Banking in Australia

The banking sector in Australia consistsof a number of banks licensed to carry on banking business under the BankingAct 1959, foreign banks licensed to operate through a branch in Australia,and Australian-incorporated foreign bank subsidiaries.

The banking system isliquid, competitive and well developed.

For the 10 years ended mid-2013, theCommonwealth Bank was ranked first in Bloomberg Riskless Return Ranking arisk-adjusted 18%.

Westpac Bank was in fourth place with 11% and ANZ Bank wasin seventh place with 8.

7%.

History The first bank to be established in Australia was the Bank of New SouthWales, which was established in Sydney in 1817, with Edward Smith Hall as itscashier and secretary.

During the 19th and early 20th century, the Bank of NewSouth Wales opened branches throughout Australia and Oceania: at Moreton Bay in1850, then in Victoria, New Zealand, South Australia, Western Australia,Fiji, Papua New Guinea and Tasmania.

In 1835 a London-based bank called theBank of Australasia was formed that would eventually become the ANZ Bank.

In1951, 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 andAustralian Bank Limited, another London-based bank, formed in 1852, inwhat was then the largest merger in Australian banking history, to form theAustralia and New Zealand Banking Group Limited.

A speculative boom in the Australian property market in 1880 led to theAustralian banking crisis of 1893.

This was in an environment where littlegovernment control or regulation of banks had been established and led tothe failure of 11 commercial banks.

The Commonwealth Bank was established in1911 by the federal government and by 1913 had branches in all six states.

In1912, it took over the state savings bank in Tasmania and did the same in1920 with the state savings bank in Queensland.

As with many othercountries, the Great Depression of the 1930s brought a string of bank failures.

In 1931, Commonwealth Bank took over two faltering state savings banks: theGovernment Savings Bank of New South Wales and the State Savings Bank ofWestern Australia.

In 1991, it also took over the failing State Bank of Victoria.

From the end of the Great Depression banking in Australia became tightlyregulated.

Until the 1980s, it was virtually impossible for a foreign bankto establish branches in Australia; consequently Australia had very fewbanks 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 nointerest to their depositors and their lending activities were restricted toproviding mortgages.

Many of these savings banks were owned by stategovernments.

Trading banks were essentially merchant banks, which didnot provide services to the general public.

Because of these and numerousother regulatory restrictions, other forms of non-bank financial institutionsflourished in Australia, such as building societies and credit unions.

These were subjected to less stringent regulations, could provide and chargehigher interest rates, but were restricted in the range of services theycould 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 somediscomfort for the other banks, and as a result the central bank functions weretransferred to the newly created Reserve Bank of Australia on 14 January 1960.

The banking industry was slowly deregulated.

In the mid-1960s, thedistinction between trading and savings banks was removed and all banks wereallowed to operate in the money market, and banks were allowed to set their owninterest rates.

From the 1970s, banks have sought toreduce operating costs by adopting new technologies.

The use of the Bank StateBranch identifier was introduced in the early 1970s with the introduction ofMICR on cheques to mechanise the process of data capture by the banks as well asfor mechanical sorting and bundling of the physical cheques for forwarding tothe payer bank branch for final cheque clearance.

Since then, BSBs have beenused in electronic transactions.

The rollout of Automated teller machinescommenced in 1969.

Foreign exchange controls were abolishedand the Australian dollar was permitted to float from December 1983.

The boomand bust of the 1980s was another turbulent time for banks, with someestablishing leading market positions, and others being absorbed by the largerbanks.

The Australian government's direct ownership of banks ceased withthe full privatisation of the Commonwealth Bank between 1991 and 1996.

There was also increased competition from non-bank lenders, such as providersof securitised home loans.

Following the Wallis Committee a Report, in 1998 theoversight of the banks was transferred from the RBA to the AustralianPrudential Regulation Authority and the Payments System Board was created, whichwould attempt to maintain the safety and performance of the payments system.

At the time, consumer credit in Australia was primarily loaned in theform of installment sales credit.

