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History of Banking Regulations in Australia

Discuss about the Banking Regulations in Australia for Past, Present & Future.

The financial system of Australia has experienced instrumental change since its inception. Though the difference between the different forms of financial institutions has blurred with time, the structure of this system is usually typified in context of the primary institutions which operate within it. Based on this, four major developments in the financial system structure of Australia stand out. The first and foremost is the rise in significance of banks, which directly make up for half of the assets of the overall financial system today, up from 40% in 1985. Besides the conventional lending and retail deposit taking functions, banks are engaged in almost every facet of financial intermediation, such as fund management, insurance, stockbroking, financial markets and business banking. Currently, there are 53 banks in the country, out of which 14 are Australia owned. The four biggest banks within the banking system of the nation are Westpac Banking Corporation, Commonwealth Bank of Australia, National Australia Bank, and ANZ Banking Group (Goodhart et al., 2013). The present essay delves into the history, present and future of banking regulation in Australia.

In 1911, the Commonwealth Bank of Australia was set up through an Act. This institution was later on renamed as Reserve Bank of Australia in 1959 under the law, to discharge central banking functions. The commercial and savings functions were moved to a separate body corporate, that held the original name of Commonwealth Bank of Australia. The power to formulate laws regarding banking and currency was then vested with the Australian Parliament after the Federation of the Australian States into the Commonwealth of Australia. During 1911, the Bank was given the responsibility of the regular functions of savings and commercial banking under the initial Commonwealth Bank Act (Paterson and Mallesons, 2017). It did not hold central banking remit, nor was it in charge of issuing notes. The Governor had the management of the Bank under his authority. The Bank commenced business during mid-1912. The Treasury Department was administering note issue at that time.

The duty of issuing notes was given to a Notes Board in 1920, from the Treasury. This board comprised of four people who were assigned by the Government. By virtue of his position, the Governor of the Bank was also a member of the Notes Board. Note issue was resultantly administered by the Bank, although the two bodies were independent of one another. After amendments in the Commonwealth Bank Act 1924, the control of issuing notes was transferred to the Bank. Board, comprising of 8 directors, was given the administration of this (Black, Kirkwood and Shah, 2009). Since then till 1945, the central banking functions of the Bank evolved steadily, principally to counter the demands of the financial crisis during the 1930s and subsequently by formal extension of its authority under wartime legislations. These encompassed exchange control plus a plethora of other controls over the system. The reformed Commonwealth Bank Act in conjunction with the Banking Act, both created during 1945, made the Bank’s powers pertaining to the overseeing of banking and fiscal policy and forex control official. The board ceased in existence as per the legislation of 1945 and in its place, came an advisory council which had 6 members (officials from the Treasury and Bank). The legislation clearly mentioned that the Governor would still be accountable for Bank’s management (McCoach and Landy, 2013). Nonetheless, a new Act in 1951, created a new board which comprised ten members and the Governor was still responsible for management of the Bank. This has long been the structure of the board since then, barring a few modifications.

Current State of Banking Regulations in Australia


As aforementioned, the Reserve Bank Act of 1959 conserved the initial body corporate, under the name of RBA, to undertake the central functions of banking of the Commonwealth Bank, which had developed gradually; other Acts differentiated the savings banking and commercial banking activities into the new formed Commonwealth Banking Corporation. The Reserve Bank Act of 1959 became enforceable from January 14th, 1960 (Wallison, 2013). There were not many significant modifications in the activities of the RBA until the removal of exchange control subsequent the float of the country’s currency in 1983. However, there were some gradual shift toward market-centric techniques of executing monetary policy, a movement from the system of direct controls on the country’s banks. The Campbell Committee, an important financial system inquiry was formed in 1979, and five years after its appointment, the financial scenario of Australia changed to a virtually deregulated system. During the same time, the RBA developed a specialized banking supervisory function (Putnis, 2014).

One more inquiry (the Wallis Committee) was announced into the Australian Financial system in 1996. This inquiry presented two important outcomes for the Bank, which were both enforceable from July 1st, 1998. The function of banking supervision was shifted to a newly formed body, the Australian Prudential Regulation Authority (APRA), from the RBA. The APRA was given control of supervising every deposit taking institution. Amendments were also made in the Reserve Bank Act to form a new Payments System Board, with an obligation to advocate the efficiency and safety of the payments system of Australia. New Acts – the Payment Systems and Netting Act 1998 and the Payment Systems Act 1998 – were introduced, providing the Bank pertinent authorities in this domain (McNally, Chambers and Thompson, 2004).

Presently, the RBA, APRA and the Australian Securities and Investments Commission (ASIC) are the main regulators of the banking system in Australia. The RBA is the central bank with the enduring responsibility for the Australian payment system’s efficiency and safety and the stability of the country’s monetary policy and financial system. The RBA does not have any involvement in prudential supervision of the ADIs. Exchange control is also technically a function of the RBA, nonetheless, on a real scale, RBA permission is not needed when forex transactions are carried out by money market dealers or forex dealers who have been sanctioned by the ASIC (Calipo and Rehder, 2017). The RBA is also not responsible for managing sanctions in relation to forex control after the Autonomous Sanctions Regulations was introduced in 2011. This duty is now of the Department of Foreign Affairs and Trade. The Foreign Affairs and Trade Minister has the authority to assign an entity or a person, to whom provision of assets is prescribed.

