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Four major banks of Australia

Question:

Discuss About The Developed But It Supported Competitive Edge?

Australia’s banking is subjected under these four banks; National Australia Bank, Westpac Banking Corporation, New Zealand Banking Group, and Commonwealth Bank of Australia. Sectors of banking are inclusive of licensing of the bank in accordance with Banking Act 1959, licensing of foreign banks are operated through a division in Australia and incorporated foreign bank subsidiary in Australia. In addition to, there is a lot of financial institutions like mutual banks, credit unions and building communities that offer only a certain type of banking services (Cummings and Wright, 2016). The system of banking is in the form of liquid and developed yet competitive. The regulation offers the best level summary of banks’ supervision and governance inclusive of authorities, international standard rules, liquidity rules, requirements of from foreign investments, liquidation management and current trends in banking regulation.

The Commonwealth Bank of Australia was established by the country’s legislation in 1911. This original body was then preserved in 1959 as the Reserve Bank of Australia (RBA) in the law, especially to undertake the central banking functions. The savings and commercial banking functions, at the same time, were shifted to a novel body, which continued with the old name, i.e. Commonwealth Bank of Australia. The Australian Parliament undertook authority to formulate laws related to currency and banking with the Federation of Australian States into the Commonwealth of Australia. The preliminary Commonwealth Bank Act in 1911, provided the Bank just basic functions of savings and commercial banking; it did not have a central banking remit and also did not have the responsibility for issuance of notes. The Governor was in charge of the Bank’s management. The Department of Treasury administered note issues.

In 1920, the authority of note issuance was shifted to a Notes Board from the Treasury. The Bank’s Governor was ex officio a member of this Board. Hence, the Bank undertook the administration for the issuance of notes, although the Notes Board and the Bank were officially independent of one another. The Commonwealth Bank Act was modified in 1924, and the power of note issue was then vested in the Bank. Management was then governed by a board consisting of 8 directors (Docherty and Viort, 2014). From then till 1945, the Bank progressed its central banking activities gradually, primarily in response to the economic turmoil of the 1930s and later on by official, albeit transient, expansion of its authority owing to the wartime regulations. Resultantly, exchange control and several other controls came under its purview.

History of Commonwealth Bank of Australia

The Banking Act and the refined Commonwealth Bank Act of 1945, institutionalized the powers of the Bank pertaining to the administration of the banking and monetary policies and forex control. Under these Acts, the board ceased to exist and was substituted by an advisory council comprising of six members belonging to the Treasury and the Bank. According to this legislation, the Governor had the responsibility to manage the Bank. Nonetheless, a new law in 1951 set up a novel board which included the Governor, Secretary of Treasury and Deputy Governor, and continued the Governor’s responsibility to manage the Bank (Cox, Hillman and Langevoort, 2016). With slight variations in member counts, this has been the standard structure of the Board since then.

The overall regulation of Australia’s finance and banking system is segregated between Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia. The RBA is the central bank of Australia and carries the long-standing accountability for the wholesome stability of the monetary policy and the country’s financial system. The RBA policies are determined and implemented by the Payments Systems Board and the Reserve Bank Board. Nonetheless, the RBA does not have any role to play in prudential supervision of the ADIs (Gitman, Juchau and Flanagan, 2015). Technically, RBA is also responsible for exchange control, nonetheless, at a pragmatic level, RBA approval is not mandatory where foreign exchange transactions are undertaken via forex dealers and money market dealers having RBA’s authorization.

When the Autonomous Sanctions Regulations 2011 was introduced under the Autonomous Sanctions Act 2011, the responsibility for administering sanctions pertaining to forex control no longer fell under the purview of the RBA. The Department of Foreign Affairs and Trade is now responsible for this.  RBA has no responsibility for the protection of banking interests of depositors or any of the creditors of banks; instead, its mission is to address with coercion to the financial consistency that is likely to fall over to the confidence of investors and consumers and to the economic activities. At the point of these threats, the bank holds its flexible role of last report lender for immediate liquidity assistance. When there is providing such assistance, the RBA first choice will be to make finance available to market completely by its familiar market operations. In some situations, the RBA will be ready to loan directly to institutions in front of difficulties of liquidity. The financial institutions will have to be managed by ARPA and will have to be solvent, and a threat is the failure to make payment in the entire stability system of finance. ARPA opinion regarding the primary reliability of institutions in a suffering will be crucial to any of the RBA assistance.

