Holmes Institute HI5003 Economics: Banking Industry Analysis Report

This report offers a comprehensive analysis of the Australian banking industry, examining its structure, key players, and market dynamics. It delves into ethical issues within the sector, such as misconduct and consumer abuse, and explores the impact of these issues on the Australian economy. The report investigates the causes and consequences of fluctuations in interest rates, applying the concepts of market demand and supply. It also analyzes government policies designed to stabilize the market. The analysis covers the major banks, their market capitalization, and their contribution to the Australian economy. The report utilizes aggregate demand and supply models to explain the industry's economic relationships and the effects of monetary policies. Finally, it evaluates ethical issues and the impact on the financial sector.

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Contents
Introduction...........................................................................................................................................3
Banking industry...................................................................................................................................3
Market structure of the banking industry...............................................................................................5
Examination of issue regarding the industry on Australian economy....................................................8
Examination of ethical issue..............................................................................................................8
Evaluation of unnecessary fluctuation in interest rates of houses......................................................8
Relevant application of market demand and market supply...................................................................9
Government policies that intervene in market and finally stabilise them.............................................11
Conclusion...........................................................................................................................................12
References...........................................................................................................................................13

Introduction
The report brings out a discussion on recent royal commission leading to misconduct in the
banking sector, financial services industry, and superannuation. This report continues
background of Australian banking industry with elaboration of major issues as given below
with how they can be resolved through government policies and law compliance.
Misconducting and the consumer abuse is quite prominent, chronic, long standing, and
profound (Reserve Bank of Australia, 2018). The authorities of royal commission is being
heard as CBA top manager as they have the power to negotiate with issues related to media
release rather than undertaking the case under court enforceable after selling bank`s super
accounts. At last, there is an analysis of affecting issue in regards to the industry on the
economy of Australia. This discussion will carry out a discussion on aggregate demand and
aggregate supply model and its relativity with the banking industry (Reserve Bank of
Australia, 2018).
Banking industry
Banking in Australia is ruled by four main banks named as Westpac banking corporation,
New Zealand banking group, Commonwealth bank of Australia and National Australian
Bank (Reserve Bank of Australia, 2019). Although, there are several banks in the country
with the large number of financial institutional including credit unions, creating societies,
mutual banks that can finally provide banking type services as being described as the deposit
taking institutions. The central bank of Australia is named as “reserve bank of Australia.”
(Cummings, and Wright, 2016).
Several greater banks have their presence where few have retail banking presence. Banks of
Australian government has guaranteed deposits nearly to $250000 per customers against the
banking failures. Under the Banking Act, 1959, it is seen that a licence has to operate through

operations in Australia and the Australian foreign corporate bank (Reserve Bank of Australia,
2019). It should comply with religious charitable development banking funds that are exempt
from the requirement of licence. For the last ten years, commonwealth bank is ranked at first
in terms of Bloomberg return riskless with a risk adjustment of 18 percent. These four major
banks hold world`s largest market capitalisation with rank of 25 for the safe banks
(Cummings, and Wright, 2016). The banking sector of Australia is its largest Australian
financial system. It can comprise of 147 authorities for the deposit taking institution that can
collectively hold nearly 55 percent of the assets of the AFI (Australian financial institutions).
History of banking has begun with the prototype banks that are related to merchants of world,
which has made grain loans to the farmers and the traders that carry goods between the cities.
The Australian market comprises of five ADIs and its five component, which can make
ASX20 amongst 20 largest stocks within the market capitalisation. ADIs can make nearly 44
percent of the total market capitalisation (Reserve Bank of Australia, 2019). The chart shows
the appropriate market capitalisation for the 10 years with financial companies that could
undertake finance, investment banking, asset management, corporate lending, financial
investment, and insurance by excluding Australian real estate trusting investments.
0
50
100
150
200
250
300
0
50
100
150
200
250
300
Jan-2008 Jan-2010 Jan-2012 Jan-2014 Jan-2016 Jan-2018
S&P/ASX200 Financial-x-A-REIT (total return) S&P/ASX 200 (total return)
Index (31 Jan 2018=100) Index (31 Jan 2018=100)
(Source: Alhassan, Addisson, and Asamoah, 2015)

