Banking in Australia
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Banking in Australia is dominated by four major banks: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation. The banking sector consists of banks licensed under the Banking Act 1959, foreign banks licensed to operate through a branch in Australia, and Australian-incorporated foreign bank subsidiaries. There are also a large number of financial institutions, such as credit unions, building societies and mutual banks, which provide limited banking-type services.
The banking system is liquid, competitive and well developed. For the 10 years ended mid-2013, the Commonwealth Bank was ranked first in Bloomberg Riskless Return Ranking a risk-adjusted 18%. Westpac Bank was in fourth place with 11% and ANZ Bank was in seventh place with 8.7%.
Between white settlement in Sydney in 1788 and 1817, there were no banks nor much currency in the colony. The first bank in Australia was the Bank of New South Wales, established in Sydney in 1817. During the 19th and early 20th century, the Bank of New South Wales opened branches throughout Australia and Oceania: at Moreton Bay (Brisbane) (in 1850), then in Victoria (1851), New Zealand (1861), South Australia (1877), Western Australia (1883), Fiji (1901), Papua (now part of Papua New Guinea) (1910) and Tasmania (1910). The Commercial Banking Company of Sydney was established in 1834, and the National Bank of Australasia establish in 1858, and set up branches in other Australian colonies: Tasmania (in 1859), Western Australia (1866), New South Wales (1885) and Queensland (1920), and a London branch (1864). After acquiring a number of other banks over the years, these two banks merged in 1982 to form the National Commercial Banking Corporation of Australia, which was renamed the National Australia Bank.
In 1835 a London-based bank called the Bank of Australasia was formed that would eventually become the ANZ Bank. In 1951, it merged with the Union Bank of Australia, another London-based bank, which had been formed in 1837. In 1970, it merged with the English, Scottish and Australian Bank Limited, another London-based bank, formed in 1852, in what was then the largest merger in Australian banking history, to form the Australia and New Zealand Banking Group Limited.
A speculative boom in the Australian property market in the 1880s led to the Australian banking crisis of 1893. This was in an environment where little government control or regulation of banks had been established and led to the failure of 11 commercial banks, even the National Bank of Australasia.
Until 1910, banks could issue private bank notes, except in Queensland which issued treasury notes (1866–1869) and banknotes (1893–1910) which were legal tender in Queensland. Private bank notes were not legal tender except for a brief period in 1893 in New South Wales. There were, however, some restrictions on their issue or other provisions for the protection of the public. Queensland treasury notes were legal tender in that state.
Private bank notes and treasury notes continued in circulation until 1910, when the federal Parliament passed the Australian Notes Act 1910 prohibited the circulation of state notes as money and the Bank Notes Tax Act 1910 imposed a tax of 10% per annum on 'all bank notes issued or re-issued by any bank in the Commonwealth ... and not redeemed'. These Acts put an end to the issue of notes by the trading banks and the Queensland Treasury. Also in 1910, the Australian pound was issued as the legal tender in Australia. Now, the Reserve Bank Act 1959 expressly prohibits persons from issuing bills or notes payable to bearer on demand and intended for circulation.
The federal government established the Commonwealth Bank in 1911, which by 1913 had branches in all six states. In 1912, it took over the State Savings Bank of Tasmania (est. 1902) and did the same in 1920 with the Queensland Government Savings Bank (est. 1861). As with many other countries, the Great Depression of the 1930s brought a string of bank failures. In 1931, Commonwealth Bank took over two faltering state savings banks: the Government Savings Bank of New South Wales (est. 1871) and the State Savings Bank of Western Australia (est. 1863). In 1991, it also took over the failing State Bank of Victoria (est. 1842).
From the end of the Great Depression banking in Australia became tightly regulated. Until the 1980s, it was virtually impossible for a foreign bank to establish branches in Australia; consequently Australia had fewer banks compared to countries such as the United States and Hong Kong. Moreover, banks in Australia were classified as either savings banks and trading banks. Savings banks paid virtually no interest to their depositors and their lending activities were restricted to providing mortgages. Many of these savings banks were owned by state governments. Trading banks were essentially merchant banks, which did not provide services to the general public. Because of these and numerous other regulatory restrictions, other forms of non-bank financial institutions flourished in Australia, such as building societies and credit unions. These were subjected to less stringent regulations, could provide and charge higher interest rates, but were restricted in the range of services they could offer. Above all, they were not allowed to call themselves "banks".
From 1920, the Commonwealth Bank performed some central bank functions, which were greatly expanded during World War II. This arrangement caused some discomfort for the other banks, and as a result the Reserve Bank of Australia was created on 14 January 1960 and assumed the central bank functions previously performed by the Commonwealth Bank.