Regulatory framework for the banking sector

The RBA, according to the support of the Payments System Board, along with this it has a direct to endorse safety, efficiency and competitiveness in the payments system of Australia, and also contains the backup, powerful regulatory powers. For instance, if RBA considers developing entrance to, safety or efficiency, of a specific payment system it can assign that system in relation to the regulation. It can after, public interest, oblige and retain to command on the system or standard for safety and effectiveness. The government predicted that these authorities and powers would be practised with a wide approach of regulatory, with safety for operations of private sectors. The bank also stays liable for performing Exchange Settlement Accounts for members in the system of payments.

According to the new regulatory provisions of the FSR Act, RBA has the duty to ensure the settlement and payment facilities performing the affairs in such a way that is stable with entire financial system stability. Being a part of this, RBA has the authority to impose and observe agreement with standards of financial stability for payment and settlement. ASIC is liable for all the issues regarding these facilities, like those concealing corporate governance, security of investor, market reliability and for imposing an agreement with the standards of RBA in case, it is mandatory. In March 2002, the ASIC and RBA agreed an MOU (Memorandum of Understanding) that establishes a structure for assistance for these two agencies regarding licence payments and settlement facilities. The purpose of MOU is to support clearness, assist in avoiding a needless replica of efforts and reducing the stress on facilities, it hides the sharing of information, notification and any other provisions aimed to attain these aims.

The APRA was founded under the Australian Prudential Regulation Authority Act 1998 to regulatory bodies in the financial domain. This body overlooks licensing as well as prudential supervision of all NOHCs and ADIs which the APRA authorizes. Australian Prudential Regulation Authority has finished it's important refurbishment of its prudential standards for the industry of general insurance. The transformation is inclusive of vital increment in capital requirements, solid reinsurance planning, and supporting of suitable risk and threat management strategies and policies (Howell, 2015). The transformation also initiated a powerful ‘healthy and sophisticated’ system for insurer’s management regarding their actuaries and auditors.

In accordance with recommendation provided by group, and to divide the review taken by the Productivity Commission and announced by government in 2002 October, that it will impose several reforms is a worldwide regime of licensing, by which every ARPA regulated trustee of superannuation fund, permitted funds of deposit and mutual superannuation trust will be needed for licensing by ARPA and to meet the term with requirements of licensing on a continuing manner (Bajada and Trayler, 2015). Trustees are required to organize and propose to ARPA a management strategy for risks and planning for all funds and trust on which they work.

Role of RBA in payments and settlement

One more significant aspect improvement for the purpose of prudential supervision strengthening of superannuation was an amendment of the reporting structure for the superannuation firms. The new and revised forms of reporting pooled the ARPA requirements of reporting and ABS; they also broad the variety of prudential details gathered and lined up the requirements, close to Australian accounting standards. The extra data gathered will help ARPA to conduct more effectively the funds and trusts of superannuation, and will be able to determine that might not be facing problems or are not managed in a prudent way. The reputing requirements revisions will be provided authorized effect under Reporting Standards identified in according to Financial Sector Act 2001. Further industry recommendation regarding the requirements occurred in 2003 first half, and the revised structure will be applicable hugely for the fiscal ending years during and after 30 June 2004.

Banks require to re-evaluate and refine their approach to their regulators and the regulations. Majority of the banks in Australia strive to maintain collaborative, honest and open regulatory relationships. However, there is a need to do go beyond this, realizing their part in safeguarding Australia’s reputation for fair dealing and sound finance. One of the concerns emerged out of the global economic downturn was acknowledgment that there are considerable interconnections between banks, especially the big, complex banks, which implies that if they fail or are engulfed in financial turmoil, it will create spillover impacts which will affect the functioning of the financial and economic systems in Australia (Dungey et al., 2015).