The arrival of hundreds of thousands ofreadily employable migrant workers under the post-war immigration scheme, coupledwith intense competition amongst lenders, discouraged properinvestigation into buyers.

Concerns about the possibly inflationary impactof 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, NationalAustralia 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 thebroad political unpopularity of bank mergers.

A number of leadingcommentators have argued that the "four pillars" policy is built upon economicfallacies and works against the nation's better interests.

The top four banking groups in Australia ranked by market capitalisation at shareprice 24 March 2015: = Mutual banking in Australia =The Customer Owned Banking Association is the industry body representing themore than 100 credit unions, building societies and mutual banks thatconstitute the Australian mutual or cooperative banking sector.

Collectively, Australian customer owned banking institutions service 4.

6 millioncustomers or 'members', with total assets of over A$85 billion.

The tenlargest customer owned banking institutions in Australia are:Heritage Bank is Australia's largest customer-owned bank, having changed itsname from Heritage Building Society in December 2011.

A number of credit unionsand building societies changed their business names to include the word'bank', to overcome adverse perceptions of smaller deposit-taking entities.

Forexample, in September 2011 bankmecu was announced as Australia's firstcustomer-owned bank.

Three teachers' credit unions havebecome known as 'banks'; namely, QT Mutual Bank, Victoria Teachers MutualBank, and Teachers Mutual Bank Limited.

The Police & Nurses' Credit Union begantrading 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 theydo not meet the criteria to be called a 'bank'.

= Other retail banks = Competitors to the 'big four' banksinclude smaller and often regional banks, including the Bendigo andAdelaide 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 abanking business in Australia must obtain a banking authority issued byAPRA under the Banking Act, either to operate as a wholesale bank through anAustralian branch or to conduct business through an Australian-incorporatedsubsidiary.

Foreign banks which do not wish toobtain a banking authority in Australia may operate a representative office inAustralia for liaison purposes, but the activities of that office will berestricted.

According to the Foreign InvestmentReview Board, foreign investment in the Australian banking sector needs to beconsistent with the Banking Act, the Financial Sector Act 1998 and bankingpolicy, including prudential requirements.

Any proposed foreigntakeover or acquisition of an Australian bank will be considered on acase-by-case basis and judged on its merits.

There are a number of foreign subsidiary banks, however only a few have a retailbanking presence; HSBC Bank Australia, Bank of Cyprus Australia Limited, BeirutHellenic Bank and Citibank Australia have a small number of branches.

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

Regulation Australia's banking regulation is extensive and detailed.

It is splitmainly between the Australian Prudential Regulation Authority and AustralianSecurities and Investments Commission.

APRA is responsible for the licensingand prudential supervision of Authorised Deposit-Taking Institution, life andgeneral insurance companies and superannuation funds.

APRA has issuedcapital adequacy guidelines for banks which are consistent with the Basel IIguidelines.

All financial institutions regulated by APRA are required to reporton a periodic basis to APRA.

Certain financial intermediaries, such asinvestment banks are neither licensed nor regulated under the Banking Act andare not subject to the prudential supervision of APRA.

They may berequired to obtain licences under the Corporations Act 2001 or otherCommonwealth or State legislation, depending on the nature of theirbusiness activities in Australia.

ASIC has responsibility for marketintegrity and consumer protection and the regulation of certain financialinstitutions.

However, ASIC does not actually investigate any issues orpropose any regulations that concern consumer protection, this authority isdelegated to the Australian Competition and Consumer Commission.

Banks are also subject to obligations under the Anti-Money Laundering andCounter-Terrorism Financing Act 2006 as "reporting entities".

They are requiredto identify and monitor customers using a risk-based approach, develop andmaintain a compliance program, and report to Australian Transaction Reportsand Analysis Centre suspicious matters and certain cash transactions and fileannual compliance reports.

See also MyState Limited Economy of AustraliaFinancial system in Australia List of banks in AustraliaTimeline of banking in Western Australia References External links Australia Banking InformationAustralia's Banking History, ABC.

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