolistic nature of the market, highlighting the dominance of four major banks. The report then delves into the industry's background, discussing the evolving financial structure and the blurring lines between investment and retail banking. It examines the market structure, characterized by high concentration and entry barriers, leading to issues such as deadweight loss and the formation of cartels. The report further explores the industry's associated issues, including the impact of market concentration on economic efficiency, stability, and profitability, and the consequences of scandals revealed by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It details the impact of these issues on the industry and the Australian economy, such as the decline in consumer confidence and aggregate demand. Finally, the report discusses government policies, including the Four Pillar policy and the role of the Royal Commission, and concludes with a summary of the key findings, emphasizing the concentration in the Australian banking industry, the impact of illegal activities, and the government's efforts to secure consumer interests. The report references various sources to support its analysis.

Economics for
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Introduction
• Australia is mostly dominated by four major banks
• Commonwealth Bank of Australia, New Zealand Banking Group (ANZ),
Australia and Westpac Banking Corporation and National Australia Bank (NAB)
• There are few smaller banks throughout the country
• Australia is mostly centred with the four reputed banks
• Lack of competition in the major banks creates dead weight loss (Hargovan
2018)
• The Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry

Industry Background
• The financial structure of Australia has undergone great deal of
changes in the past two decades
• In Australia, the difference between investment and retail banks
has become immensely obscure
• Fraud in banking sector by CBA (Liu 2015)
• The chief executive of CBA apologised to the public
• Banks involved in money laundering
• Australia’s “oligopolistic banking system” channels

Market Structure
• Highly concentrated oligopoly market.
• The major big banks have created a cartel
• The shareholder’s work is to extract the maximum profit (Salim,
Arjomandi and Seufert 2016)
• Joining a cartel leads to an increase in market power
• High entry barriers to enter the industry.
• Banks are able to easily depart the fleeting of full cut in interest
rate to the borrowers

The Industry’s associated
issue
• Concentration of market has significant effect on the
economy
• Economic efficiency, financial aspect, economic efficiency,
stability and profitability of Australia.
• In 2010, the rate of lending specifically for housing loans
has increased more than the official cut rate in Reserve
Bank of Australia (RBA).
• Customers were forced to accept the rate for the lack of
options (Fisse 2018)
• Four banks ruled the economy with high interest rates

The Industry’s associated
issue
• The Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry
• 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 commission was formed on 14 December 2017 under
the Royal Commission Act of 1902.

Impact of the issue on the
industry and Australian economy
• Banks performed really well in terms of economic surplus and GDP growth.
• Financial institutions were contained in money laundering for the purpose
of drug association
• The institutions did not have propriety in foreign trading and exchange
• Avoided statutory reporting responsibilities (Lipton 2017)
• The National Australia Bank (NAB) was involved in an array of scandals
• NAB secretly refunded millions of dollars for coverage of hundreds of
clients for improper financial planning between 2009 and 2015 (Ellis and
Littrell 2017).

Impact of the issue on the
industry and Australian economy
• Westpac received allegations in terms of rigging one of Australia’s key
interest rates known as the bank bill swap rate (Tomasic, 2018).
• Westpac repaid 65 million dollars top 220,000 customers for its inability to
provide benefits written in packed deals
• ANZ Bank was involved in the scandal of bank bill swapping rate and settled
with ASIC for convocation of legal proceedings
• Macquarie Bank was charged guilty of having a scandal in foreign exchange
trading(Cusbert and Rohling, 2013). .
• Customers asked to review an estimated amount of 84 dollars taken for loans
when the interest rate was very high.

Impact of the issue on the
industry and Australian economy
• Scandals of big banks lowers confidence of consumers
• Decline in demand for banking product and service (Evans and
Bratton 2015)
• As demand falls there is a general downward pressure on interest
rate
• Weak baking sector affects the entire economy
• Decline in aggregate demand
• Results in a decline on national income and price level (Hayne 2018).

Government Policy
• Four Pillar policy
• Prevents any mergers within the four major banks
• 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 commission required to organize an inquiry for resolving the individual
disturbance
• 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).

Conclusion
• Massive concentration in Australian banking industry.
• Oligopoly market
• Formation of cartel.
• Illegal activities; money laundering
• Formation of Royal Commission to conduct inquiry
• Scandals of major banks exposed
• Hurt the financial system and Australian economy as a whole.
• Government policy to secure consumers’ interest

References
• Cusbert, T. and Rohling, T., 2013. Currency Demand during the Global Financial Crisis: Evidence from
Australia. Available at SSRN 2209604.
• Ellis, L. and Littrell, C., 2017. Financial Stability in a Low Interest Rate Environment: An Australian
Case Study. Monetary Policy and Financial Stability in a World of Low Interest Rates. Reserve Bank of
Australia, Sydney
• Evans, L. and Bratton, S.K., 2015. Price Signalling and Cartels-A Critique of the Australian Approach.
CLPD, 1, p.25
• Hargovan, A., 2018. Governance in practice: Hayne royal commission interim report: Unclogging the
central artery. Governance Directions, 70(11), p.691.
• Hayne, K.M., 2018. Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry. Interim report, Commonwealth of Australia, Canberra, ACT, Australia.
• Lipton, P., 2017. The Introduction of Limited Liability into the English and Australian Colonial
Companies Acts: Inevitable Progression or Chaotic History. Melb. UL Rev., 41, p.1278

References
• Liu, H., 2015. Constructing the GFC: Australian banking leaders during the financial
‘crisis’. Leadership, 11(4), pp.424-450.
• Lodhia, S., 2015. Exploring the transition to integrated reporting through a practice
lens: an Australian customer owned bank perspective. Journal of Business Ethics,
129(3), pp.585-598
• Salim, R., Arjomandi, A. and Seufert, J.H., 2016. Does corporate governance affect
Australian banks' performance?. Journal of International Financial Markets, Institutions
and Money, 43, pp.113-125.
• Sheedy, E.A. and Jepsen, D., 2018. Risk Management Maturity in Large Australian
Superannuation Funds. Macquarie University Faculty of Business & Economics
Research Paper.
• Tomasic, R., 2018. Corporate Crime and Corporate Culture in Financial Institutions: An
Australian Perspective. In White Collar Crime and Risk (pp. 283-315). Palgrave
Macmillan, London.
• Wishart, D. and Wardrop, A., 2018. What can the Banking Royal Commission achieve:

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