Adoption of new technology
Banks have sought to reduce operating costs by adopting new technologies. The rollout of automated teller machines (ATMs) commenced in 1969. There are currently a number of ATM networks operating in Australia, the largest five of which are: the Commonwealth Bank-Bankwest network (with over 4,000 machines), NAB-rediATM network (with over 3,400 machines), Westpac-St.George-BankSA and Bank of Melbourne network (with over 3,000 machines), ANZ (with over 2,600 machines) and Suncorp (with over 2,000 machines), and others. Financial institutions are linked to interbank networks.
The use of the Bank State Branch (BSB) identifier was introduced in the early 1970s with the introduction of MICR on cheques to mechanise the process of data capture by the banks as well as for mechanical sorting and bundling of the physical cheques for forwarding to the payer bank branch for final cheque clearance. Since then, BSBs have been used in electronic transactions (but is not used in financial card numbering).
Deregulation and concentration
The banking industry was slowly deregulated. In the mid-1960s, the distinction between and separation of trading and savings banks was removed and all banks were allowed to operate in the money market (traditionally the domain of merchant banks), and banks were allowed to set their own interest rates. Building societies were allowed to take deposits from the public. Foreign exchange controls were abolished and the Australian dollar was permitted to float from December 1983.
The boom and bust of the 1980s was another turbulent time for banks, with some establishing leading market positions, and others being absorbed by the larger banks. Beginning in the 1980s, several building societies sought to convert to banks, but were required to demutualise before they were permitted to do so. This included NSW Building Society which became Advance Bank, St.George, Suncorp, Metway Bank, Challenge Bank, Bank of Melbourne and Bendigo Bank. A change in regulations allowed building societies and credit unions to become banks without having to demutualise, and several including Heritage Bank have converted since 2011 while retaining their status and structure as mutual organisations.
In 1990, the government adopted a "four pillars policy" in relation to banking in Australia and announced that it would reject any mergers between the four big banks. The four pillars policy, however, has not prevented the four major banks from acquiring smaller competitors. In 2000, CBA acquired the Colonial group, which had emerged as a major bank–insurance combine in the 1990s, after the Colonial Mutual insurance group took over State Bank of NSW in 1994. The Commonwealth Bank also acquired the State Bank of Victoria in 1990 and BankWest in 2008. Westpac acquired the Challenge Bank in 1995, Bank of Melbourne in 1997, and St.George Bank in 2008.
The Australian government's direct ownership of banks ceased with the full privatisation of the Commonwealth Bank between 1991 and 1996. There was also increased competition from non-bank lenders, such as providers of securitised home loans. A category of authorised deposit-taking institution was created for a corporation which is authorised under the Banking Act 1959 to take deposits from customers. The change formalised the right of non-bank financial institutions — such as building societies and credit unions — to accept such deposits.
Following the Wallis Committee Report, in 1998 the oversight of the banks was transferred from the RBA to the Australian Prudential Regulation Authority (APRA) and the Payments System Board (PSB) was created, which would attempt to maintain the safety and performance of the payments system.
At the time, consumer credit in Australia was primarily loaned in the form of installment sales credit. The arrival of hundreds of thousands of readily employable migrant workers under the post-war immigration scheme, coupled with intense competition amongst lenders, discouraged proper investigation into buyers. Concerns about the possibly inflationary impact of lending created the first finance companies in Australia.
Four pillars policy
In 1990, the government adopted a "four pillars policy" in relation to banking in Australia and announced that it would reject any mergers between these four banks. This is long-standing policy rather than formal regulation, but it reflects the broad political unpopularity of further bank mergers. A number of leading commentators have argued that the "four pillars" policy is built upon economic fallacies and works against the Australia's better interests.
|Rank||Company||Market capitalisation||Cash earnings (2015)|
|1||Commonwealth Bank of Australia (CBA)||A$129.89 billion||A$9.14 billion|
|2||Westpac Banking Corporation (Westpac)||A$100.80 billion||A$7.82 billion|
|3||National Australia Bank (NAB)||A$69.46 billion||A$5.84 billion|
|4||Australia and New Zealand Banking Group (ANZ)||A$69.13 billion||A$7.22 billion|
Mutual banking in Australia
The Customer Owned Banking Association (formerly known as Abacus Australian Mutuals) is the industry body representing the more than 100 credit unions, building societies and mutual banks that constitute the Australian mutual or cooperative banking sector.