This has given rise to concerns in the banking regulatory circles regarding what is the best way to address and regulate the important banks. The regulators in Australia’s banking sector have made a lot of efforts in the past some years to put together good mechanisms and planned to handle bank failures. These are some strategic moves. However, the regulatory bodies are still not sure about how to handle one of the big four – if they are in difficulty in Australia or in their New Zealand subsidiaries. The issue with the big four is that they are extremely large to swallow and hence it is difficult for other banks to smoothly and quickly take over.

The several measures recommended to try and mitigate the adverse social externalities related to SIBs encompass steps like preventing them from growing so interdependent and huge. There are recommendations for compulsory sell-offs or restructuring. Some reports have even advocated for retail ring-fencing, i.e. dissociating retail banking from other parts so that there is no spillover effect. There are also suggestions of imposing taxes on big banks, compelling them to turn smaller (Docherty and Viort, 2014).

MOU between ASIC and RBA

There is also some advantage in obligating SIBs to maintain a minimum extent of contingent capital. This capital takes the shape of hybrid securities that compulsorily turn into equity on some triggers being hit when a SIB is in difficulty. This has two merits. Firstly, extra equity is formed automatically when required. Secondly, such security holders are likely to exert and monitor market discipline over the banks provided their exposure to it. Unquestionably the suitable design of these securities needs to be thought through meticulously (Cummings and Wright, 2016).

In order to improve its process of prudential supervision and also train the best of their resources, ARPA has improved a PAIRS (Probability and Impact Rating System). It contains a stable risk consideration tool that incorporates risk of likely failure and its likely effects on a sole measure of entire concerns of supervisory. PAIRS works in combination with SOARS that is a Supervisory Oversight and Response System, by which the measures of PAIRS of concerns of supervisory is converted in a suitable manner; that is restricted, normal, improved and oversight. PAIRS illustrate a universal practice and build up harmony on the aspects of ARPA ancestor bodies. In terms of considering the potential of failure, these are on the basis of risk types acquired by financial in institutions, and for considering likely impacts are on the basis of size and scale of a financial institution (Yan et al., 2014).

Conclusion

Present study shows significant revolution in banking regulatory norms of Australia in order to ensure transparency, fairness and ethical aspects in transactions. Sectors of banking in Australia are inclusive of licensing of the bank supported by provisions of Banking Act 1959. Banking system is in the form of liquid and developed yet competitive. In regulation, RBA and APRA have crucial role as RBA has the duty to ensure the settlement and payment facilities performing the affairs in such a way that is stable with entire financial system stability while APRA overlooks licensing as well as prudential supervision of all NOHCs and ADIs which the APRA authorizes. There are six effective and solid factors that are handling the Australia banking sectors today; technology, behaviour and attitude of customer, varying demographics and a passive universal economy. These factors are addressing change timely when traditional value drivers for the industry- development and growth of asset to a low extent, influence are dissolving and can even overturn. Subsequently, expectations of outcome and future position of industry are modified along with each announcement of earnings.

References

Bajada, C. and Trayler, R., (2015). Technology-driven service innovation in the banking industry. In The Handbook of Service Innovation (pp. 319-343). Springer London.

Cox, J.D., Hillman, R.W. and Langevoort, D.C., (2016). Securities regulation: cases and materials. Wolters Kluwer Law & Business.

Cummings, J.R. and Wright, S., (2016). Effect of higher capital requirements on the funding costs of Australian banks. Australian Economic Review, 49(1), pp.44-53.

Docherty, A. and Viort, F., (2014). Better Banking: understanding and addressing the failures in risk management, governance and regulation. John Wiley & Sons.

Dollery, B.E., Kortt, M.A. and Grant, B.J., (2013). Funding the future: Financial sustainability and infrastructure finance in Australian local government.

Dungey, M., Doko Tchatoka, F., Wells, G. and Yanotti, M.B., (2015). Mortgage choice determinants: The role of risk and bank regulation. Economic Record, 91(295), pp.417-437.

Gitman, L.J., Juchau, R. and Flanagan, J., (2015). Principles of managerial finance. Pearson Higher Education AU.

Yan, X., Skully, M., Avram, K. and Vu, T., (2014). Market discipline and deposit guarantee: evidence from Australian banks. International Review of Finance, 14(3), pp.43
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