Banking In Australia - Australia Banks

The banking sector in Australia consists of a number of banks licensed to carry on banking business under the Banking Act 1959, foreign banks licensed to operate through a branch in Australia, and Australian-incorporated foreign bank subsidiaries. The banking system is liquid, competitive and well developed. For the past 10 years ended in mid-2013, Commonwealth Bank got the first rank of Bloomberg Riskless Return Ranking with returned a risk-adjusted 18 percent. Westpac Bank set in fourth with 11 percent and ANZ Bank set in seventh with 8.7 percent.

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History

The first bank to be established in Australia was the Bank of New South Wales, which was established in Sydney in 1817, with Edward Smith Hall as its cashier and secretary. 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 New Guinea (1910) and Tasmania (1910).

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 1880 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.

The Commonwealth Bank was established in 1911 by the federal government and by 1913 had branches in all six states. In 1912, it took over the state savings bank in Tasmania and did the same in 1920 with the state savings bank in Queensland. 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 very few banks when compared with such places as the United States or Hong Kong. Moreover, banks in Australia were classified into two distinct categories, known as 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 central bank functions were transferred to the newly created Reserve Bank of Australia on 14 January 1960.

The banking industry was slowly deregulated. In the mid-1960s, the distinction between 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.

From the 1970s, banks have sought to reduce operating costs by adopting new technologies. 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 in financial card numbering). The rollout of Automated teller machines (ATMs) commenced in 1969.

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. The Australian government's direct ownership of banks ceased with the fully 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. Following the Wallis Committee a 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.

Financial institutions

Four pillars

Currently, the Australian banking sector is dominated by four major banks: Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.

In 1990, the Commonwealth Government of Australia announced that it adopted a "four pillars" policy and 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 bank mergers. A number of leading commentators have argued that the "four pillars" policy is built upon economic fallacies and works against the nation's better interests.

The top four banking groups in Australia ranked by market capitalisation at share price 24 March 2015:

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 banking institutions 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 banking institutions in Australia are:

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 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 Limited (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

Competitors to the 'big four' banks include smaller and often regional banks, including the Bendigo and Adelaide Bank, Suncorp-Metway, the Bank of Queensland and ME Bank. Other banks, and Bankwest are owned subsidiaries of the big four.

Foreign 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, Bank of Cyprus Australia Limited, Beirut Hellenic Bank and Citibank Australia have a small number of branches.

Foreign banks have a more significant presence in the Australian merchant banking sector.

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Regulation

Australia's banking regulation is extensive and detailed. It is split mainly between the Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC).

APRA is responsible for the licensing and prudential supervision of Authorised Deposit-Taking Institution (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 has issued 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 Australian Competition and Consumer Commission (ACCC).

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.

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