State Bank of South Australia Collapse: Causes, Analysis & Suggestions

This case study examines the collapse of the State Bank of South Australia in 1991, focusing on the underlying causes and potential solutions. Established in 1984 and owned by the Australian government, the bank's failure stemmed from ineffective management of financial assets, particularly its loan portfolio. An auditor general's report highlighted issues such as poorly managed property-related and corporate loans, underperforming subsidiaries acquired between 1985 and 1990, and inadequate handling of debts, capital, interest rate, and liquidity risks. The study also points to policy and procedural inadequacies, ineffective supervision, and a lack of expertise in credit risk evaluation. The higher management's haste in signing deals without proper analysis, coupled with misleading financial reports, further contributed to the bank's downfall. The study suggests that the bank lacked effective leadership, had flawed lending policies, and suffered from inexperienced board members and a lack of financial management principles. Appointing experienced managerial authorities is recommended for better administration and control. Desklib provides access to this and other solved assignments.

State Bank of South Australia
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Table of Contents
Introduction......................................................................................................................................3
The Main Causes for the Collapse...............................................................................................4
Suggestions..................................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8
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Introduction
The State Bank of South Australia was created in the year 1984. It was owned and managed by
the Government of Australia. It collapsed in the year 1991. The bank has a part which is now
established under the name of Bank SA. The report has been drafted in order to consider the
main causes and reasons behind the collapse of the State Bank. The report will develop an
empirical understanding of the causes and the suggestions developed in order to resolve the
identified issues at the State Bank of South Australia.
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The Main Causes of the Collapse
The bank was established in roots of the ancient Australian history majorly focusing on the
community service and welfare rather than profit making as a primary objective. The bank failed
in 1919, later an auditor general was appointed in order to conduct an audit for examining the
main reasons for the bank’s failure. It was determined that major causes for financial distress
were examined to be the ineffective performance of the financial assets claimed by the bank. The
loan portfolio of the bank is determined to be one of the greatest reasons behind the billion dollar
collapse of the State Bank of South Australia. The auditor general also identified that ineffective
assets were property related and corporate loans made by the bank. The loans advanced by the
bank were not managed and claimed properly and resulted in the major failure of the bank.
Furthermore in the investigation and audit conducted it was observed that subsidiaries acquired
by the bank majorly in the time period of 1985 to 1990 did not perform as per the expectations of
the bank and were determined as a contributory cause for the failure.
The auditor general also examined the managerial aspect of the bank and realised the ineffective
management and administration of the bank and its day to day activities resulted in the greater
impact and contributory cause for the bank failure. It was analysed that financial position also
failed due to the inadequacy of the bank to manage its debts, capital, interest rate and liquidity
risks of the bank finances (Adelaide.edu.au. 2018). The auditor general laid emphasis on the
policy and procedural inadequacies and defined them as a major defect in the management and
administration of the bank and its ancillary activities. As per the discussions provided in The
Bold Riders, it was also identified that the ineffective supervision contributed towards the lack of
control and administration for the bank activities.
The discussions of Sykes provides with the bank was poorly organised and managed. It was
identified that credit risk evaluation undertaken in order to execute the risk rates for the credits
landed were ineffective. It lacked the expertise of aggressive and in-depth analysis of the loans
and advances made by the bank. It also depicts that the lending policies and procedures are
undertaken by the bank were not as per the standards and platforms preferred and executed in the
other banks and the financial lending industry of Australia. The policies depicted serious errors
and omissions in the risk evaluation, interest rate, and capital management aspects etc. The poor
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organisation and management of the bank led towards the doom of the once a national expansion
bank of Australia. In addition to these contributory reasons for the failure and collapse of the
bank, it was also identified that the higher management including the board of directors and the
loan approving authority in the bank lagged in the required skills and experience for executing
the financial lending activities and undertaking major decisions at the State Bank of South
Australia.
The auditor general appointed to conduct the audit and investigation research for the failure also
realised that the senior management was in a rush to signing the deals and did not undertake the
required procedures and analysis of the deals and contracts signed. The financial reports depicted
a false understanding of the bank’s budgeted asset growth rate. The budgeted profits for the bank
did not exceed each financial year but the reports depicted an increased every year causing
misleading expressions and impressions of the financial status for the State Bank of South
Australia (Carnegie and O’Connell, 2014.). It was determined that the bank represented its up-
front fee as an income in the source of interest on the loans. This resulted in major flaw of raising
more loans in order to depict increased income as interest each year. All these major flaws and
defects in the financial and managerial aspects of the bank led its way to the doomed and
collapsed future of the bank.
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Suggestions
After the reading from The Bold Riders, it has been analysed the bank lacked an ineffective and
empirical controlling and managing leadership. The bank must have focused towards the lending
policies and procedures in order to scrutinise the methods and approaches applied by the bank.
The board of directors and the non-executive directors lacked experience and knowledge in the
required fields. The administrative bank affairs and day to day activities of the bank lacked
ineffective management and control of the bank. The management lacked for financial
management principles and procedures of effective management. It is suggested to appoint
experienced and effective managerial authorities for better management and admiration of the
financial and managerial aspects of the bank.
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Conclusion
Form the above discussion it can be concluded that the bank majorly failed due to the non-
performance of the assets and acquisitions made by the bank at the later stages. It can also be
stated that ineffective and lack of controlling power in the administration and management of the
bank acted as a contributory factor for the collapse and failure of the bank. The report has
suggested better and effective management overcome the issues and defects identified at the
bank.
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References
 Adelaide.edu.au. 2018. New insight into State Bank collapse. [online] Available at:
https://www.adelaide.edu.au/news/news372.html [Accessed 26 May 2018].
 Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of
corporate collapse, accounting failure and governance change in Australia: Early 1890s to
early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.
 Sykes, T., Not Defined. The Bold Riders. Behind Australia’s Corportae Collapses. Allen
& Unwin. Second Edition.
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