It is important to calculate profits and return on equity of the ADIs (American depository
investments) derived a net profit of nearly around $35.9 billion in 2017. The major banks of
Australia earn a profit margin of $831 million. International comparison of prices of Australia
bank profits and its relative returns can not undertake different accounting standards and
financial reporting. ADI has substantially contributed to Australian economy. At the end in
2017, ADIs held on $4.6 trillion in regards to assets. Financial with other insurance services
include several financial corporation that is the major contributor to the gross value added to
real industry. It is a measure for healthcare, social services, and construction with
contribution of 8 percent, manufacturing mining contributes to 6 percent to the real industry
as it is added to the real industry valuation (Alhassan, Addisson, and Asamoah, 2015).
Market structure of the banking industry
From the above chart, it is seen that banks of Australia can be its major bank such as
Commonwealth bank, National Australian Bank limited, Westpac banking and Australian,
NZ banking Group limited and their associated subsidiary banks. Other domestic banks can
be locally owned banks excluded as classified as their major banks. For instance- bank of
Queensland limited and Macquarie bank limited. Foreign banking organisation can carry out
banking business with local incorporated subsidiary such as ING Bank, and HSBC bank.

Banking industry can handle credit, financial transactions and cash that provides a safe store
to keep the extra cash and the credit. This will help to offer certificates, checking accounts,
and saving account. The structure is believed to be transparent, reliable, and also there are
some relative structural with operation difference as compared to the American system. There
are almost 149 authorised depository institutions in Australia. In the business environment,
majority of banks occupy 80 percent of market and then set models in order to measure the
risk of loan without mattering whether it is a small ADI. The financial service sector has
three main regulators such as reserve bank of India that look at the monetary policies,
responsible institutions named as building societies, banks, credit unions, Australian
securities and the investment commission that will focus on consumer protection and market
integrity.
The market structure of the banking system is related to monopoly where the market is
dominated by four major banks (ANZ bank, commonwealth bank, national Australia bank,
and Westpac). Trade finance liquidity that remains as an issue in the rest of the world.
Monopoly requires where a group of banks dominates the whole economy. Form the point of
view of regulations, monopoly exists as the 75 percent of the Australia`s economy is
dominated by these four banks.
Associated issue
Ethical issue-
Recently, the Australian banking industry has been facing severe challenges as it has been
facing reputation issues as financial industry has misshapen. These days, Australian financial
industry is ranked last in some of its surveys. The Australian banking industry has noticed
that it is expected to pick up through the back of monetary with the fiscal stimuli that is likely
to boost household income with consumer pricing. With compliance of moral standards,
principle, rules, and regulations, which give a sense of professional behaviour. The ethical

issue relates to unauthorised trading, short selling, credit rating, mis-selling, and bribery
among the top-level management. Australian Prudential regulation Authority, Australian
securities with the investment commission, and the reserve bank of Australia launch a set
banking code of conduct that is an enforceable standards which the consumer, guarantors,
and small businesses expecting from the banks of Australia.
(Source: JACOBS, 2018)
The issue is related to disruption from the innovation strategy including lack of real time
payments with the mobile banking both in terms of threat for the sector. Improvement in
efficiency ratios in regards to the Australian economy, which has certainly slow down the
growth as the curve has been falling down (JACOBS, 2018).
Examination of issue regarding the industry on Australian economy
Examination of ethical issue
RBA (Reserve bank of Australia) has examined that the Australian ethical index has fallen
majorly six points from 41 to 35. The financial and corporate sector faced significant falls.
The governance of Australia points out that index suggests several high profiling scandals
with the alarming company breaches that have undermined confidence (Cassidy, and Kosev,
2015). These big banks had huge customer trust in its operation and advice, which is being

eroded by streaming the stories of scandals. The ethics index of Governance institute of
Australia has been dragged by poor perception of ethics in regards to the banking sector.
Almost half of banking, insurance, and finance are considered unethical and only 28 percent
of the cases are ethical (Liu, 2015). Ethically important issue in the banking and finance
industry continues to execute salaries, corruption and bribery issues even in the executive
bonuses (Cassidy, and Kosev, 2015). Australians often think that CEO is paid maximum so
more unethical they think it may be. Nearly three-fourth of people think that they are
unethical when the CEO is paid nearly to $3 million and 50 times higher than the average
Australian income for an year. The most trusted professionals in banking industry are
ambulance officers, fire fighters, and the nurses. The least trusted people are state politicians,
federal politicians, and real estate agent (Liu, 2015).
Evaluation of unnecessary fluctuation in interest rates of houses
The required reduction in interest rate reflect weak performance of the Australia`s economy
in 12 months. With the need of the hour, central bank has noticed that it leads to full
employment, which has shifted, with the number of Australians that started their work with
more increased working hours implying lower unemployment rate leading to get their wages
and rise in the prices. The growth has decreased due to number of reasons such as least
number of productive workforce, slow down economic growth, increased risk of business,
weighted potential recovery in terms of investments, which have resulted into US china trade
dispute. Fall in sizable housing prices in among the two Australian greatest market that
further leads to fall in the new building construction when weakened housing sentiments. It is
the sign of slowing economy evident in terms of household income growth.
Relevant application of market demand and market supply
Aggregate supply is the total quantity of the output, which the organisations will produce and
sell at a certain price level. This curve shows a certain adjusted level of income with relation

