Trimester 2, 2019: HI5003 Economics Banking Sector Analysis Report

This economics report provides a comprehensive analysis of the Australian banking sector, examining its structure, market dynamics, and the influence of the Royal Commission into the misconduct in the Banking, Superannuation and Financial Service industry. The report begins with an introduction to the banking sector, highlighting its importance and the dominance of the "big four" banks (CBA, Westpac, NAB, and ANZ). It delves into the market structure, characterized by an oligopoly, and the high concentration of market share. A significant portion of the report focuses on the Royal Commission, its findings regarding misconduct, and its impact on the banking industry, including regulatory changes, increased costs, and the potential for a credit crunch. The report also explores the impact on the Australian economy, including consumer confidence and economic growth, and discusses government policies in response to the Royal Commission. The conclusion summarizes the key aspects of the banking sector and the implications of the Royal Commission. The report includes references to academic sources, providing a well-researched and detailed overview of the subject.

Economics
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Introduction
 Banking: an important sector
 Provides secure system of payment
 Four largest and important retail banks
 CBA, Westpac, NAB and ANZ
 Differs from American system
 RBA regulates the payment system
 Analyzes the banking sector.
 Royal Commission misconduct in the Banking, Superannuation
and Financial Service industry

Banking industry background
 Competitive, sophisticated and profitable sector
 CBA ranks first in terms of riskless return: 18% return
 Westpac in fourth position : 11% return
 Four major banks
 Largest in terms of market capitalization
 Contribute to GDP and employment
 Deregulation in 1960
 Four pillar policy since 1990
 Mutual banks, retail banks and foreign banks

Market structure of banking
sector
 Oligopoly market
 Highly concentrated industry structure
 Four banks dominates the industry
 Westpac, CBA, NAB and ANZ
 Over 75% market share
 High entry barriers
 Regulation, huge capital and dominating market power
 HHI index to measure concentration
 Has become more and more concentrated

Royal Commission into the misconduct into the
Banking, Superannuation and Financial Service
Industry
 Established on 14 of December in 2017
 Royal Commission act of 1902
 Enquiry into the misconduct of banking sector, superannuation and
financial service industry
 Greed culture of financial institutions
 Lack of regulation
 Results in money laundering
 Drug syndicates, terrorism financing and other fraudulence
 Seven rounds of enquiry

Impact on baking industry
 Recommendation of Royal Commission
 Practical, Purposeful and Responsive recommendation
 Enhance the intention and spirit of the law
 Strengthen regulatory base of the culture, remuneration and
other practices
 Impact the dominance of major banks in Australia
 Untended consequences of regulatory reform
 Banks were accused of severe allegations

Impact on baking industry
 NAB found guilty for different scandals
 The bank secretly refunded million of dollars
 . Licenses of many of staff members were cancelled
 Allegation on Westpac
 Manipulation of bill swap rate
 Fraud lending to elderly pensioners
 Regulatory crackdown of loan approval
 Review of risk management and internal risk process
 At the expense of banks

Impact on baking industry
 Higher cost burden for banks
 Lower profitability
 Higher cost
 Began to lay of employees
 Disrupts supply of service
 Lower supply
 Inward shift of supply curve
 Higher price
 Lower service availability Figure 1: Impact of Royal
Commission on financial service
industry

Impact on Australian Economy
 Credit crunch
 Lack of funds for investment
 Lower employment
 Revelation of major banks’ misconduct
 Hurt consumers’ confidence
 Lower aggregate demand
 Decline in economic growth
Figure 2: Impact of Royal
Commission on Australian
economy

Government Policy
 Royal commission: hurts confidence of consumers
 Policy to restore trust
 Established a Financial System Inquiry
 Closely monitor the financial system
 Recommendation through FSI
 Improvement in the industry
 More resilient service
 Fair treatment to customers
 Innovation and competition

Conclusion
 Banking sector
 Crucial sector
 Made of commercial banks, mutual banks, foreign banks, retail
banks and other institution
 Banking sector oligopoly
 Become more and more concentrated
 Royal Commission into the misconduct of Banking,
Superannuation and Financial service industry
 Banks face higher regulator cost
 Credit crunch and lower economic growth

References
 Adams, M., Borsellino, G., McCalman, J. and Young, A., 2017. Australia's proposed
banking executive accountability regime: Regulatory panopticon or fail-
safe?. Governance Directions, 69(9), p.528.
 Bank, J., Durrani, K. and Hatzvi, E., 2019. Updates to Australia’s Financial
Aggregates’. RBA Bulletin, March, viewed, 19.
 Export.gov. 2019. Australia - Banking Systems | export.gov. [online] Available at:
https://www.export.gov/article?id=Australia-banking-systems [Accessed 23 Sep. 2019].
 Hayne, K., 2018. Interim report: Royal Commission into misconduct in the banking,
superannuation and financial services industry. Commonwealth of Australia Retrieved
Oct, 1, p.2018.
 Janda, M. 2019. The big four spent up to 200 years swallowing other banks, but Hayne
may cause regurgitation. [online] Available at: https://www.abc.net.au/news/2019-02-
01/how-did-the-big-four-banks-become-so-dominant/10767994 [Accessed 24 Sep.
2019].