Regulators of Banking System in Australia


The APRA regulates institutions in the Australian financial sector. It licenses and prudentially supervises all ADIs and NOHCs sanctioned by APRA. It also supervises general and life insurance firms plus superannuation funds. Such supervisory powers of the APRA emerge from a series of legislation, mainly, from the Superannuation Industry Act 1993, the Life Insurance Act 1995 as well as the Banking Act. While discharging its powers and functions, the institution needs to balance the goals of efficiency and financial safety, competitive neutrality, contestability and competition, and in balancing such goals, to advocate the stability of Australian financial system (Bailey, Davies and Dixon, 2004.).

The ASIC is responsible for promoting and monitoring market integrity in addition to customer protection. This includes oversight of the market conduct and disclosure of Australian firms, and for licensing pertaining to financial services and products. ASIC, in collaboration with the RBA, is also accountable to take some regulatory steps to mitigate systematic risk in settlement and clearing systems. For this purpose, the ASIC has authority under the Corporations Act 2001 pertaining to the standard establishment, licensing and direction of providers of settlement and clearing facilities (Lui, 2016). The Australian Treasury is obligated to advise the government on the stability of its financial system as well as on supervisory and governmental matters regarding financial system infrastructure. The Australian Competition and Consumer Commission (ACCC) is the country’s consumer and competition protection body accountable for advocating adherence to competition law by enforcing and administering the Competition and Consumer Act 2010. The ACC promotes competitive markets by reprimanding firms that advocate their market influence by intentionally misleading customers or using restrictive trade practices. The Australian Transaction Reports and Analysis Centre is the regulator of anti-money laundering in Australia (Paterson and Mallesons, 2017). It oversees abidance with anti-money laundering laws by a broad spectrum of financial service providers encompassing all ADIs.

The Banking Regulation situation in Australia has experienced immense activity in the past few years. This has overlapped with a reconsideration of the role of financial institutions in the Australian society. It also concurred with market pressures to alter the way banks have been managing their risks. Before the economic downturn, credit spreads were not high, leverage was available easily, banks had become extremely interconnected, and big maturity mismatch was common (Posner, 2009). Several financial assets had been perfectly priced, and various banks had underpinned their business models on the presumption that nothing would go unexpectedly. For some time everything was going as planned; banks were immensely profitable, and the worldwide growth was also robust. However, the risk was underpriced, and there was excessive leverage, and not much was being done to deal with the growing vulnerabilities (Gorajek and Turner, 2010).

Future of Banking Regulations in Australia

The outcome was that the citizens paid a heavy price. Luckily as compared to the worldwide developments, banks in Australia were faring relatively better. However, as finance is a global field, some of the implications of the events overseas were being experienced in Australia too. In the wake of this situation, it is not astonishing that regulators and the banks themselves seek to deal with the several issues. Capital ratios are being raised plus the capital quality is also being enhanced. Maturity transformation is reducing, and the banks are keeping greater liquid assets (Lowe, 2012). Such modifications are not just occurring because of the refined regulations, but also due to the demands of the marketplace. Cumulated, such modifications are raising the cost of financial intermediation undertaken across banks’ balance sheets. The choice which the society is making – partially via the regulators – is to pay more but have less of financial intermediation. The advantage that the society and regulators wish to attain is a stable and safer financial system. However, this choice has two major implications. The first is related to lending spreads as well as return on bank equity. The second is the high cost of financial intermediation (PWC, 2016).


It is now time to turn toward the subject of the future course of financial regulation. This is definitely a vast topic. However, there are three major issues that need to be looked at. The first is the importance of supervision. One of the most evident lessons from banking history is that the financial sector always finds a way to connect savers with borrowers. New products are introduced, and a new type of financing emerges. Australia has witnessed several examples of this in previous decades. Reflecting back on the experience of past few years, it appears that rules are being seen as a replacement for supervision. This is a big mistake. Financial stability cannot be preserved only by rules. It demands competent and active supervision (Davis, 2012). Sound supervision requires a wholesome system focus. The supervisor ought to contemplate the implications of institutions adopting corresponding strategies. It requires reviewing the interrelatedness between banks closely. There is a need to review developments in credit growth, asset prices and construction activity, and how are these apportioned across Australia. Subsequent to that, it requires comprehension of how the competitive dynamics are altering. The APRA is making genuine efforts to serve Australia through its approach to supervision which focuses on the entire industry. The RBA and Council of Financial Regulators are supporting the APRA, and these bodies have frequent discussions on system-wide developments (Ernst & Young, 2013). It is crucial that with agreement and execution of new rules, such powerful attention to system-wide supervision is maintained.