to inflation rate. It comprises of certain components, which has direct relation to the banking
industry of Australia such as real balances, interest rate impact, exports, supply of money,
GDP, impact of monetary policy, impact of fiscal policy, and condition of capital market. On
the other hand, aggregate demand refers to amount of total spending of the domestic goods
and services in an economy. This will include government spending on certain programs,
consumption through purchasing assets with the use of money, investment in assets or bank
itself. For aggregate demand, it equals to (M): C + I + G + X – M, where c refers to
consumption spending, I refers to investment spending, G refers to government spending, and
X refers to spending on exports.
(Source: Reserve Bank of Australia, 2018)
Monetary policies in Australia has been determined by RBB (Reserve bank board) in terms of
cash rate. The initial phase refers to transmission of how changes of the cash rate affect
interest rate in the whole economy. The cash rate is the real market rate (interest) including
interest rate, deposits, lending rates for businesses and households. Transmission relates to

change in the interest rate affecting economic inflation and activity. The central bank can host
inflation expectation increasing the confidence of business while making decisions regarding
decision and saving the investment as uncertainty is reduced. It is important to understand
that there are several channels defined in aggregate demand and aggregate supply such as
saving and investment channel, asset pricing and wealth management, cash flow model and
the exchange rate channel (Alhassan, Addisson, and Asamoah, 2015).
Interest rate affect economic activity to change the incentive for investment and saving. This
channel affects housing investment, business investment and the consumption. A decrease in
deposit rates has reduced the incentive for our households. Lower lending rates can lead to
the encouragement to increase the borrowing, which face lower repayments as lower lending
rate can support huge demand for the housing assets. Interest rate can affect the decision of
the household by changing the amount of the cash available on services and goods
(Mortimer, Neale, Hasan, and Dunphy, 2015). Reduction in the lending rates has reduced the
interest repayment on debt, business to spend on services and goods, and raised amount of
cash available for businesses and household to spend on the goods. Asset price with the
people`s wealth impact can borrow and how will it spend in economy. The asset price with
people wealth impact with how they can borrow and how these can spend in the economy.
Low interest rate can support asset price by motivating demand for assets. A reason can be
due to present discounted value of future income, which is higher when interest rate is lower
(Pham, Anderson, Duong, and Lajbcygier, 2018).
Government policies that intervene in market and finally stabilise them
There is an established between government and businesses in Australia as being examined
with the consideration of availing stable set of rules for organisation to act within and adapt
to the changing situations (Salim, Arjomandi, and Seufert, 2016). Government has attempted
with an achievement to step certain changes with usage of independent task forces, which has

examined technological progression (Pham, Anderson, Duong, and Lajbcygier, 2018). The
challenge is related to development of rulers and regulation, which would avail stable to
operate within the strategy. The government authorities should comply with policies relating
to code of conduct as seen by the reserve bank board members. This will recognise the role
while maintaining the reputation for integrity and the propriety in each respect to which they
will have to agree (Salim, Arjomandi, and Seufert, 2016). Payment system board will find the
role of maintaining the reputation of bank for all the respects and agreeing to the code of
conduct. Staff is responsible for conduction of code of conduct with high level of integrity to
achieve excellence, perform well, and promote interest. The reserve bank ensures that they
meet compliance related to Australia`s competition laws (Pham, Anderson, Duong, and
Lajbcygier, 2018).
Conclusion
Australia’s banking industry has been emerging from GFC as it emerged as strong position.
The reputation was enhanced but at the same time, it faces challenges in making of the
policies as being related to cost with the stability of funds, implementation of the
international reformation, and the enhancement of consumer welfare. It is important to
maintain a competitiveness as it will help the banks to gain welfare profits in any of the
market. Competition is the main cornerstone of the related to efficiency. Competition need to
become more balanced with the maintenance of stability. There is safe and stable banking
system as it is one of the important component of the economic infrastructure. From the
above discussion, it is seen that policy maker and government look forward to work with
industry to meet several challenges, where the customers are facing ethical issue and
implementation is related to government reform package as being announced. The greater fall
in the housing prices that are coincided with an extended period of weakened household
income, level that is quite weighing in terms of consumer spending.