Collectively, Australian customer-owned banks service 4.6 million customers or 'members' (as they are mutual shareholders in the institutions), with total assets of over A$85 billion. The ten largest customer-owned banks in Australia are:
|2||Heritage Bank||A$8.5 billion|
|3||Newcastle Permanent||A$7.5 billion|
|4||People's Choice Credit Union||A$6.1 billion|
|5||IMB Bank||A$4.9 billion|
|6||Greater Bank||A$4.8 billion|
|7||Beyond Bank Australia||A$4.12 billion|
|8||Teachers Mutual Bank||A$4.08 billion|
|9||P&N Bank||A$2.9 billion|
|10||Bank Australia||A$2.8 billion|
Heritage Bank is Australia's largest customer-owned bank, having changed its name from Heritage Building Society in December 2011. A number of credit unions and building societies changed their business names to include the word 'bank', to overcome adverse perceptions of smaller deposit-taking entities. For example, in September 2011 Bank Australia (formerly bankmecu) was announced as Australia's first customer-owned bank.
Three teachers' credit unions have become known as 'banks'; namely, QT Mutual Bank (formerly the Queensland Teachers' Credit Union), Victoria Teachers Mutual Bank (formerly the Victoria Teachers' Credit Union), and Teachers Mutual Bank (formerly Teachers Credit Union Limited). The Police & Nurses' Credit Union began trading as P&N Bank in March 2013, and some credit unions are electing to use 'mutual banking' as a business tagline, rather than as a business name, as they do not meet the criteria to be called a 'bank'.
Other retail banks
There are other retail banks in Australia. These are smaller and often regional banks, including the Bendigo and Adelaide Bank, Suncorp-Metway, the Bank of Queensland and ME Bank. Other banks, such as Bankwest, St George Bank and Bank of Melbourne, are subsidiaries or alternate trading names of the big four banks.
Foreign banks wishing to carry on a banking business in Australia must obtain a banking authority issued by APRA under the Banking Act, either to operate as a wholesale bank through an Australian branch or to conduct business through an Australian-incorporated subsidiary.
Foreign banks which do not wish to obtain a banking authority in Australia may operate a representative office in Australia for liaison purposes, but the activities of that office will be restricted.
According to the Foreign Investment Review Board, foreign investment in the Australian banking sector needs to be consistent with the Banking Act, the Financial Sector (Shareholdings) Act 1998 and banking policy, including prudential requirements. Any proposed foreign takeover or acquisition of an Australian bank will be considered on a case-by-case basis and judged on its merits.
There are a number of foreign subsidiary banks, however only a few have a retail banking presence; HSBC Bank Australia, Delphi Bank, Bank of Sydney and Citibank Australia have a small number of branches.
Foreign banks have a more significant presence in the Australian merchant banking sector.
Formally, there is extensive and detailed regulation of Australia's banking system, split mainly between the Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC). The Reserve Bank of Australia also has an important involvement. However, in practice, banks in Australia are self-regulated through External Dispute Resolution (EDR) schemes, the most prominent of which is the Financial Ombudsman Service (Australia) (FOS).
APRA is responsible for the licensing and prudential supervision of Authorised Deposit-Taking Institutions (ADIs) (banks, building societies, credit unions, friendly societies and participants in certain credit card schemes and certain purchaser payment facilities), life and general insurance companies and superannuation funds. APRA issues capital adequacy guidelines for banks which are consistent with the Basel II guidelines. All financial institutions regulated by APRA are required to report on a periodic basis to APRA. Certain financial intermediaries, such as investment banks (which do not otherwise operate as ADIs) are neither licensed nor regulated under the Banking Act and are not subject to the prudential supervision of APRA. They may be required to obtain licences under the Corporations Act 2001 or other Commonwealth or State legislation, depending on the nature of their business activities in Australia.
ASIC has responsibility for market integrity and consumer protection and the regulation of certain financial institutions (including investment banks and finance companies). However, ASIC does not actually investigate any issues or propose any regulations that concern consumer protection, this authority is delegated to the External Dispute Resolution schemes and the Australian Competition and Consumer Commission (ACCC). The front face of the regulation of financial institutions and financial advisers are the various EDR schemes, the most popular of which is the (FOS). ASIC is responsible for the approval of the EDR schemes, all of which must comply with ASIC Regulatory Guide 139.
Banks are also subject to obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 as "reporting entities". They are required to identify and monitor customers using a risk-based approach, develop and maintain a compliance program, and report to Australian Transaction Reports and Analysis Centre (AUSTRAC) suspicious matters and certain cash transactions and file annual compliance reports.
There have been calls in recent times for an added level of regulation of banks because of recent banking, financial planning controversies and Senate inquiries. Referring to white collar crime, ASIC's Chairman Greg Medcraft said 'This is a bit of paradise, Australia, for white collar [crime]'.
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