One of the things that have manifested due to the evolution of banking regulation in the last two decades is that the Basel committee has continuously raised the intrusiveness and complexity of regulations they suggest. During this time, the banks’ leverage has grown – seen in the current fall in the ratio of equity to assets. The attention is on having capital requirements which have been risk-adjusted so that if the bank is involved in any risky business, it needs to maintain a higher capital ratio to serve as a buffer to safeguard depositors from loss. The problem is how to define risk (Posner, 2009). The last two decades of experience shows that is extremely difficult to define risk accurately, plus there are so many incentives for banks to involve in activities which are not seen as extremely risky by regulators. Hence, an alternative method is to establish a higher but simple leverage ratio, wherein the ratio is identified as a minimum amount of capital compared to the size of its exposures. The risk here is that banks may react to it by indulging in greater-risk activities. However, there is no reason why the regulators cannot raise the minimum capital ratio which they need for any bank (Lowe, 2012).

To recap, it is worth re-mentioning that the banks of Australia have performed far better than their global counterparts in the past some years. This is in part due to the robust economic outcomes in the country plus the approach of APRA toward supervision and regulation. However, it also shows higher lending standards of the Australian banks than some of their international peers plus their comparative restricted exposure to innovative and risky financial products. While the country did not get too much engulfed in the economic downturn, the North Atlantic crisis definitely has a considerable effect on its banking and financial system. This is taking place through the stiffening of regulation and marketplace developments. Several changes are positive and are likely to augment the resilience and safety of the banking system (Konzelmann and Davies, 2013). However, as these modifications happen, everyone having an inclination toward finance must do their best to comprehend the effect on the availability and cost of finance. Also, the regulators must not neglect system-wide supervision.

References

Bailey, K., Davies, M. and Dixon, L., 2004. Asset Securitisation in Australia. Financial Stability Review.

Black, S, Kirkwood, J. and Shah, I., 2009. Australian Corporates' Sources and Uses of Funds’, RBA Bulletin, pp 1–12.

Calipo, A. and Rehder, P., 2017. Banking Industry Outlook: Banking reimagined. Deloitte.

Cornish, S., 2010. The Evolution of Central Banking in Australia. Reserve Bank of Australia, Sydney.

Davis, K., 2012. A system at risk: the case for regulatory overhaul in Australia’s banking sector. [Online]. Available through: <https://theconversation.com/a-system-at-risk-the-case-for-regulatory-overhaul-in-australias-banking-sector-6417>. [Accessed on 13th September 2017].

Ernst & Young. 2013. Building the bank of 2030 and beyond. [pdf]. Available through: <https://www.ey.com/Publication/vwLUAssets/EY_-_Building_the_bank_of_2030_and_beyond/$FILE/EY-Building-the-bank-of-2030-and-beyond.pdf>. [Accessed on 13th September 2017].

Goodhart, C., Hartmann, P., Llewellyn, D., Suarez, L. and Weisbrod, S., 2013. Financial Regulation: Why, How and Where Now? Routledge.

Gorajek, A. and Turner, G., 2010. Australian Bank Capital and the Regulatory Framework. [Online]. Available through: <https://www.rba.gov.au/publications/bulletin/2010/sep/6.html>. [Accessed on 13th September 2017].

Konzelmann, S. and Davies, M., 2013. Banking Systems in the Crisis: The Faces of Liberal Capitalism. Routledge.

Lowe, P., 2012. Bank Regulation and the Future of BanGking. [Online]. Available through: <https://www.rba.gov.au/speeches/2012/sp-dg-110712.html>. [Accessed on 13th September 2017].

Lui, A., 2016. Financial Stability and Prudential Regulation: A Comparative Approach to the UK, US, Canada, Australia and Germany. Taylor & Francis.

McCoach, L. and Landy, D., 2013. Australia. [pdf]. Available through: <https://www.claytonutz.com/ArticleDocuments/178/Law-Business-Research-Banking-Regulation-Review-Australia-2013.pdf.aspx?Embed=Y>. [Accessed on 13th September 2017].

McNally, S., Chambers, S. and Thompson, C., 2004. The Australian Hedge Fund Industry. Financial Stability Review.

Paterson, I. and Mallesons, W., 2017. Banking regulation in Australia: overview. Thomson Reuters.

Posner, R., 2009. How Should Banking Be Regulated? The Atlantic. [Online]. Available through: <https://www.theatlantic.com/business/archive/2009/05/how-should-banking-be-regulated/17271/>. [Accessed on 13th September 2017].

Putnis, J., 2014. The Banking Regulation Review. Law Business Research Ltd.

PWC. 2016. Escaping the commodity trap: the future of banking in Australia. [pdf]. Available through: <https://www.pwc.com.au/pdf/pwc-report-future-of-banking-in-australia.pdf>. [Accessed on 13th September 2017].

Wallison, P., 2013. Bad History, Worse Policy: How a False Narrative about the Financial Crisis Led to the Dodd-Frank Act. Rowman & Littlefiled.

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